The Rise of the Digital Nomads

Employer Considerations for the Next Breed of Remote Workers
by Laura A. Siclari and Cara A. Fialkoff

Reprinted with permission from NJSBA’s June 2023 issue of New Jersey Lawyer magazine.

As remote work policies implemented during the COVID-19 pandemic demonstrated that employees can effectively work from anywhere, the digital nomad lifestyle began gaining momentum. The Merriam-Webster Dictionary defines “digital nomad” as “someone who performs their occupation entirely over the internet while traveling”1 These types of remote workers can travel and work domestically or internationally and may include self-employed individuals, freelancers, and employees. The internet keeps them connected to jobs, coworkers, and clients.

Statistics show that the number of digital nomads from the U.S. has nearly quadrupled over the past four years and was up to 16.9 million as of September 2022.2 The total number of digital nomads worldwide has ballooned to over 35 million, with 52% coming from the United States.3 As of 2022, the percentage of digital nomads who are traditional remote employees has overtaken the independent workers by 66% to 34%, respectively—a shift caused by the pandemic-driven remote work boom. Additionally, digital nomads by-and-large are well-educated and technologically savvy, with 47% of digital nomads being in their 30s. Digital nomads work in a wide variety of fields, with the primary professions including information technology (21%), creative services (12%); education and training (11%); sales, marketing, and PR (9%); finance and accounting (9%); and consulting, coaching and research (8%).4 The unifying theme of these professions is that they can be performed remotely using digital tools and the internet.

As these statistics reflect, the digital nomadism trend has reached the size and scale across industries such that many employers can no longer ignore it. Accordingly, it is crucial to understand the rules and regulations that come with employing this unique type of professional. These considerations include: (1) digital nomad travel laws; (2) payroll and tax obligations; (3) worker classifications; and (4) other employment law considerations.

Digital Nomad Travel Laws

Digital nomads may travel and work in a variety of countries through tourist visas or digital nomad visas. Tourist visas typically last from 30 to 90 days, sometimes up to six months, and can suffice for a short-staying digital nomad unless a particular country’s tourist visa prohibits work in that country.5 In the alternative, a growing list of countries6 have instituted digital nomad-friendly travel policies with incentives and special visa programs for applicants to both travel and work. For example, countries like Bermuda, Dubai, Greece, Iceland, Croatia, Mexico, Portugal, as well as others, offer digital nomad remote working visa programs that permit remote workers to stay in their country for an extended period (often up to one year), as long as they meet the visa requirements. These requirements may include proof of employment, their own insurance, and demonstration of a mini- mum monthly income. In most cases, employment with a local company in the country where the remote worker is traveling is not permitted by either a tourist visa or a digital nomad visa. These programs only work when the employer is outside of the country.

Businesses managing or supporting the visas of their remote working international employees must be mindful of each country’s specific laws and regulations and may want to consider using third-party agencies specializing in remote and international workers.

Payroll and Tax Considerations

Both digital nomads and their employers are subject to the tax and payroll laws of the state or country where they work. Compliance is a key challenge for all businesses employing out-of-state or international workers. Taxes are one of the biggest compliance issues, as employers must ensure that the correct local deadlines and payroll regulations are met and what documents the company and employee are required to have based on the country or state where the employee is working. Indeed, in certain countries, such as Italy, payroll tax rates are deter- mined at a local level7 and can vary from town to town or region to region. It is the responsibility of the employer and its payroll specialist to determine whether payroll is being calculated correctly and whether the overtime rules applicable to each international or out-of-state remote worker are being followed.8

For domestic remote workers within the United States, the business will likely be required to withhold income taxes for the state in which the employee lives and works. While some states suspended temporary presence rules for employees due to the COVID-19 pandemic, these provisions have largely expired as of 2023. Several states, such as Connecticut, Delaware, Nebraska, New York, and Pennsylvania, have a “convenience of employer rule” which asserts that a state has the right to impose an income tax on wages an employee earned while working for a business based in that state.9 To address this, some states have entered into “reciprocal agreements” which may limit an employee’s tax obligations. For instance, the Reciprocal Personal Income Tax Agreement between Pennsylvania and New Jersey provides that compensation and wages paid to New Jersey residents employed in Pennsylvania are not subject to Pennsylvania income tax. Likewise, compensation and wages paid to Pennsylvania residents employed in New Jersey are not subject to New Jersey income tax.10 It should be noted that while New Jersey has a reciprocal tax agreement with Pennsylvania, there is no agreement with New York. However, New Jersey residents may receive a tax credit for taxes paid to New York, or another state, on income earned in and taxed to both states.11

There may also be different tax implications if an employee’s presence in a state is temporary. Temporary presence rules vary among states and often involve a determination as to the number of days an employee resides in a state. States with a 183-day residency rule, such as California, Massachusetts, New Jersey, New York, Maryland, Vermont, Washing- ton D.C. and Delaware, will consider an employee a full-year resident for tax purposes if the employee spent more than half the year in that state.12 It should be noted that the burden of proving residency varies from state to state and some may require documentary evidence. As such, it is important for employees who frequently travel and work between states to keep track of the number of days spent in each state.

In general, businesses that permit employees to work remotely out of state or internationally should consult with their tax counsel to ensure they follow all applicable tax and payroll rules and regulations for all of their workers.

Worker Classifications

Accurate classification of employees and independent contractors is critical to ensuring compliance with local labor and tax laws. Digital nomads may be either direct employees or contractors/ freelancers depending on a number of factors, the most important of which is the worker classification law in the country where the worker resides. As the digital nomad lifestyle grows in popularity, several countries have introduced or passed worker classification legislation or rules aimed at capturing tax revenue of the freelance remote worker. For example, the United Kingdom implemented IR35, known as the “off-payroll working rules,”13 which may apply to digital nomads. Spain also launched new legislation on external worker classification. The European Union (EU)’s new proposed rules on “platform work” will regulate digital labor platforms and may result in more uniform worker classification rules across the EU if passed.14

Employers may want to consider partnering with local resources in the countries where they employ their remote workers or recruit talent to ensure legally compliant employment.

Other Employment Law Considerations

Employers are responsible for knowing and applying all other relevant and applicable employment laws for the states or countries where their workers reside, which can vary significantly between countries and states. Such laws may include: transportation taxes (withheld from wages); different tax treatment of employee benefits; wage garnishment restrictions/limits; family/sick leave requirements; disability insurance; discrimination and whistleblowing laws; pay equity laws and reporting; background screening restrictions; and privacy & employee data protection.15

For example, within the United States, federal law requires the posting of notifications of specific worker rights under the Fair Labor Standards Act (FLSA), the Family and Medical Leave Act (FMLA), and other acts. With the growth of remote working, traditional physical postings required by the U.S. Department of Labor (DOL) may not suffice. In December 2020, the DOL’s Wage and Hour Division (WHD) issued Bulletin No. 2020-7 which detailed guidance on meeting poster requirements for remote workers.16 In most cases, electronic notices supplement but do not replace the statutory and regulatory requirements. Whether notices are provided electronically or in hard-copy format, the bulletin reiterated that it is an employer’s obligation to provide the required notices to all affected individuals.

Rules and regulations such as these are just one of many potentially applicable federal, local, and international employment laws that employers must become educated on and apply to their applicable workers. Having specialized human resource employees or outside third-party agencies knowledgeable of the employment laws of the states and/or countries of an employer’s digital nomad workforce is critical to ensuring compliance and employment protections for each employee.

Last Thoughts

Employers considering opening their talent pool to digital nomads both domestically and internationally have potentially significant benefits to gain, which include using a category of professional reported as being among the most satisfied in the world with their work and lifestyle.17 Job satisfaction significantly impacts employee retention, which directly benefits the employer’s bottom line. Another significant benefit can be talent acquisition, as companies are better able to attract the best talent by expanding their acquisition efforts across borders. However, with these benefits come the challenges that employing digital nomads and other remote workers bring. Employers must be prepared to educate themselves on the various laws and regulations applicable to all of their workers and to use the resources necessary to compliantly and successfully retain these unique professionals.

Reprinted with permission from NJSBA’s June 2023 issue of New Jersey Lawyer magazine. Download a PDF of the article.

Endnotes

1. merriam-webster.com/dictionary/ digital%20nomad
2. Statistics taken from the 2022 MBO Partners State of Independence in America Study Survey. infmbopartners.com/rs/mbo/imag es/2022_Digital_Nomads_Report.pdf
3. statist.com/statistics/1298849/ digital-nomads-by-nationality- worldwide/
4. infmbopartners.com/rs/mbo/ images/2022_Digital_Nomads_Repo rt.pdf
5. remotcom/blog/managing-digital- nomads-compliance#what-are-the- visa-requirements-for-digital-nomads
6. citizenremot.com/visas/
7. globalization-partner.com/blog/your-guide-to-global-payroll-in-2021-and-beyond/#what_are_the_challenges_of_setting_up_global_payroll
8. for.com/sites/adp/2017/11/15/ top-5-challenges-of-managing- international-payroll
9. com/spark/articles/2022/06/implications-of-work-from- anywhere-when-remote-workers- cross-state-lines.aspx
10. statnj.us/treasury/taxation/ njit25.shtml#:~:text=If%20you%20are%20a%20Pennsylvania,give%20it%20to%20your%20employer
11. nj.gov/treasury/taxation/pdf/pubs/misc/nj601_i.pdf
12. investcom/tax-residency- rules-by-state-5114689
13. gov.uk/guidance/understanding-off- payroll-working-ir35
14. for.com/sites/jonyounger/2023/02/08/as-more-freelancers- work-across-borders-expect-more- emphasis-on-worker-classification- and-tax-collection/?sh=47cc75325c4c
15. com/spark/articles/2022/06/implications-of-work-from- anywhere-when-remote-workers- cross-state-lines.aspx
16. gov/sites/dolgov/files/WHD/legacy/files/fab_2020_7.pdf
17. See Endnote 2.