The Surprising Reasons Why Location Matters, Especially When Paying Remote Employees

Happy September! I hope you had time for a break - I enjoyed mine! I spent two months writing my new Equal Pay book and I made great progress. I also took some time off. And I just returned from HR Week Lithuania, which was an awesome conference!

My corner of LinkedIn was abuzz with posts about the pros and cons of location-based pay. It started with a post from Nick Bloom , followed by this opinion piece in Time "Where a Remote Employee Lives Shouldn't Affect Their Pay". LinkedIn published a summary article "Solving Remote Pay Structures". People have lots of opinions on the topic, but I also read many misconceptions. So let me use this newsletter to lay it out. And I hope you add your wisdom in the comments, so we can learn from each other.

Let me summarize the debate for you: it started with the statement "We should move towards paying fully-remote employees for what they achieve, not where they claim to live." You can find the post here. But should we? Can we?

The argument seems straightforward: if a job is performed remotely, it shouldn't matter where the worker is based. And in an ideal world, that might be true. But location plays an important role when paying people. And there are reasons why employees must always inform their employers where they are working, even if they are "working from anywhere". Because when an employee moves, that can have monetary consequences you did not see coming.

What are we talking about?

When people ask me questions about paying remote workers based on location or achievement, the first thing I ask is: are we talking about employees or independents? When I read the comments and debates, too many people are mixing this up. And the difference matters.

You pay independents for their work, for a deliverable, and they send you an invoice. Do you need to know where they are based? Absolutely! You must make sure they are an official supplier, have registered with the local (tax) authorities, and have legal status as an independent. If not, your company could be liable for additional costs. Worst case, while you think they are an independent, they could actually be classified as an employee, and you will have to pay up. Treat carefully.

Do they need to tell you where they work? Probably not. Does their location influence what you pay them? Very likely. Just take a look on Fiverr and other platforms to see how much location plays a role in fee structures. And don't tell me companies don't take that into account. There are very few independent workers that can ask for a global rate, and it's usually because they have unique or rare skills, are famous, have a huge following etc.

What about employees?

Employees on the other hand, have a permanent contract and get paid a salary (or wage). In determining that salary, you might factor in location. What does your compensation philosophy say? Is location a factor in determining pay? If it does not say anything, you have some decisions to make.

When we talk about paying remote employees, there are three main models:

1. Pay the same everywhere: Pay is determined based on role. Location does not play a role in setting the pay level. While it is easy to manage, it can get expensive quickly. Often used by smaller companies with a large remote workforce.
2. Pay aligned to location: the most common way of determining employee pay. Companies use external data, like a local benchmark or industry database, to determine the level of pay. Location can be defined as a city, country or region. Often used when companies have a mix of onsite and remote employees in the same geographies.
3. Base pay with a geographic multiplier. This is a combination of option 1 and 2, where the base salary is determined per role. The company adds a multiplier based on the geographic zone in which the employee lives.

But that's not all. Because when it comes to employees, employers have additional obligations. These obligations are partly determined by the company (benefits and perks) and partly by the country (or state) where that employee lives and performs the work (taxes, social security, labor laws, health insurance, pensions etc.). And that means that the location of an employee, even when they work remotely, influences their Total Employee Cost: total compensation + benefits + perks + taxes + social security + any employee related expenses.

Can an employee live anywhere they want?

Of course they can. Obviously, an employee is free to move wherever they want. But they can't do so without informing their employer. Because when that employee packs up and moves across the (state) border, suddenly there are complications that an employer must be aware of, especially for fully remote employees. And it also affects pay - no matter how you look at it. For a non-remote employee, moving abroad will often terminate the employee's contract. But even a fully remote employee can't just work from anywhere: a new location likely changes their Total Employee Cost, and the employer needs to be aware of that.

Here are four major issues that can affect compensation when an employee moves abroad:

1. Foreign Labor Law: Employment regulations are typically governed by the location where the employee conducts their work. The longer an employee works from a different country, the higher the chances that local laws will come into play. This can impact various aspects of employee management, such as mandatory vacation time, work hours, promotions, and termination processes. Employees might even argue they're entitled to the advantages and protections of the country they are in.
2. Freedom of movement: But what about EU citizens? Don't they have freedom of movement and can work from anywhere in the EU? They absolutely can! But, when they pack up and work in another country for an extended period of time, they might come to enjoy the same rights as nationals of that country. Which means that your employee could claim additional benefits and you might have to pay them.
3. Income tax and social security: Many countries consider a person subject to their tax regulations after they've spent 183 days within their borders. The specific duration varies by country, but after this time, individuals are viewed as residents, subjecting them to local tax and social security systems. It's essential to keep track of any additional criteria that could establish residency beyond just the number of days spent. Also, the nature of the work performed abroad (e.g. strategic decision making) could establish a permanent business presence for the employer in that country, potentially leading to corporate tax obligations there.
4. Health & safety: Employers have a responsibility to maintain the well-being and safety of their employees, regardless of whether they're working remotely or outside traditional office settings. While corporate health insurance typically covers in-country employees and short vacations, prolonged stays abroad often fall outside the scope. And if remote employees encounter work-related injuries or health issues while abroad, they might use the local healthcare system. This could trigger an inquiry by local authorities into the employer's responsibility for social security payments or medical treatment expenses.

And I want to add two more points that are not compensation related, but contribute to reasons why an employer should always know where a remote employee works:

1. Visa: Tourist visas don't cover extended work periods, and business visas offer limited permissions. Occasional emails or calls during a holiday might be acceptable, but long-term work in a country on a tourist visa is against the rules. While some places are considering digital nomad visas to promote remote work, only a handful have adopted such provisions. Working without the proper permissions poses risks for both the worker and the employer.
2. Security & data privacy: A remote employee might pose an increased threat regarding the safe transmission of data, especially if data crosses borders. And handling personal data remotely can present data protection concerns. Especially if the employee moves from a region with data protection regulations to a country outside of that region.

Let's keep some perspective in the conversation

It's easy to get sucked into a Linkedin bubble and assume that remote and hybrid work are all everyone talks about. But let's be realistic: 80% of the global workforce is deskless. They can't work from anywhere. Their work is tied to a location: a restaurant, a hospital, a shop, a school, a bus etc. The other 20% are desk-based workers, and fully remote workers represent only a few points.

Still, even if the number is small, paying people correctly is important. And being transparent about the role location plays in your compensation strategy is important too. What I do hope you take from this conversation is that remote employees can't just pack up and work from anywhere. Even if we wanted to pay remote employees for what they achieve, we can't just ignore the location where they work.

Before you update your compensation strategy, I suggest you spend some time on determining what it actually means to have remote employees, and if you are ready for them to work from anywhere. Do a proper risk assessment. Define what a remote employee actually is. Once you have that clarified, it will be a lot easier to determine if location should be a factor in pay.