Lawyers love a signature. Even better is a sign with a date. What they really love though, is having a signature with a date and knowing exactly where it was signed - it can make a massive difference to a piece of paper whether it was signed in New York or New Zealand.
Geography, in other words, plays a big part in the law.
When it comes to equity compensation and employee share plans, geography also plays a big part in how we design plans and reward people across the world in different ways. Different countries have different incentive schemes, pushing people towards a certain type of plan, and tax rates obviously vary across the world.
The smart company knows this and designs a plan to fit all the moving parts that are its people. And ‘moving parts’ has never been more of an apt description; despite us all being locked in our homes for the best part of 12 months (and more), we’ve also seen an incredible amount of international movement in terms of where people ended up working during the pandemic.
People have, and are currently, making decisions on where to live and work using a whole new set of metrics, primarily based around the question ‘Can I work remotely from there?’ The freedom that hybrid working gives a certain type of professional means that new areas, and new countries, are now available for them to move to.
We won’t go into the potential societal impacts this may have (let’s save that for when we can all meet up for dinner again) but instead focus on how this may affect equity compensation and employee share plans.
So, how might hybrid working change equity compensation and employee share plans?
The challenges of hybrid working and equity compensation
The first thing we have to say is we don’t have all the answers – some of the questions are only starting to become clear – but in many ways, not much will actually change. We’ve been designing cross-border share plans for years (you can see an example client story here) and have always had to account for different laws and regulations in each jurisdiction.
So, a few of the challenges (and solutions) below are what we’ve faced before. What might really change is the scale and getting visibility on what the challenges really are.
Corporations are global, tax laws are local
In almost all circumstances, where you work (and not where your company is based) is where you're taxed
If you’re paying someone a monthly salary, all you need to worry about legally is where they are resident that month you pay them. When it comes to employee share plans though, which will typically run for three years or more, you need to understand their tax liabilities for whatever period it runs for and where they were based during that time.
Again, this has always been true and has often been the case. People move between countries (and this is also applicable for different states if you live in the US) for all sorts of reasons and a company simply kept track of these movements on an individual basis.
What’s changed now is the potential scale of movement, the frequency of that movement, and ultimately how you will track this movement.
Ask yourself these questions: Where there are any cases in your company where someone was working from somewhere that the management didn’t know about? Do you know anyone who secretly stayed in London with their family rather than their small apartment near the office HQ in Paris?
Now, the question many of these people asked themselves was ‘What does it matter? If I’m doing the same work here than I was there, does it really make a difference?’ Well, when it comes to their actual work, they’re probably right – in many cases it doesn’t matter where you produce the goods as long as you produce them – but in a legal sense, this can cause all sorts of problems.
Collect data accurately, wherever your people are
At the most fundamental level, each country will have different income tax rates and different employment laws, meaning you as a company may be abiding by one set of rules while your employee is following another. During the pandemic, this sort of loose arrangement has been largely ignored by governments but as it becomes more common it will surely become more regulated.
There is also a greater motivation to bring in this regulation because the tax takes of governments have been hit so badly over the last year. They’ll be looking for ways to claw that back and the billions that go through share plans are an obvious target.
So, what’s the solution to this challenge? Essentially, excellent data collection.
Employers will need to start collecting data on where their employees are and when and put in procedures for self-reporting; potentially making that self-reporting part of the employment contract to ensure compliance.
Because make no mistake about it, the legal burden lies with the employer when it comes to this area, not the employee. It’s something Bob Grayson, Partner at global compliance experts, Tapestry, called out specifically in a recent Global Shares webinar.
‘In about 80% of countries around the world, if you give a benefit to your employee, then you as the employer have the responsibility to withhold and report tax correctly for that individual, so it is absolutely going to be an employer problem,’ said Bob. ‘In the past, that would have just been the payroll in the country where that person is located, whereas in the future that may involve multiple payrolls.’
Indeed, as Bob went on to say, the biggest potential danger for employers when it comes to compliance and share plans in a hybrid working environment is getting the tax reporting and withholding right. If you get that wrong, you have potential financial liability.
Collecting data and using equity compensation software like the Global Shares platform will allow you to get this right, and automate the process on an ongoing basis.
Designing your equity compensation plan to fit the laws in multiple countries is a must
We’ve talked about potential challenges when it comes to tax and share plans, but what about the regulatory challenges?
Let’s take an example around securities law (essentially the laws around stocks and shares) and the rewarding of stock options to an individual. If ‘John Smith’ was living and working in England but happened to be working in Japan when someone made him an offer of securities, then the Japanese laws are the ones applied to the transaction, not the English ones.
This means organisations need to be aware of 1) where their employees are and 2) what the consequences of offering securities in their current location are.
There will be regulatory challenges wherever you go, ranging from easy hurdles to onerous challenges depending on the location, so incorporating them into your equity compensation strategy is a must.
A whole new world of equity compensation?
Lawyers really do love signatures on a solid piece of paper. However, in a digital landscape where people are working remotely from far-flung places in the world, the fact that the piece of paper is solid or not doesn’t matter – but the signature still does, and where it was made.
With employees increasingly willing to move to new areas and work remotely, it is up to their employers to figure out how this will impact everything they do – including equity compensation plans – and act accordingly, or risk seeing lawyers showing up at your door looking for a signature on something you don't want to sign.
Do you want equity compensation software designed to support a modern, hybrid workforce? Contact our experts today by clicking the button below.