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How to Pay Remote Workers Fairly

Avoiding the global ‘HR Nightmare’ of ‘Work from Anywhere’ practices

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Woman on a Floatie working from her LaptopIn 2021, Spotify became the first company to launch a ‘work from anywhere’ policy.  The streaming platform announced it would allow employees the freedom to work from anywhere, while continuing to pay remote workers San Francisco and New York salaries. Via the policy, Spotify employees are free to live and work globally, so long as their working locations cause no legal issues.

However, according to financial expert Nicolas Colin, Spotify’s policy may not only result in legal issues, but also cause problems in the HR department.  Colin called the ‘Work from Anywhere’ concept a potential “HR nightmare”, and wagered many companies will start to set limitations on remote work as soon as complications begin rising to the surface.

With over 25 years of experience managing global workforces and international payroll, Mauve offers fair and compliant methods of paying remote workers.

How to pay remote workers

This article will focus on the practice of paying remote workers fairly, in order to increase job satisfaction within your company, as well as employee productivity and retention.

Nevertheless, in order to compensate employees fairly, we must first understand how to pay them. What follows is a brief guide to the 7 key points to consider when managing a remote workforce and extending payroll overseas.

1) Employee classification

Each country defines the term ‘employee’ a little differently. As an employer of a remote workforce, you are obligated to accurately classify everyone on your payroll as either an ‘employee’ or an ‘independent contractor’.

Whether deliberate or accidental, ‘employee misclassification’ can have grave consequences for your business: from the financial to the reputational.

Paying remote workers overseas requires an understanding of how to properly classify them according to the local laws of their host country.

2) Permanent establishment

Permanent establishment (PE) is another thing to keep in mind. PE is a concept which determines your income tax and VAT liability in a given jurisdiction. Relocating employees overseas could be enough to trigger PE in the eyes of a local tax authority, depending on the role of the employee in your company and the nature of their stay.

A large part of knowing how to pay remote workers fairly is first knowing how to protect your company from PE risk through careful global compliance.

3) International labour laws

A degree of pay fairness is already mandated by the ILO and associated international labour laws. These laws, in conjunction with treaties and conventions, inform the local labour laws of most countries worldwide. Paying remote teams fairly requires a comprehensive understanding of employee rights protected by law. These rights can include:

  • Maximum (and minimum) number of hours in a working week
  • The minimum wage a worker can be paid on an hourly, daily, weekly or monthly basis
  • 13th, 14th, and 15th month salaries
  • Sick pay, holiday pay, and retirement
  • Health and safety regulations
  • ‘Equal pay for equal work’ (protecting workers against workplace discrimination)
  • The right to strike and collective bargaining

4) Local pay culture

Even if you decide to keep your remote overseas workers on a ‘home country’ salary, despite a lower cost of living in their ‘host country’, you will still have to adhere to local labour laws. Similarly, it is prudent to familiarise yourself with local pay culture and law, such as:

  • Pay cycles: Are workers typically paid on a weekly, fortnightly, or monthly basis? Are they entitled to a 13th month salary, either by law or as a cultural norm? 13th month pay refers to the practice of employers paying employees a bonus, once a year, which is equivalent to one month’s wages.
  • Payroll forms: Unless paying independent contractors for services rendered, the employer of overseas remote workers is responsible for completing and submitting all relevant payroll forms. For example, forms I-9, W-4, and State W-4 for workers based in the USA.
  • Payslips: The information contained on payslips is also regulated by local labour law, and may differ from country to country. In India, for example, pay stubs must include an itemised breakdown of the gross salary pay.

5) Currency

Deciding which currency to pay remote workers in is yet another important consideration. Paying them in their host country’s currency is arguably best for the employee, but could cost you in exchange rates. The inverse goes for choosing to pay an overseas employee in your home country’s currency. Of course, you may find that it is only possible to pay your remote workers in their local currency. Mutually beneficial compromises can be found in some of the different methods of pay, which we’ll discuss in a moment.

6) Calculating tax contributions

Tax law, like labour law, is set by each individual jurisdiction – be that a state, country, or autonomous region. A massively important part of both global compliance and paying remote employees fairly is knowing what your tax obligations are as an entity operating across borders. You may be responsible for withholding certain national insurance, healthcare, or pension contributions on behalf of your remote workers.

7) Selecting a payment method

Finally, paying international remote workers requires settling on a payment method which works for you both. You have two main candidates:

  1. Establishing a legal entity in the worker’s host country, and paying them through that according to all applicable local labour and tax laws and customs.
  2. Working with an Employer of Record (EoR) and thus streamlining the entire payroll process by entrusting its management to them.

Considering how much to pay remote workers

In his article ‘Remote work: HR nightmare?’ Nicholas Colin goes on to point out that the question of what to pay remote workers is a domestic issue, as well as an international one.

For companies with previously centralised work locations, existing salary levels tend to be based on appropriate benchmarks for that specific local economy and labour market. Where employees have relocated overseas as remote workers, however, we are liable to see employers begin to re-evaluate their employees’ salaries based on potentially lower costs of living.

In other words, the existing model for salary calculation may still see use when enterprises transition from a 100% local, on-site workforce to a global team of remote workers. Unfortunately, chances are that this model could quickly create pay inequity within the company. By considering the impact of poorly managed or outdated remote pay models on your staff, we can begin to piece together a more effective and fair type of payroll for remote employees.

How and why to compensate remote workers fairly

Understanding the impact of poor pay policy on your workers

Feelings of low morale can arise when any worker feels they are being unfairly paid. Not only can this dampen productivity levels, but some lab-based studies have also found pay-related stressors to cause physiological impacts linked to cardiovascular disease.

It is not, however, a question of blindly agreeing to substantial compensation for the remote worker to ward off these potential problems. Local salary levels should still be taken into account when establishing pay for remote workers, especially where companies also employ local staff members in that jurisdiction.

The 2016 ERSC-funded study ‘Addup’ explored the wage gap between the salaries of local and expat co-workers performing similar roles for aid sector organisations in lower–income countries. It found pay disparities of up to 900% in favour of expatriates.

Local workers interviewed as part of the study expressed feelings of dissatisfaction and workplace injustice. They cited the pay gap as having damaged relationships with their wealthier co-workers, creating power inequities, and ultimately reducing productivity.

In some situations, dual pay practices can lead to an ineffective, unhappy workforce, and could stand at odds with many organisations’ commitments to equality and inclusivity.

Recognising the issue of promotion inequality in a remote work culture

Pay rise and promotion equality across dispersed employees is also something that companies will have to consider. Nicholas Bloom’s study of a Chinese company that tested home working nearly a decade ago revealed that people working remotely were promoted at about half the rate of those still in the office. His more recent studies suggest office workers are still 30% more likely to be promoted than their remote counterparts.

Although some workers claim working from home is as valuable as an 8% pay rise, questions about pay rise discrimination are likely to emerge if employers do not establish clear policies.

Should employees be earning based on their value to the company, or proportional to their cost of living?

Glassdoor’s Dr Andrew Chamberlain argues that workers should always be paid according to their worth. Yet, when the work location is removed from a centralised economy and becomes global, how do you quantify that worth?

Exploring regional pay policies from the worker’s perspective

Workers moving out of cities for a different quality of life are generally settling in areas with a better cost of living – but they are not necessarily expecting a drop in pay. In their minds, they are carrying out the same tasks, but now away from the overhead-rich environment of a central office. They may also be missing out on some of the perks and benefits of the office, such as subsidised lunches and colleague camaraderie.

For employers with existing regional pay policies, and perhaps with less resources than Spotify, this expectation can spell difficulty. The company may want to avoid an office headcount exodus if they are tied into lengthy contracts or other constraints.

Remote work could trigger a longer-term reduction in worker value to the business, even if short-term impacts are nominal: for example, if they are unable to attend client meetings in person or network to the same standard.

Another focus point for employers is the issue of taxation. Technology may have broken down the geographic limitations to remote work, but financial boundaries mean global governments will still require local tax revenue from workers living away from their companies.

Employers should explore the financial impacts on the business, as well as the implications for the remote worker and their colleagues, when proposing a remote pay structure that works for everyone.

How to build a remote pay policy as a global hybrid employer

From our experience as an employer of a hybrid global workforce, and of supporting organisations with their global pay policies, we know that there is a delicate balance to be struck between employee value and operational viability.

While every employee should be paid their worth, other considerations must also factor into pay policy discussion – fairness and equality across the workforce, the financial benefits and limitations of remote work, international compliance, long-term organisational goals, and individual employee needs.

To achieve a fair balance between these factors, we recommend prioritising the following before agreeing on a remote work pay policy:

  • Salary benchmarking– Familiarise yourself with local rates of pay by carrying out salary benchmarking. You can explore job roles, industries, experience levels, and expected benefits to determine salary ranges for your chosen market, and thus build a fair, appropriate package. Mauve Group monitors salary levels across its network and provides a salary benchmarking service to its global clients.
  • Consultation– Gauging worker opinion and managing expectations is a vital part of formulating a winning remote pay policy. Survey your workers and find out what they are looking for; exercise honesty and transparency in the avenues you are investigating. Great communications between all involved parties will reduce the risk of creating ill-feeling.
  • Financial viability audit – Every option should be fully costed, including the long- and short-term impacts of remote work. For organisations without the resources of Spotify, the financial health of the enterprise, and viability of each pay model, has to be considered.
  • Risk assessment – Commissioning a risk assessment can draw attention to potential red flags for your business and the worker if they choose to settle in a certain location. These reports can focus on local HR, tax, immigration and compliance issues, and draw your attention to permanent establishment concerns – awareness of which can provide a foundation to develop a universally beneficial salary package. Mauve Group’s compliance department offers bespoke risk assessments based on the unique circumstances of your organisation. From there, you can build a structure of salary bands that take into account workforce variances in location, experience, worth and seniority, and allow for upward progression whether office-based or remote.

The future of ‘Work from Anywhere’

‘Work from Anywhere’ policies are likely to become a common extension of the remote work revolution. Progressive companies that want to keep abreast of workplace trends will be looking to accommodate this new way of working in order to benefit from the economic and productivity-driven advantages.

Financial experts like Nicolas Colin agree that supporting ‘Work from Anywhere’ will eventually become a powerful tool for economic development, providing companies can navigate the maze of external restrictions and internal responsibilities.

With careful planning and the right support at hand, even resource-constrained companies can avoid the pitfalls of poor pay policy. Awareness of the risks will help to build a fair global structure that is workable and accepted across the entire workforce, no matter their physical location. To learn more about preparing your business for a fair transition to remote working, visit Mauve Group.

Interested in the solutions that could help you form better remote work policies? Get in touch here. Salary benchmarking, risk assessments, global HR consultancy – whatever your need, Mauve Group’s experts can support.