Editor's note: This article is a contributed piece by Steve Black, co-founder and chief strategy officer of HR technology company Topia. The views expressed in the article are solely those of the author.

For cost-conscious CFOs, the pandemic has brought some silver linings: business travel has nearly vanished, landlords are willing to negotiate rents, and companies are vacating offices as leases expire. Since everyone is working remotely, why pay high prices for real estate in San Francisco, New York, or London?

However, closing offices to save money could be a short-sighted move. Decisions about physical office space should be made in consultation with the Chief Human Resources Officer (CHRO)—talent strategy will determine how the company uses office space in the future.

At the same time, talent strategy can bring unexpected tax and legal risks, especially when employees can work from anywhere. Governments facing budget deficits have little to lose and much to gain in investigating whether remote employees are violating tax or even immigration laws. Next year is likely to be the "year of audits."

Steve Black
Steve Black Image source: Topia

Rather than closing offices to save money, I suggest CFOs and CHROs discuss three factors together that affect office space needs, remote work policies, and the relationship between compensation and location.

How does office space affect employee productivity, well-being, and retention?

The decision to allow remote or hybrid work after the pandemic is not just about real estate costs. A study commissioned by real estate firm JLLsurveyshows that office employees are divided on remote work: half want to continue working from home but come to the office twice a week on average; a quarter want to be fully remote; the remaining quarter want to be in the office full-time.

Productivity considerations

The reasons for these differences are not hard to imagine, especially if you have children attending online classes at home—that is a productivity and efficiency issue. Netflix CEO Reed Hastings told the Wall Street Journal that remote work is "purely negative." Microsoftresearchfound that remote collaboration and video conferencing trigger brainwave patterns associated with stress and overwork. However, a study by consulting firm Mercersurveyshows that among about 800 U.S. employers, 94% said productivity was flat or higher compared to pre-pandemic levels even with employees working from home.

What is clear is that the best remote work policy depends on company culture, job roles, locations, technology stack, and many other variables beyond the CFO's control. Therefore, CFOs and CHROs must coordinate before closing or opening offices.

Liability considerations

Additionally, remote work policies carry tax and legal implications. From a tax perspective, there are good reasons to leverage geography. For example, Amazon has 55,000 employees in Seattle and plans to place25,000 employeesin Bellevue to avoid Seattle's 1.4% "Jump Start" payroll tax on employees earning over $150,000 annually. Similarly, Goldman Sachs isconsideringmoving its asset management business from New York to Florida as part of a $1.3 billion cost-cutting plan.

Managing the tax risks of company-level, organized relocations is relatively straightforward. Butflexible workpolicies can make employee mobility unpredictable and risky.

Suppose your company is a partnership and has implemented an indefinite "work from anywhere" policy. A top business developer based in New York wants to leave the city, which seems like a cost-saving opportunity. New York City's Unincorporated Business Tax (UBT) imposes a 4% rate on income earned within the city, but only applies to work performed within the city. If this business developer moves to the suburbs (e.g., Larchmont in Westchester County), they can avoid the UBT—unless the employee comes into the city for meetings, in which case careful records must be kept to withstand an audit.

Perhaps this business developer and three London colleagues have a more interesting location choice: they rent a chalet in the French Alps. Permanent establishment rules mean your company could inadvertently have a French entity. If these employees become French residents, your company must meet French standards for paid leave, parental leave, health and safety, and terminating these employees would become extremely difficult. Additionally, your company may need to regularly pay for these employees' flights and hotels back to headquarters—after all, the policy says "anywhere," right?

With the rise of so-called "Zoom towns" in resort areas, such dilemmas are more common than one might think. CFOs and CHROs must collaborate here. An effective approach is to list "green light" and "red light" locations based on their impact on tax risk, travel costs, and legal liability.

Handling compensation arbitrage

Before the pandemic, most companies paid based on local market salary levels and cost of living. The average rent for a San Francisco apartment is$3,111(down 16% year-over-year), but still much higher than the average rent in Bozeman, Montana, at$1,266. If you take a San Francisco salary and move to Bozeman, you naturally want to keep your original pay. Therefore, employees may deliberately hide their actual residence, which exposes the company to tax and legal risks.

CHROs and CFOs have responded to thiscompensation arbitrageconflict in different ways. Some companies stipulate that pay remains unchanged as long as employees return to their residence within six weeks. For employees wanting to leave the Bay Area, Stripe hasoffered a $20,000 relocation bonus, but salaries will be cut by 10%. Reddit, on the other hand, says it will not reduce salaries regardless of where employees choose to live.

You and the CHRO must jointly manage this risk. Reddit's decision simplifies risk management because employees have no incentive to hide their residence, which involves payroll withholding issues. Another option is to use smartphone-based technology that records employee location without invading privacy, with enough detail to satisfy audit requirements.

Strategy first, cost second

Before closing offices to save costs, sit down with your CHRO and discuss: how office space fits into company culture and talent strategy; remote work may temporarily empty offices but can bring new travel costs, tax risks, and legal liabilities. Finally, examine whether your compensation policies incentivize employees to hide their whereabouts, and how to address that.

The COVID-19 pandemic will not last forever, but the choices you make regarding global mobility may affect your competitiveness in the talent market for years to come. Do not rush to close those offices.