The Workplace: Remote Office or Hybrid?

from Middle Market Executive // Spring 2022

by Association for Corporate Growth

Value-Add: Funding Southern Lower Mid-Market Businesses

Remote, Office or Hybrid?

How Mid-Market Businesses Can Make the Right Choice

THE STAND-UP //

The Workplace

Return to the office, embrace a hybrid workforce or continue with a remote strategy? HR professionals consider how mid-market businesses can make the right choice for their needs.

BY CAROLYN VALLEJO

Some of the biggest names in business led the way at the beginning of the pandemic to embrace a remote workforce. The middle market, on the other hand, took a bit of convincing before embracing the shift.

“The mid-market was a laggard, in my opinion, in really going public about what they were going to do,” says Scott Baker, founder and CEO of HR leadership and consulting firm Stage 3 Leadership. “They held back to see what the other ‘bigger companies’ were going to do.”

With pandemic restrictions easing, and confidence about in-person gatherings gaining strength, some of those big names—including Microsoft and Google—have publicly announced their plans to return to in-office work.

While some middle-market companies may be tempted to once again wait for cues from multinational conglomerates, HR and talent experts agree: Mid-market companies have an opportunity to gain a competitive advantage by carving out their own strategy for the workforce.

A Competitive Advantage

Amid the Great Resignation, it’s now a well-known trend that employees hold much of the leverage during the hiring process. It’s also widely understood that many professionals are prioritizing a work-life balance, one that allows for flexible or entirely remote working.

As Nate Olsen, former ACG board member and vice president of global alliances, global employment outsourcing at HR outsourcing and payroll service provider Safeguard Global, explains, middle-market companies can secure a significant competitive advantage by continuing to support a remote workforce.

“The pandemic has essentially fast-forwarded the ability to reach talent pretty much anywhere on the planet,” he says, admitting that while he was skeptical in the beginning, the prominence of remote staff has proven its benefits: happier employees without compromising productivity.

Rather than viewing the HR decisions of Google and Microsoft as a blueprint, middle-market businesses should instead look at those developments as an opportunity to gain an even greater competitive edge, says Jason Blonstein, managing director at ECA Partners, which provides talent solutions for businesses and private equity firms.

“Whether you think you’re competing with Google or not in terms of your product or services, in some ways, you’re competing with them for talent,” he notes.

Stage 3’s Baker agrees.

“This is a once-in-a-lifetime opportunity for mid-market companies to go and grab some incredible talent from Microsoft and Google that normally would not be attracted to the mid-market,” he says, pointing to research that suggests professionals are willing to take a pay cut in exchange for greater job flexibility.

Indeed, last November, Owl Labs and Global Workplace Analytics released the annual State of Remote Work survey, which found that nearly half of U.S. workers would be willing to take a 5% pay cut in order to continue working remotely or in a hybrid environment. What’s more, 25% of the 2,050 full-time professionals surveyed said they would quit outright if they were no longer allowed to work remotely.

For the middle-market companies that deploy flexible work strategies, there is an opportunity to scoop up the professionals who choose to reenter the job market rather than stick around with a company that requires a return to the office.

Justifying the Return

Of course, a fully remote workforce isn’t the right decision for every business.

Blonstein points to manufacturing companies, for example, that do not necessarily have the option to have professionals work away from the plant. And even if a company does have the option to continue a remote working strategy, there are arguments in favor of the return to the office.

THE STAND-UP //

The Workplace

For a company like Google, Olsen says, often the justification for returning to the office is the concept that in-person collaboration spurs innovation, which creates a competitive advantage.

The problem arises, however, when companies fail to adequately communicate to their staff why they have made the decision to require a return to the office. According to Baker, failing to justify that decision to talent can backfire, harming workplace culture, increasing turnover and dulling a company’s competitive edge.

“A big part of a highly engaged team is having trust,” he says. “Companies need to articulate why they need employees back in the office, and I don’t think many companies have done that. ... What data has Microsoft shared to say they think their employees are more productive and effective by being in the office? I have not seen or heard of that data being shared yet.”

Even hybrid strategies can fail to meet employee needs and expectations, he warns. If businesses require their most essential and valuable employees to work at the office, remote-working employees may feel devalued. If one employee is allowed to work remotely for several days to care for a sick child, other professionals may feel slighted that they aren’t permitted to work from home as well.

Business leaders have everything from employees’ child care needs to daily commutes to consider when deciding whether to return to the office or not, and with so many factors at play, it can seem overwhelming to begin the process of making any workforce changes.

According to Olsen, executives should take a data-driven approach to this evaluation by first surveying staff to understand their needs and obtain feedback. That way, when it comes time to make and implement the decision, those business leaders will be able to justify their choice.

“We’re not saying you should be all-remote, all over the country, all over the world,” Olsen adds. “What we’re saying is, you should evaluate your situation, and evaluate how you

can meet those employees where they are.”

Companies need to articulate why they need employees back in the office, and I don’t think many companies have done that.

Making the Right Choice

While the Googles and Microsofts of the world may be publicizing their choice to return to the office, HR executives agree that middle-market companies need to carefully consider their own needs and goals before doing the same.

In addition to understanding competitive opportunities, as well as employee needs, business leaders should also remember that the job market remains in flux, and further changes may be coming.

For one, Blonstein predicts that the balance of power that currently weighs in favor of job-seeking professionals will eventually readjust.

“As the market will inevitably shift back to an employer-driven market, I think you can expect to see more and more companies requiring people to be in-person,” he says.

Others aren’t so convinced of this inevitability, especially considering recent findings that remote work does not lead to a decline in productivity. That same Owl Labs report, for example, found 90% of remote employees reporting they were as productive, or more so, working

from home compared to working in an office.

Olsen emphasizes the importance of challenging CEOs and other business leaders to make a decision backed by data and a full understanding of the implications of any move. But more importantly, he says, middle-market companies should broaden the scope of the conversation beyond simply where employees will physically operate, and begin to consider deeper, more fundamental changes to workforce strategy and talent management.

“It’s so much bigger than just where people work,” he says. “It’s not just work-from-home, hybrid or whatever. It’s really about rethinking the entire structure of how we work together.” //

Sovereign Wealth Funds: Important Investors With Specific Tax Concerns

By Steven D. Bortnick and Morgan L. Klinzing

Sovereign Wealth Funds (SWFs) are an important source of capital for private equity funds. SWFs generally enjoy favorable tax treatment in the U.S., but this treatment is subject to specific limitations; SWFs typically require separate LPA provisions or side-letter protection to ensure that their favorable tax treatment is not thwarted by the activities of the funds in which they invest.

US Tax Exemption. Foreign governments (including for this purpose wholly-owned subsidiaries (1) formed in the same jurisdiction as the foreign government, (2) the net earnings of which inure entirely to the benefit of such subsidiary or the foreign government, and (3) all of the assets of which must be paid to the government in the event of liquidation) are exempt from U.S. tax on certain U.S. source income, including dividends and interest paid by U.S. payors, and gain on the sale of stock and bonds issued by U.S. issuers.

Commercial Activity Income. Importantly, income from commercial activities (CAI) is not exempt from tax. Moreover, income received by a controlled commercial entity (CCE) does not benefit from this exemption, nor is income (e.g., dividends) from a CCE or gain from the sale of a CCE exempt.

Commercial activities include activities ordinarily conducted with a view toward producing income, but do not include investing in stocks and bonds or trading in stocks, securities, or certain commodities for the foreign government’s account. A CCE is an entity in which a foreign government owns 50% or more of the interests (or in which the foreign government has effective control) and that is engaged in commercial activities. As SWFs often are controlled entities, if such entities engage in commercial activities (anywhere in the world) that may preclude a SWF from benefiting from tax exemption on U.S. source income (even passive income, such as dividends and interest). Thus, SWFs regularly request that PE funds not generate CAI, and expect funds to use below the fund blockers or alternative investment vehicles that block such income for SWF investors.

Generally, the nature of the income derived by, and activities conducted by, partnerships flows through and retains its character in the hands of their partners. To ameliorate the extreme result that CAI recognition by a partnership in which a SWF is invested would taint all of the U.S. source income of the SWF, proposed regulations provide that CAI derived through a limited partnership will be taxable, but generally will not taint other U.S. source income so long as the SWF does not have rights to participate in the management and conduct of the partnership’s business. Though these proposed regulations indicate that taxpayers may rely on them even before they are finalized, SWF investors generally do not rely on the proposed regulations because of the risk that they will not be enacted and because of the lack of clarity as to certain terms (e.g., whether serving on a fund’s limited partner advisory committee constitutes control).

Steven D. Bortnick

Partner

steven.bortnick@ troutman.com 609.951.4117

Morgan L. Klinzing

Associate

morgan.klinzing@ troutman.com 215.981.4560

troutman.com

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