In regards to how companies are altering the ways in which employees are compensated to reflect the transition to remote working arrangements, since the health and safety of employees have been the main concerns of many employers, there has been a concerted effort to support employees working from home or remotely through adjustments to leave policies and benefits to meet employees’ specific needs. Employers are adjusting their policies to include benefits such as reimbursements of home office supplies, additional elder- or child-care assistance, and expanded sick leave.
In addition, companies are becoming more data driven, utilizing the insights derived from employee tracking data to adjust compensation for employees who may be working in a different tax jurisdiction than the location in which they worked previously, especially if there is a substantial difference in the cost of living or tax rates between the old and new location.
The types of changes companies are considering with respect to their compensation and benefits policies also vary based on the impact the pandemic has had on their business operations and bottom lines.
Companies that are flourishing during the pandemic may be seeking ways to share strong performance results with their employees either through providing short-term incentives, such as cash bonuses, or by adjusting benefits based on personal circumstances to better support and incentivize employees. Conversely, companies that are adversely affected by the pandemic have taken measures, such as implementing freezes in salaries and variable compensation, and reducing or eliminating 401(k) matches. In addition, executives have reduced compensation in order to preserve cash for business operations. However, regardless of the effect the pandemic has had on companies’ operations, companies are increasingly considering the use of equity compensation as a means to retain talent and reward performance regardless of where employees are working, with some companies even expanding their equity grants to include broader employee populations in order to encourage employee engagement and retention.
Location, Location, Location
While compliance risks are inherent for any company that employs a remote workforce, as the performance of services by an employee in a tax jurisdiction generally generates income tax, employment tax, and corporate tax requirements, these risks are greatly exacerbated if employers do not have a clear picture of where—whether domestically or internationally—their employees are performing services. This is especially true for equity awards, since the work location over the entire term of the award is relevant. Thus, it is imperative for companies to have the systems, processes, and technology in place to foster their compliance with payroll and withholding requirements in each taxing jurisdiction an employee provides services over the entire term of the award.
The payroll compliance challenges are further complicated by the fact that, from a U.S. state perspective, each state has its own income tax laws and payroll reporting requirements, which may or may not include reciprocity with another state. States have de minimis thresholds for reporting and withholding based on either the amount of income attributable to services performed in the state or the number of days spent performing services in the state.
As such, not only is it crucial for employers to know where their employees are working and performing services, but it is also imperative that employers have the technical knowledge to comply with each state’s specific laws and requirements. This is especially true in regards to trailing tax liabilities that may arise from an employee performing services in a nonresident state during the term of his or her equity award.
With respect to U.S. states, there are some general rules employers should be aware of as they relate to equity compensation (however, please be advised that the specific laws must be reviewed for each state and locality):
- the gain at exercise or vest is subject to tax in the employee's resident state
- the gain is also partially taxable in any state where the employee worked over the term of the award
- generally, a credit can be taken by the employee in their resident state for taxes paid in other states
- an employee has the obligation to pay the tax; however, the employer does not always have the obligation to report and withhold in the state—factors for this determination can include:
- laws of the state
- corporate nexus
- reciprocity agreement
- convenience of the employer.
(States adjust telecommuting and remote/dislocated worker rules (nexus, residency, etc.)
The increase in remote work arrangements has led many states to institute telecommuting rules and provide additional resources to their tax departments in order to help them capture revenue attributable to nonresidents who may be working remotely from their state. For example, a New York-hired employee is working in Virginia and that person’s direction and control are still directed from New York. In such case, New York will still want to tax 100 percent of wages as the employee is working at home in Virginia at her own convenience. Virginia will also look to tax the income under its own tax rules. Mechanisms in the state laws help to lower the chances of double taxation; however, payroll systems cannot always handle reporting 100 percent of wages in two or more states. This issue becomes a lot more complex to manage when employees have a national or global role, and there is no clear permanent office.
As a result, the increased focus from state tax departments highlights the need for companies with remote workforces to have policies, systems, processes, and technology in place to not only track where their employees are working firm, but also to comply with differing tax laws and reporting requirements. Review of specific cases where these telecommuting rules come into play is requiring a higher level of expertise and attention to report and withhold on these cases appropriately. Or in cases where companies are paying for an employee’s travel expenses, it is important to review the telecommuting rules to determine if the travel expense reimbursements are considered as taxable compensation to the employee or a deductible business expense for the employer.
Impact of ESG Factors on Compensation and Rewards
While the transition to a “work anywhere” environment, the pandemic, and policies have accentuated and changed the landscape of how employers compensate their employees, it has also accelerated the incorporation of ESG considerations into the financial and nonfinancial performance of companies, which can impact measurement, reporting, and employee compensation and benefits.
ESG refers to a framework to integrate environmental, social, and governance risks and opportunities into a firm’s strategy to build long-term sustainability and value creation. In other words, ESG strategies can help companies address questions that investors, shareholders, employees, and the general public are asking with respect to:
- achieving improved company performance
- enhancing a company's reputation and brand image
- fostering customer loyalty
- driving economic vibrancy
- delivering long-term value through effective engagement with all the stakeholders.
“Environmental” has to do with how a company acts in its role as a steward of nature, such as energy use, recycling practices, pollution emission, and natural resource conservation. The criteria can also be used to assess environmental risks and how the company is managing them. “Social” concerns how well a company manages relationships with employees, suppliers, customers, and the community. “Governance” is about a company’s leadership, internal controls, executive pay, audits, and shareholder rights.
From a compensation and benefits perspective, companies are incorporating ESG elements, such as cleaner commuting initiatives, health and wellness programs, locally sourced products, and energy - efficient home and appliance initiatives, into benefits packages offered to their employees. Furthermore, companies are aligning their ESG strategy with employee compensation by moving towards integrating ESG-related performance metrics when determining remuneration and variable short- and long-term compensation.
With stakeholders focused on ESG strategy—they include investors, employees, suppliers, and the general public—a higher use of ESG measurements by companies when evaluating and determining compensation, benefits, and rewards can be expected.