In a post-COVID world, flexible working is becoming the norm. For many businesses, this means a number of employees working from home two or three times a week. For others, it means access to talent across the globe, or incentivising staff by allowing them to work from anywhere. Increasingly, our clients want to know how easy it is to engage these ‘digital nomads’ and the associated pros and cons. We have put together the following guide to set out the key considerations.
1. Do my employees have a right to work from abroad? What if they’re a consultant?
There is no automatic right to work abroad, whether as a consultant or an employee. Employees’ contracts will often stipulate their place of work to be the company’s UK premises and/or (since working from home has become more common) the employee’s home. However, it would be expected - unless agreed otherwise - that the employee's home is in the UK. Consultants may have more freedom to work where they choose but, as with employees, there may be immigration issues to consider if they are going to be working abroad for a UK company.
First, you should be satisfied that the employee has the right to reside and work for that particular organisation in that country. Whether working as an employee or consultant, typically the person would need to obtain a work visa in the country they wish to work from (unless that country is their country of residence, or they are a citizen). You, as the employer, should ensure that the individual would not be breaching their visa conditions by working for you. Specialist immigration advice is likely to be needed in the country in which the individual will be residing.
You should also consider any immigration issues that may arise on the employee's return to the UK. If the employee is not a UK national, a prolonged absence from the UK may affect their immigration status or right to work in the UK.
There are other points to consider if an employee wants to and can legally work abroad. Does your organisation’s insurance cover extend to employees working in that particular country, and does that host country allow employees to be employed by overseas entities? Depending on the sector in which they work, there may be also regulatory requirements triggered by the employee working abroad, for example if the worker is regulated by the FCA or PRA. If the employee is a director, you should seek corporate advice with respect to whether they can attend board meetings remotely.
2. How will tax on salaries work if someone is living abroad?
It will depend on how many days per year the individual is present in the UK. It is possible that the employee will need to pay income tax and National Insurance contributions in the UK if they are a UK tax resident. They may also need to pay income tax and social security in their country of residence but much will depend on the tax rules of that country. Specialist tax advice should be obtained in both countries.
Assuming the employee is a UK tax resident, you, as the UK employer should:
- continue to deduct income tax under your PAYE system
- check whether the host country can impose tax on the employee’s employment income and whether there are any implications for you as the employer
3. Will my employees have the right to the same employment benefits we offer our employees based in the UK?
If an employee is working abroad on a temporary basis, their employment will arguably still have a greater connection with Great Britain and British employment law than with the country in which they are working temporarily (known as the host country). If this is the case, the employee is likely to continue to benefit from UK statutory employment rights and the same benefits as other UK based employees.
However, local employment law advice should be sought regarding the statutory employment rights they are also likely to have in that country. These rights could relate to, for example, paid time off and minimum rates of pay. They could also affect your ability to terminate the employee's employment lawfully and the likely cost of doing this.
4. Can I grant EMI options or other incentives to employees abroad?
Working out what tax is payable on share options depends on where the option-holder is tax-resident.
EMI options are share options with special tax advantages for UK residents, which mean that, when structured properly, the option-holder won’t pay income tax on the exercise of the options. This differs from non-EMI option grants granted to employees who are UK tax-residents, where income tax will be payable on the value of the option share on exercise.
For any options granted to employees or consultants who are not taxed in the UK, the tax position will depend on the tax rules which apply where the option-holder is tax-resident. Typically, companies with an option scheme will be happy to grant standard (i.e. non-EMI) options to those individuals, and allow those individuals to work out what tax they owe in the relevant jurisdiction. However, if this is going to be particularly disadvantageous to certain members of staff, it might be worth considering other ways to incentivise members of your workforce who are based abroad. This might include offering them reverse-vesting (also known as ‘restricted’) shares, or growth shares.
Reverse-vesting or ‘restricted’ shares
Reverse-vesting or ‘restricted’ shares are shares which are issued up-front to individuals, subject to a number of restrictions (such as with regards to voting rights or dividends) and which are subject to claw-back by the company if the relevant individual leaves the business. The restrictions lift when certain conditions are met, which can be performance-based or time-based. This is the ‘reverse-vesting’ element. The potential tax benefit of this kind of shares over options is that the initial tax point is likely to be when the shares are issued (when the value is likely to be lower), whereas option shares may be taxed on exercise (when the value of the shares has hopefully gone up, incurring a higher tax charge).
Growth shares are also shares which are issued up-front to individuals, and these allow the holders to share in the growth in value of the company above a valuation hurdle. These shares have conditions attached which mean that, on a return of capital such as an exit, the holder of the growth shares would only be entitled to participate in capital above a certain hurdle. That hurdle is typically the value of the business at the date of issuing the growth shares, to incentivise the recipients to help grow the business. The potential tax benefit of this kind of shares over options is similar to that of reverse-vesting shares, in that the initial tax point is likely to be when the shares are issued, and in the case of growth shares this is likely to be nil, as the shares won’t usually have any value until the value of the whole company grows above the hurdle.
However, with reverse-vesting and growth shares, the tax position will still need to be assessed from the perspective of the members of staff receiving shares, taking into account where they are tax-resident and the applicable tax rules.
5. Are there any GDPR considerations to think about with employees who are based overseas?
The UK General Data Protection Regulation (GDPR) is a data protection law which applies to everyone in the UK (whether or not they are residents or citizens of the UK). The original GDPR still applies in relation to the personal data of anyone who is based in the EU. Both the UK GDPR and EU GDPR regulate the collection and processing of ‘personal data’. If your business is currently GDPR compliant when it comes to the handling of personal data, you should be able to transfer data to and receive data from your digital nomad employees or consultants based in a European Economic Area (EEA) country– but you may need to put some agreements in place.
Under the GDPR, you are also allowed to transfer data outside of the EEA, but you will need to make sure that appropriate safeguards are in place for the relevant jurisdiction – and this applies equally to all aspects of your business, whether it is transferring data outside of the EEA as a result of your interactions with customers, or because members of your workforce reside there.
As well as the EEA countries, some other countries have been deemed to have an adequate data protection framework (e.g. Switzerland and Canada) and data can be transferred to these territories.
For transfers outside of the EEA or other countries which are officially recognised as having an adequate data protection framework, the parties who receive the data may need to sign up to ‘model clauses’ or contracts which incorporate data protections for data subjects. For contractors based anywhere (including the UK) a data processing agreement with the contractor is likely to be required, and employees should be subject to clear internal rules.
In practice, you will need to consider on a case-by-case basis the rules regarding a particular jurisdiction that data is being transferred to as a result of employees or consultants working abroad, and what they will be doing with that data.