Employment Solutions and ESG in the workforce

Rebecca Archer
Welcome to Navigating the New Normal – Grant Thornton’s podcast exploring trends in business and the marketplace.

I’m Rebecca Archer and today I am joined by George Bendall, Partner in Employment Solutions and Shivani Krishnamoorthy, Director in Employment Solutions.

Today we’re unpacking the connection between ESG and employment solutions. This includes a focus on work from anywhere policies that have grown increasingly popular as a result of the pandemic, global mobility programs as we now no longer rely on our domestic workforce to fill the vast range of roles, skillset and expertise needed to achieve businesses growth ambitions, as well as the more robust use of benefits through salary packaging to support Social and environmental change.

Welcome Shivani and George!

George Bendall
Thanks Rebecca, great to be here.

Rebecca Archer
Since COVID flexible work practices have offered real work life balance to employees, I'm wondering what are the key benefits and potential risks associated with employees working from home?

Shivani Krishnamoorthy
Thanks Rebecca. Yes, the way that we work has definitely revolutionised in the recent years, although this did become a necessity in COVID times and people may not necessarily view this sort of policy as an ESG strategy. It is more apparent than ever that businesses need to have flexibility in their working policy to remain competitive in the market and attract key talent as well.

From an environmental perspective, there are clear gains from the reduced carbon footprint from reduced commuting functions. However, the real ESG benefits SBC it is in the social aspect. So, employees experience a significant improvement in work life balance and inclusivity. There are efficiency gains from the loss of commute and remote work options can attract and retain top talent as well, and this also helps reduce office cost which supports efficient governance.

George Bendall
Yeah, I definitely agree with Shivani. There are some clear benefits to businesses of the work from home policies. We do need to think about some of the risks associated to ensure that these work from home policies are implemented correctly and sort of best align with businesses ESG strategies and of course their broader commercial strategy.

So, whilst I think the risks are commonly associated with things like disconnect, isolation and particularly with some of the younger employees making sure that they've got the appropriate support and training, I just obviously want to talk a little bit around the associated tax risks, which are sometimes a little bit lower down the pecking order.

So, thinking about a work from home policy from an Australia only perspective, just as a starting point, it's important to recognise that that sort of home terminology in work from home is much broader now. I have team members who frequently work interstate – maybe they're visiting family or friends, or maybe they just want a complete change of environment. When considering these policies on a national level, one of the immediate concerns is that the movement of people can sometimes cause some tax issues due to the interstate nature.

Therefore, you're getting this sort of tradeoff between promoting a policy that will highlight the social aspect of the ESG strategy for a sustainable and flexible work practice, but also this associated tax risks, which can be expensive if not managed correctly. So, for example, with that interstate movement, if payroll and HR programs are not up to date or correctly identifying where the individuals are, that can actually lead to payroll tax and workers comp issues because they're state led taxes.

Rebecca Archer
So, you've talked about the domestic picture there, but what about internationally? What can you tell me about that area?

George Bendall
Taking a sort of similar theme from the domestic side, looking internationally, the tax issues are almost exasperated. Further, as part of the employee attraction and retention piece, it is really essential for businesses to meet the social aspect of their ESG policies by offering this sort of work from anywhere policy, so individuals can experience the new working environments, the culture, rather than just restricting them to sort of measly 20 days a year to experience all of this.

That can vary a lot, but a lot of these businesses are now offering these policies where you can work from a country to say, two months at a time, but of course, with this increasingly agile workforce, businesses are potentially opening themselves up to increased tax risks caused by having employees in multiple jurisdictions at any one time. These risks can cause inadvertent employment, tax reporting or even corporate tax registration requirements if not handled correctly.

So, for particular jurisdictions, having someone there even for two months could actually cause a tax registration not too dissimilar to setting up a whole business in that country. So, businesses have really got to be aware of that.

Rebecca Archer
And how are businesses managing that risk? I guess particularly for the international policies that you mentioned.

Shivani Krishnamoorthy
So, you can't exactly reduce the risk completely, but businesses are definitely looking into tools and resources that are available to help mitigate the risk, which is what you're always trying to achieve. So, this can be in the form of having a tax risk matrix for selected countries to act as a decision tool to help underpin the remote working policy.

So, using other resources as well, such as double taxation agreements and social security agreements in this matrix can help streamline the program and provide guidance on the tax risk and expected triggers and also recommendations on the risk in each of these jurisdictions.

George Bendall
Yeah. Completely agree Shivani. It's about balance, ensuring that a policy can both promote the social aspect of the ESG program through this sort of increased global mobility and flexibility in working practices. They do have something practical like a matrix where the decision makers can make this informed decision, set the policy parameters and the approval process of specific working arrangements. So, this might involve – you might need to exclude countries where the risk is too high, ultimately. For example, where there's no double tax agreement or social security agreement. It also could even mean different rules for different people.

For example, if you're a citizen of a certain jurisdiction and you want to go back there to visit, there might be different timing restrictions on that versus say, someone who just wants to visit that on a working visa because of the different tax outcomes. 

Rebecca Archer
Global mobility programs, including staff secondments, are often a very popular incentive for employees. How does ESG factor into these?

George Bendall
ESG factors really gained significance in recent years – investors, employees, customers – they're all holding businesses accountable for their environmental impact, the social responsibility and their corporate governance. When I think about it from my sort of experience – when going through something like a graduate recruitment program and interview process, the same reoccurring theme always arises – the ability to, at some point, go on an international secondment.

It's such a huge incentive to pick one employer over another. For myself, I started in the UK and I went on an international secondment, and I know back then it probably wasn't labelled as part of an ESG strategy, but it was definitely one of the reasons I picked my employer. So, it's clear that the ability to undertake a secondment such as I've done is a fundamental pillar of the social aspect of an ESG strategy for Grant Thornton and of course, other businesses.

Shivani Krishnamoorthy
I completely agree, George. So, the ‘E’ – the environmental aspect of ESG can be addressed through global mobility programs by promoting sustainable transportation options, for instance, reducing emissions during relocations and also selecting more environmentally friendly housing arrangements, and if you look at the ‘G’ so the governance aspect, it's also critical to ensure transparent ethical practices in mobility programs.

George Bendall
Yeah, and then just sort of combining that. It's important to understand that when you're undertaking global mobility program, different regions have unique ESG priorities. Some jurisdictions are really in the infancy of adopting ESG as part of this, while others are much further down the track, and therefore it's not really a sort of blanket approach or one size fits all when sending someone to every jurisdiction.

It's the same way we've talked about for years, from a tax perspective, when you have a global mobility program, you can't have a one size fits all for the benefits, for example. So, in one jurisdiction you might send someone to housing will be concessionally taxed and therefore you encourage that, whereas somewhere like Australia, FBT means it's really costly. So, you've got to have a bit of flexibility in implementing your ESG strategy.

Just to add to that, from our recent conversations with our global Grant Thornton teams, particularly in the Netherlands and other parts of Western Europe, it's clear that some countries and regions are further along in those particular areas on their ESG protocols.

As such, with somewhere like the Netherlands in mind, it's essential for organisations to tailor their global mobility programs to align with their local ESG goals. So, for example, the mobility program should be more conscious on environmental conservation and companies may need to prioritise carbon neutral offsetting with the flights, maybe provide additional subsidies to support sustainable travel once they've actually arrived on the ground. So, thinking about sort of public transport, bicycles, things like that, and the nature and location of accommodation.

So really, it's about talking to global counterparts about their local ESG policy before you send someone there. And there should be an ongoing narrative talking about ESG as part of that.

Rebecca Archer
So, on a deeply practical level, what are some steps that organisations can take beyond what you've just discussed to integrate ESG principles into their global mobility programs?

Shivani Krishnamoorthy
So, when we think global mobility, there's definitely a degree of stigma associated with it. So, you immediately conjure up like images of international travel and then there's that inevitable carbon footprint that comes along with it, but it is key to highlight that as businesses, how are you thinking of these impacts and how are you trying to reduce this?

So, for instance, have you thought of measures with reducing unnecessary travel? So, think about the location of where the employees are staying in the new location; think about how companies can reduce unnecessary travel by using video conferencing and other communication technologies. So, this helps reduce carbon footprint but also saves time and money.

Businesses should also think about their policy and home leave flights like how often do they provide these flights and providing other kind of sustainable travel options. So, whilst it's important to keep that connection with the home location, this can be done in a more sustainable way through travel choices and timing.

The other thing to think about is collaboration with local partners and service providers – this is crucial. These local partners and service providers can help identify region specific ESG opportunities and challenges. So, building partnerships with ESG focused organisations or NGOs can also be beneficial in achieving sustainability goals.

George Bendall
Ultimately, to add sort of one further point is probably just the way that businesses are approaching mobility programs. So, in addition to all these sort of changes and strategies that they're implementing, ultimately they're conducting an environmental impact assessment first before an international assignment actually takes place. So, once they've sort of gone through that process, they're then either taking steps to reduce emissions, such as the things we've talked about having the ecofriendly housing options, reducing air travel and providing carbon offsetting, or alternatively actually thinking about an alternative to the travel. Maybe, as Shivani mentioned around can we do this by video conferencing or resourcing locally so the adoption of technology can play its role there.

So, I think ultimately having the environmental impact assessment first as part of a business case for an assignment will make businesses think a bit more holistically about whether they should go ahead with the assignment and the pros and the cons more broadly.

Rebecca Archer
What about businesses who want to think more about employment solutions closer to home? What tools are available to drive their ESG goals from a local perspective?

George Bendall
Yeah, that's a good question because as part of employment solutions it's not just about the global mobility, it's about a more broader employment package and we're certainly seeing a growing trend towards total employment package. So, this isn't just highlighting the pay and maybe a few other small perks, but a more conscious and rounded employment package to help improve culture and retention as part of social aspect of the ESG strategy.

For example, we're seeing things like wellbeing programs, so most businesses implement benefits packages that prioritise employee wellbeing. These are wellness programs, vaccinations, mental health support, childcare subsidies to kind of work through that diversity piece. These initiatives can contribute to the social aspect of ESG by fostering a healthy and inclusive workplace, as well as improving performance, reducing lost efficiency and production through illness. They can also be concessionally taxed as well, which is the most important thing from our view sometimes and provided that they are obviously carefully designed and implemented correctly.

Shivani Krishnamoorthy
Some of the policies from a global perspective are also relevant here and from a local perspective such as providing incentives for sustainable travel choices. So, these can help highlight the environmental aspects as well as striking a balance between the flexibility of working from home while trying to retain that connection with employees.

So, there are also other benefits that already might be provided such as gym memberships, which have not previously been thought about through an ESG lens. So therefore, it's important for businesses to highlight these as part of a more rounded ESG strategy.

The other thing to consider as well is that they definitely can use salary packaging opportunities or other sort of fringe benefits to support diversity and inclusion efforts. So, these might include offering benefits that cater to the specific needs of a diverse workforce and also by including flexible working arrangements or subsidies for remote working equipment.

Rebecca Archer
Are there any other environmental benefits that can be achieved through employment packaging?

George Bendall
The key one that's been trending in the last year is the change they've seen around the concessional treatment of electric vehicles. In short, from 1 July 22 employees can salary package zero or even low emission cars such as FEVS. This was a bit of a groundbreaking change in Australia and has a really big impact. Obviously, the environmental benefit of encouraging people to buy electric vehicles and you can, as a business, can harness this and promote it as part of an ESG strategy because it's clear like most of the current generation of workers are much more mindful of your brand as an employer, but secondly is of course the tax saving.

An employee can salary package the cost of a vehicle without making post tax contributions which basically that translates to if you had a $20,000 lease then that's a $10,000 saving to the individual a year. So, it's really having that environmental side but also having the savings associated. So, this is sort of showing it's not just a few perks but it's a more conscious, rounded employment package.

So, we will definitely be encouraging, obviously, if you can get them people to go out and look into electric vehicles, but also it should be the onus on the employers to sort of push that as one of their benefits because it still has some businesses not adopting that at the moment.

But just be careful, there are some rules around it such as thresholds, like the luxury car tax threshold of $89,322 applies, so you can't just rush off and buy any electric vehicle, but certainly something we're seeing a big change in 22 and 23 and going forward.

Rebecca Archer
Now we've discussed many environmental and social aspects, but what are some of the governance issues that organisations need to really be aware of in terms of employment tax?

Shivani Krishnamoorthy
So, if you tuned into the previous ESG podcast, Navigating the New Normal, businesses are now reporting on non-financial information. This includes ESG and it becoming more recognised under the International Sustainability Standards. So, from an employment tax perspective, the reporting is now expanded into the total tax contribution. So not solely specific to corporate tax, but looking at all taxes that businesses are making.

So, you may ask how this correlates to an ESG strategy? So, it shows the growing trend showing an organisation's commitment to responsible and ethical business practices and doing its part in ensuring governance from an organizational perspective. So, this is not isolated, it's just Australia, but globally it shows the business's commitment to government and total contribution to society.

George Bendall
Yeah, and I think just to highlight that, if you listen to, say, the Budget papers, or even if you filed your return, you get this report on your assessment which says where your tax dollars are going. So why should companies really limit themselves to their corporate tax when if you have a big workforce and you're contributing PAYG then you're obviously contributing very broadly to the economy as a whole. So, it's really just highlighting that it's not just the corporate tax contribution which we've seen, it's around your total contribution of tax.

Rebecca Archer
And are there any risks associated with this particular approach? 

George Bendall
The fact that you're being more transparent with your total tax contribution, particularly in respect of employment taxes and entitlements such as super, there's obviously a greater risk associated with that tax governance. It's quite a litigious environment at the moment. We've seen a lot of controversy in the news around shortfall of employee entitlements as well as ensuring a fair and equitable tactical tax contribution.

So, the impacts can obviously be detrimental from both a social aspect and a governance aspect if you actually promote this but also fail to comply. As such, before implementing any of these sort of strategies, we'd always recommend a bit of a robust tax governance process before you effectively go live and show to the world, and we've seen with the introduction of single touch payroll 2, there's an increased visibility of incorrect coding for withholding and superannuation. As such, one of the strategies that companies are taking as part of this tax governance is a pay code review, just making sure that they're reporting all of the right employee entitlements, including super.

Often, we see that payroll providers will set this up with default codes and then kind of put the onus back on employers to correctly categorise as such, the sort of one oversight when you're implementing this can lead to continued incorrect reporting going forward.

Shivani Krishnamoorthy
It's also important to think beyond tax. Recently in the media, you would have seen some attention being given to underpayment of wages. So, it's important that employers complete a broader payroll assurance review and revisit their interpretation of the enterprise agreements and awards to ensure the correct application of wage rates and that you're paying employees correctly.

So incorrect payment of wages just doesn't stop at the underpayment of wages or possibly overpayment of wages even. There's also a greater impact on the payment of things such as superannuation, PAYG, withholding and payroll tax as well. So, there is sort of like a continued flow of not looking at this.

Rebecca Archer
George and Shivani, thank you so much for your invaluable insights today. I wonder, do you have any final comments or maybe some tips around how businesses can best tie employment solutions within their broader ESG goals?

George Bendall
I think for me, the key trend at the moment is around successfully implementing a work from anywhere policy. I think businesses that don't adopt these will start to lose their competitive advantage in attracting and retaining the staff and we know how significant, particularly in this time, this current environment, about keeping and retaining the best talent.

So, I think implementing these programs with an eye on the environmental impact, of course, and making some small but significant changes to the sustainable nature of these and the associated travel will be a way of implementing them with a commitment to a broader ESG strategy. Furthermore, like talking to my tax routes, of course, there's ways that these need to be refined to best manage and minimise any tax risks associated and to protect both the business and of course, the employee as well.

Shivani Krishnamoorthy
The other thing to consider is also providing a more rounded benefits program. So, this might include the provision of employee wellness programs, gym memberships, incentives, vaccination programs and even mental health support.

In addition to this, from a sustainability point of view, organisations can consider encouraging more environmentally friendly travel. So, this includes, say, maybe salary packaging, electric vehicles, or the provisions of incentives to promote the use of more sustainable travel, like the use of public transport, for instance.

So, they're definitely easy steps that businesses can start taking to create a more robust ESG strategy.

Rebecca Archer
Now, if listeners would like to hear more or get in touch and perhaps find out more about how you might be able to specifically help them, how should they find the both of you.

George Bendall
So, we’re both on LinkedIn; we have our details on Grant Thornton website. There's also an Employment Solutions landing page, Grant Thornton, which gives you some more insight on some of the other topics we've discussed as well. 

Rebecca Archer
If you liked this podcast and would like to hear more, you can find and subscribe to Grant Thornton Australia on Apple Podcasts or Spotify.