International competition to capture remote workers: the increasing use of EOR companies

Damiano Di Rienzo

Legance Avvocati Associati, Milan

ddirienzo@legance.it

Silvia Tozzoli

Legance Avvocati Associati, Milan

stozzoli@legance.it

Introduction

The Covid-19 pandemic and the consequent growth and interest in remote working has overturned decades of narrative relating to the ability of workers to work from home of from a location which differs from the traditional office workplace.

The latest Eurostat research of 8 November 2022 and 12 June 2023 shows that in 2019, approximately 5.5 per cent of employed workers in the EU usually worked from home. The impact of the Covid-19 pandemic was apparent as this share more than doubled in 2020 to 12.3 per cent. To a lesser extent, there was a further increase in the share of people usually working from home in 2021, reaching 13.5 per cent. The Covid-19 pandemic led many enterprises to turn to virtual meetings to bridge the physical distance and ensure the continuity of their businesses. In 2022, 50 per cent of enterprises in the EU with ten or more employees or self-employed persons conducted remote meetings online. Similarly, research by the US Bureau of Labor Statistics published on 22 March 2023, shows that in 2022, 27.5 per cent of the US private-sector establishments (2.5 million) had employees teleworking for some or all the time.

During this situation, countries appear to be competing to capture remote workers and, specifically, so-called ‘digital nomads’. The term ‘digital nomad’ typically relates to people (entrepreneurs, self-employed workers or employees) who travel while working, rather than travelling for business. According to academic definitions, digital nomads use digital technologies to work remotely; they have the ability to work and travel simultaneously, have autonomy over frequency and choice of location, and visit at least three locations a year which are not their own or a friend’s or family home.^[1]

As remote working and digital nomadism have expanded exponentially, this article aims to provide a first glance over the different approaches and solutions adopted by countries worldwide, highlighting the latest trends and challenges which emerge from these topics.

Major attractions for digital nomads: visas and tax benefits

In the global pursuit of attracting and retaining digital nomads, countries focus on crucial factors such as cost of living, internet connectivity, and recreational opportunities.^[2] Governments are actively implementing various policy initiatives to attract remote workers, including repurposing spaces for satellite offices, and creating new dual-living or co-living accommodation. In fact, the latest research show how countries are positively valuating the presence of digital nomads, which can enhance local infrastructure and help tourist destinations cope with typical downturns in tourists during off-peak seasons as well as, overall, help economies fight declines in population.

Those attracted to digital nomad destinations focus on several key aspects, including culture, nature, infrastructure, work facilities, amenities, economic factors, and social/political aspects.^[3] Even more importantly, such destinations offer digital nomad visas and tax policies to attract and retain remote workers, with 51 countries/regions offering such visas as of April 2023. For instance, the United Arab Emirates (UAE) has introduced a Remote Work Visa which allows professionals such as software engineers to reside there for a year, providing access to public services and exempting local income tax payments. Portugal’s Non-habitual Residency scheme allows entrepreneurs to become residents by spending a certain amount of time in the country each year. In Spain, France and Italy, digital nomad visas have emerged as mechanisms to attract remote workers seeking extended stays. Spain offers a non-lucrative residence visa, which allows individuals to reside in the country without engaging in local economic activities for a renewable period of up to two years, provided they can demonstrate sufficient financial means to support themselves. France has introduced the Talent Passport scheme, which includes a specific visa for freelance professionals, enabling them to live and work in the country for up to four years. Italy, through its Elective Residence Visa, permits non-EU citizens to reside there, provided they have adequate financial resources and health insurance coverage.

Digital nomad visas are sometimes complemented by tax policies, such as exemptions or reductions. Costa Rica offers reduced tax rates (30 per cent) for digital nomads, while Greece offers a 50 per cent tax reduction programme for those staying for at least two years. Furthermore, expedited application processes, discounted renewals, and favourable travel rights (eg, in Estonia) are among the competitive terms offered by some countries to make their digital nomad visa programmes more appealing and competitive. In Portugal, an example of this is the Digital Nomads Madeira Islands project, which is overseen by Madeira’s regional government in collaboration with Startup Madeira. Such initiatives offers remote workers a complimentary co-working space along with customised resources, including guidance on travel, accommodation choices and social engagements, irrespective of whether they are working under a tourist visa or any other visa category.^[4]

Compliance with immigration and employment rules and the risks posed by the EOR

Remote working, and namely digital nomadism, pose a number of challenges both for employers and workers^[5] and, particularly, challenges regarding compliance with immigration regulations (in those instances in which a digital nomad visa has not been provided by the law). The shift to remote work, whether full-time or part-time, can obstruct the obtainment of a sponsored immigration visa, which are usually designed for traditional in-person employment. Although the workers, which are the visa holders, are typically responsible for compliance with immigration provision, employers may face consequences such as losing sponsorship eligibility or reputational harm if their employees violate visa terms.

In general, remote working poses several challenges relating to compliance with local employment and labour laws (eg, minimum wage, paid leaves, health and safety in the workplace etc). In fact, key issues regarding, among others, tax and social security compliance may arise. Namely, an employers’ first concern relates to the possible triggering of a so-called ‘permanent establishment’ of the company abroad by the presence of a remote worker in a certain country. This would not only require the employer to pay taxes in the country in which the remote worker performs their activity, but it may also prompt criminal sanctions for tax evasion. Employers may also be required to adhere to the foreign country’s payroll obligations such as making social security contributions.

Employers tend to handle such challenges through an instrument known as ‘Employer of Record’ (EOR). Generally, an EOR refers to a service which a company contracts to a third-party organisation to handle various aspects of employment, such as payroll, benefits administration and compliance with local employment laws. This arrangement allows businesses to expand their workforce into new markets quickly and efficiently without the need to establish legal entities in each location and mitigating the risks related to international employment. The use of an EOR scheme is usually particularly sought after in avoiding the risk of a permanent establishment, handling tax and payroll matters, as well as for immigration visa sponsorship.

As a result, the demand for EOR providers, especially for handling isolated remote workers, has expanded resulting in a number of countries utilising this instrument, including Australia, Austria, Canada, Denmark, India, Singapore, Sweden, Switzerland and the UK. Consequently in 2023, the global EOR market size was valued at US$1.89bn and is expected to reach US$3.75bn by 2030. In contrast, it is worth noting that the use of EOR is unlawful in various EU countries such as Belgium, France and Italy. The use of such an EOR scheme in these jurisdictions could lead to civil, administrative and, possibly, criminal sanctions, as well as possibly invaliding any visa sponsored by the EOR. Therefore, the possibility of utilising an EOR, although certainly most convenient in some instances, should be assessed on a case-by-case basis.

Conclusion

The increase in remote working and digital nomadism, accelerated by the Covid-19 pandemic, has reshaped the landscape of employment and international mobility. As shown by Eurostat and US Bureau of Labor Statistics data, the increased prevalence of remote working has caused countries to compete for digital nomads’ interests through innovative visa and tax policies.

Nevertheless, alongside the opportunities presented by remote working and digital nomadism, there are compliance risks faced by employers and workers. Challenges include immigration regulations, compliance with local employment and labour laws, and tax and social security obligations. To address these challenges, many employers use EOR services, which facilitate international employment by handling payroll, benefits administration, and compliance with local labour laws.

The increasing demand for EOR providers, as evidenced by the sector’s expanding global market size, reflects the growing need for solutions to navigate the complexities of international employment. However, it is worth noting that the use of EORs is not universally permissible, with some EU countries prohibiting their use under penalty of civil, administrative, and possibly criminal sanctions.

Consequently, the phenomenon of remote work and digital nomadism presents both opportunities and challenges for employers, workers and policymakers alike. By adopting innovative policies and using solutions such as EOR services, economies and businesses are effectively attempting to harness and develop the potential of remote working in an increasingly competitive market.