Working from home - who pays?
COVID-19 lockdowns have forced millions of office workers to transition to working from home. Kitchen tables and spare bedrooms have been commandeered as make-shift home offices and reliable home internet has become a necessity as usage of Zoom and similar products has soared.
Eventually COVID-19 will pass but expectations around working from home may be long lasting, expediting an extant trend. The Christchurch and Kaikoura earthquakes made clear to New Zealand employers that employees need to be ready to work from home as part of a resilience strategy. Employees exceeded expectations in terms of productivity during the COVID-19 lockdown leading many to suggest that post-pandemic, working from home will be the norm.
The question is, who should pay when employees are working from home? Employees based in the workplace expect their employer to provide a computer, an ergonomically set up workspace, stationery, the internet, and electricity. Conversely, a self-employed person working from home is permitted under New Zealand’s income tax rules to deduct some expenses related to these (e.g. an annual amount of depreciation on capital items of expenditure such as computers and office furniture) against their taxable income. However the ‘employment limitation’ in the Income Tax Act 2007 (s DA 2(4)) specifically precludes employees from claiming deductions for expenditure incurred in the course of deriving income from employment.
New Zealand employers may choose to reimburse their employees for the costs of working from home but there is no requirement that they should do so. Regrettably, IRD’s guidelines for reimbursement seem needlessly complicated for both employees and employers. Firstly, the amount to reimburse is not always easy to determine. Typical household expenses that increase due to working from home (e.g. power, Internet, rent or mortgage, etc.), must be either apportioned based on the area of the home set aside for use as an office, or alternatively by applying a fixed rate determined by IRD based on the average cost of utilities per square metre of housing for an average New Zealand household. This might be straightforward enough when the employee has a dedicated home office, but what about those working from the kitchen table or the spare bedroom? Secondly, employers must ensure that they have categorised any payments to employees correctly, as either a reimbursement, which is not subject to tax, or an allowance, which would be subject to PAYE.
The government has recognised that lockdowns have resulted in increased costs for many employees, and as part of their COVID-19 response, has sought to temporarily simplify the reimbursement process for employers. IRD has introduced a safe harbour threshold of $15 for general expenditure relating to working from home, as well as a $5 threshold for costs related to telecommunications tools and plans. This allows employers to reimburse employees up to the threshold amount without the need to go through the cumbersome process of apportionment described above. However, this measure is only temporary and will expire in September this year. It also seems woefully inadequate to cover all of the increased costs of working from home employees incurred during lockdown.
Thus, despite IRD’s efforts to temporarily simplify the process, complexities remain. Moreover, in the current environment of pay cuts and looming redundancies, it would take a brave employee to stick their head above the parapet to ask for reimbursement. Cash flow pressures arising from the lockdown may also further restrict an employer’s ability to reimburse their employees to the extent they may like to.
The situation seems unsatisfactory. While it may be hard on employers to pay the costs of home working, it is also untenable for employees. The principle of equity is undermined when taxpayers are treated differently based on the way their income is sourced – an employee working from home should not be in a worse position than someone who is self-employed, running a small business from home. New Zealand is out of step with other jurisdictions in this respect.
Australia’s tax rules do not prevent employees from deducting work related expenses from their taxable income. Indeed, the criteria for claiming a deduction as an employee in Australia seems straightforward: the employee must have spent the money themselves and cannot have already been reimbursed; the expense must be directly related to earning their income; and there must be a record to prove the expense was incurred. This means that employees do not have to seek reimbursement through their employer when they incur costs associated with their employment, saving compliance and administrative costs for both employees and employers.
Similarly, Canada’s ‘workspace-in-the-home’ deduction allows Canadian employees to claim a deduction for expenses incurred in the course of carrying out their employment duties from home. Qualifying for this deduction is simple for both employees and employers. Employees must either work from home more than 50 per cent of the time, or use a home office exclusively for work and regularly meeting clients. Employers are required to fill out a form certifying that working from home is a condition of employment.
In Switzerland the Federal Supreme Court has ruled in a decision dated 23 April 2019 that if an employee is required to work from home, the company must pay a share of the rent. ‘Companies must pay share of rent for employees working from home’. Earthquakes and pandemics are an unavoidable part of life, and all we can do as a community is attempt to manage the risks and spread the costs of such events equitably. As it currently stands in New Zealand, the costs of home working are predominantly being transferred onto employees. Perhaps it would be appropriate for the state to take up some of the burden through tax concessions if employers cannot.
If the shift to work from home becomes permanent as a long term cost saving to employers rather than as a short term crisis response, then question of who should pay – employees, employers, or the state requires careful consideration; the moral justification for employees bearing these costs becomes more dubious.