Employee relocation expense can be a complex area with many opportunities for failure if not handled correctly.
Employee relocation costs can escalate as unplanned surprises will undoubtedly make it more expensive than you first anticipated - both for the company and the employee. Make sure you have all bases covered and work out exactly what costs you are likely to incur when relocating an employee.
Do You Have a Relocation Service Delivery Agreement?
For any service you engage or product you intend to purchase, you should agree the price in advance. The same goes for employee relocation services, even if you are relocating just one member of your team.
Some relocation companies will confirm costs for a “one-off” relocation via a brief email whilst others use a service delivery agreement that details agreed service costs as well as their responsibility to deliver relocation services to you. This approach ensures that there are no surprises throughout the relocation process.
Which Services Do You Need?
If you do not have any experience of relocating staff, you may not know which services you are likely to need or want to include in your relocation policy. Count 12 basic services to actually get your employee settled at their destination, and at least another 6 support services for HR and the organisation. You may or may not need all of these services, but you will need to rely on a relocation provider to guide you - a consultative approach can assist you in identifying which ones are relevant to your organisation.
A great employee relocation company will assess your needs, as well as those of your relocating employee(s), and put together a service suite that supports those requirements without the need for unnecessary add-ons that increase the cost of relocation without adding any tangible value. This will enable you to see what you are buying and how much it will cost.
However, providing personal support to your employee(s) is only a segment of the financial pie chart and there are a number of other areas that you need to bear in mind that will impact the overall cost of relocation. Let’s look at a handful of them:
Employee Tax Liability
One point that is often overlooked is how relocation services are taxed. It is a given that tax is as inevitable as death, but does the organisation incur any tax liabilities when relocating an employee? In the UK, for example, some organisations choose to pay the employee’s tax liability arising from receiving relocation services (it is classed as an employee benefit), but whilst this makes the prospect of relocation more attractive to the employee, it can significantly increase the overall relocation cost to the organisation and not the kind of surprise the budget holder will warm to in a hurry.
Take time to discuss the tax implications of relocation with a tax specialist. Whether you are relocating in-country or internationally, specialist tax advice relating to relocation will help you avoid pitfalls and remain compliant.
When your employee relocates and works in another country, they may be subject to different taxation from the home country, or even to double taxation, where they are taxed on their declared income in both the home and host countries. Some countries have agreements (tax treaties) to offset this double taxation situation, but in the absence of such an agreement the organisation will need to consider its position in relation to the employee’s tax burden and this may increase the overall relocation cost.
Organisations use tax equalisation policies to offset any such difference so that working abroad is tax neutral for the worker. Ideally, under a relocation programme, the employee should neither gain nor lose and similarly, under tax equalisation policies an employee incurs “no gain/no loss” on their income tax burden. This makes the prospect of an overseas assignment much more attractive to the employee.
Essentially, the employee maintains the same tax burden as if they had remained at the home location and the employer bears the tax impact of the assignment and any increase in tax costs that may arise during the assignment.
Cost of Living Allowance
A Cost of Living Allowance (known as COLA) is an element of the expatriate compensation package based on what is known as the “home-country balance sheet approach”. The balance sheet approach implies matching the expatriate’s salary with home-country peers rather than with host-country colleagues in order to maintain the expatriate’s standard of living at the same level as it was in the home country.
Conversely, the “host-country based approach” links compensation to the salary structure of the host country, taking into account local market rates and compensation levels of local employees.
The COLA offsets the higher overseas prices of non-housing goods and services to ensure the employee remains in a “no gain/no loss” situation. It is calculated by comparing the prices of goods and services in the home location with average prices for equivalent goods in the host location.
You may provide further benefits to your relocating employee(s), either to make the assignment more attractive to them or as a matter of necessity (e.g. keeping them safe, or to satisfy host-country legislation) and these should be covered as part of a relocation policy build exercise. We won’t go into detail here as this is a subject for another time, but be aware of the following benefits that are commonly provided to relocating employees. Naturally, they all add a cost to the relocation but you will need to establish whether or not they form part of your policy:
Home leave allowance
Car and driver
Essentially, if you choose the right relocation delivery partner, they will be able to guide you through the process and help you reduce or avoid unnecessary costs.