Workforce Redesign: Outlooks for Business Leaders

Workforce Redesign

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Outlooks for Business Leaders

Managing the impact of economic volatility on the workforce

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In every market and sector, organizations are feeling — and responding to — the impact of economic volatility. While the pandemic distilled lessons learned around the importance of building business resilience to manage turbulent times, there are also follow-on impacts directly shaping this current environment of uncertainty, including the war for talent and the implementation of a more flexible workforce. Four Baker McKenzie experts share their views on how businesses can manage the current economic climate while confidently planning for what’s next — and without losing the momentum to build their flexible futures.

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What's shaping the future of work?

Kim Sartin Employment and Compensation Partner, London

Kwun-Yee Cheung Restructuring and Insolvency Partner, Hong Kong

Paul Keenan Restructuring and Insolvency Partner, Miami

Imke Gerdes Tax Partner, New York

Amid inflation, rising labor costs and historically low employment rates, there is an apparent contradiction between heightened layoff activity and the war for talent. In the context of current recessionary and inflationary concerns, a 2023 survey by Mercer found half of executives surveyed anticipate a struggle to meet demand with their current talent model.

Kim Sartin Employment and Compensation Partner, London

It is an interesting time and different to previous economic downturns. On the one hand, we are seeing some organizations reducing headcount for the more traditional reasons, such as reductions in demand or to reduce their cost base. But alongside the financial imperative, others are looking to restructure more opportunistically, whether in efforts to address over-hiring during the pandemic, to change the shape of their workforce or as a result of market expectations from heightened layoff activity generally. Regardless of thinking, however, organizations are having to take a more tactical approach to any reductions because the war for talent remains fierce in many sectors and there remain historically low unemployment rates. This is especially true in most of Europe and the United States.

What is the interplay between these factors and how are you seeing this playing out?

"It is an interesting time and different to previous economic downturns. On the one hand, we are seeing some organizations reducing headcount for the more traditional reasons such as reductions in demand or to reduce their cost base. But, alongside the financial imperative..."

In the Asia Pacific region, we've been helping companies who are struggling to strike a balance between liquidity and business needs and spend. This is essential to building business resilience and long-term survival given the host of factors businesses have had to deal with, including the pandemic, geopolitical and economic turmoil and, more recently, rising interest rates and lending constraints.

"In the Asia Pacific region, we've been helping companies who are struggling to strike a balance between liquidity and business needs and spend. This is essential to building business resilience and long-term survival given the host of factors businesses have had to deal with..."

Kwun-Yee Cheung Restructuring and Insolvency Partner, Hong Kong

Kim Sartin Employment and Compensation Partner, London

What this means is that companies are having to work hard to manage the messaging to ensure they retain key talent. Organizations are also increasingly thinking about issues such as what the organization will look like after reductions from an inclusion, diversity and equity perspective, how they can preserve existing efforts to recruit diverse talent and what they can do to remain an employer of choice. Although it might not be legally required, organizations should consider equality impact assessments to fully understand the implications of a potential restructuring. This is something that is used in the United States but hasn’t featured as prominently internationally until now.

We were seeing layoff activity to trim excess capacity which led to a corresponding willingness from employees to be resilient and diversify. For example, when the airline industry faced significant redundancies, some affected employees moved to entirely new industries with a greater need for people, such as hospitality. This of course can lead to manpower and talent issues when demand picks up.

Poorly thought out or executed workforce reductions can impact an organization's ability to attract top talent and backtrack hard-won inclusion and diversity progress.

What are other consequences for companies who take a short-term view to navigating current times?

Key stakeholders are looking at organizations beyond shareholder value, taking into account ESG considerations. This includes not only inclusion and diversity considerations, but a view to whether they are doing the right thing and how they treat their employees. Employees are also not standing for being treated badly, whether that's existing employees or prospective talent. So alongside redundancies, we are also seeing an increase in employee activism and interest from unions and works councils in holding employers accountable and making sure they are living their values.

Communication again plays a key role here — both in managing relationships with third party unions but also in demonstrating humanity in delivering what can be hard messages to employees. For more practical insights to understand, prepare for and respond to the latest labor and employment issues visit our Employment and Compensation Insights dashboard.

Kim Sartin Employment and Compensation Partner, London

"Key stakeholders are looking at organizations beyond shareholder value, taking into account ESG considerations. This includes not only inclusion and diversity considerations but a view to whether they are doing the right thing and how they treat their employees...."

Kim Sartin Employment and Compensation Partner, London

It seems we are going to narrowly avoid a "true" global recession, but nevertheless, companies are still feeling the impact. What strategies should they have in place to build resilience and optimize outcomes?

The sentiment on whether we are not heading into a recession seems to change every week, at least here in the United States. The themes of recessions and mass layoffs vary by industry and market. Here, the industry facing the most headwinds is the tech sector, where we've seen significant layoffs over the last year. Several large domestic and international crypto companies have filed bankruptcy cases in the United States, and other well-known tech companies have engaged in mass layoffs due to changes in strategic direction and less liquidity in the capital markets. These issues were exacerbated by the demise of Silicon Valley Bank.

It is always difficult for a company in distress to face the situation and develop a strategy and contingency plans, but it must done — the fiduciary duties of directors and officers require it. The earlier a company begins to plan a restructuring, the more options will be available. When you address issues — such as mass redundancies or loans being deposited with a struggling bank — months ahead rather than days ahead, oftentimes the legal fees end up being less and the outcomes are far more positive.

Paul Keenan Restructuring and Insolvency Partner, Miami

"The sentiment on whether we are not heading into a recession seems to change every week, at least here in the United States. The themes of recessions and mass layoffs vary by industry and market. Here, the industry facing the most headwinds is the tech sector, where we've seen significant layoffs over the last year. Several large domestic and international crypto companies have filed bankruptcy cases in the United States, and other well-known tech companies have engaged in mass layoffs..."

"We're seeing clients restructuring, conducting layoffs across multiple jurisdictions or considering closing companies, whether liquidating them or merging them out of existence. This often spurs on a number of related questions...

Imke Gerdes Tax Partner, New York

We're seeing clients restructuring, conducting layoffs across multiple jurisdictions or considering closing companies, whether liquidating them or merging them out of existence. This often spurs on a number of related questions: What do we do with our employees? Do we want to keep them in the country with a permanent establishment? Do we want to give them an opportunity to work remotely?

All of these questions can bring significant tax implications and, as Paul mentioned, the best approach is to address issues as early on as possible. For example, while liquidating a company can be a more straight forward process, restructuring can allow organizations to move forward with a more positive range of options from a tax and corporate perspective. Generally, tax planning is front of mind for organizations as a means to increase business profitability and results in light of the OECD's Pillar One and Pillar Two initiatives, and it's important to have a legal partner who can help to optimize your tax approach in line with international tax developments, legal requirements and your business objectives and spot and manage the various interdependencies across tax, restructuring considerations, employment, real estate and more.

Paul Keenan Restructuring and Insolvency Partner, Miami

Imke Gerdes Tax Partner, New York

Global Restructuring and Insolvency guide

For insights on restructuring and insolvency considerations for your organization, explore our

One lesson learned from the pandemic was the need to embrace new and transformative ways of working. While there are certainly crisis-driven responses borne from the current economic climate, are organizations still exploring a more proactive redesign of the workforce?

"Some companies are preemptively planning; they see the writing on the wall and are thinking where they can downsize and improve results overall. However, we are also seeing companies expanding into other markets and wanting to know..."

Some companies are preemptively planning; they see the writing on the wall and are thinking about where they can downsize and improve results overall. However, we are also seeing companies expanding into other markets and wanting to know, "How do we best set this up? What is the best structure for us to actually do this?" Organizations are also trying to be flexible in terms of workforce as a way to incentivize and retain acquired talent. They are considering how they might do this without jeopardizing their tax position and at the same time advance their business objectives.

This is where interdependency comes into play as well. Such planning involves not only tax considerations, but corporate and trade, technology, real estate, immigration and employment issues.

"We are seeing more businesses take a proactive approach on their operations and workforce, likely due to how events have played out over the last few years. Clients are becoming quite savvy and attuned to issues on the horizon. As a result, they are carefully assessing issues including business priorities and counter-party risk. They are alert to the fact that they need to plan ahead, which is good to see."

Imke Gerdes Tax Partner, New York

Kwun-Yee Cheung Restructuring and Insolvency Partner, Hong Kong

our interactive Contingent Workforce tool.

Identify the risk areas for your business as it relates to flexible working arrangements via

The pandemic spurred on the implementation of a more flexible workforce structure as remote work became a norm and preferred set-up for many. For example, a 2022 survey assessing the state of remote work conducted by Gallup, found that 60% of "remote-capable" employees in the United States cited a preference for a long-term hybrid work arrangement.

"In the tech sector, we are seeing some companies dialing back the remote workforce or flexible working policies implemented during COVID and not necessarily because it's not working. The pandemic has proven that remote work is not a damper on productivity, but it has become more of a question of trying to build a community around the company..."

Imke Gerdes Tax Partner, New York

In the tech sector, we are seeing some companies dialing back the remote workforce or flexible working policies implemented during COVID — and not necessarily because it's not working. The pandemic has proven that remote work is not a damper on productivity, but it has become more of a question of trying to build a community around the company and preserving the opportunity for in-person collaboration and knowledge transfer. On the other hand, there are businesses that would like to embrace flexible efforts and programs, but tax implications sometimes override these efforts. The bottom line is that there is no one-size-fits-all solution. This goes back to the point of having an individualized solution for certain employees or categories of employees and proactively connecting with other parts of the organization on flexible working strategies. For some employees, remote work may not be feasible from a tax perspective as their activities might create a permanent establishment, thereby subjecting the company

to corporate income tax, or trigger transfer pricing or VAT issues. Working remotely potentially also creates wage tax and social security withholding obligations for the company. However, for others remote work is a viable path forward, giving the business and its employees the desired flexibility without triggering major tax concerns. All these issues must be looked at holistically to find a solution that serves the employees and the larger business model. However, most of these issues can be managed by careful planning.

Imke Gerdes Tax Partner, New York

The Year Ahead Global Disputes Forecast 2023 report

For insights on remote work as a driver of disputes, read

How is the rise of remote work being impacted by the current environment, and is it here to stay?

The expectation of employees and workers is that that flexibility will continue, and some businesses are struggling with that to a degree. In some circumstances, they don't want to provide as much flexibility anymore. These tensions have been widely reported in the press. On the other side of the coin, you have organizations wanting to make sure that there's maximum flexibility for their people and putting permanent remote programs in place to do so.

We've all probably heard about the trials of the four-day work week. I don't think that's going to become widely adopted any time soon. But it is something that people are talking about. You can see this drive for increased flexibility and personalization in how individuals want to work. There is an expectation that for individual workers flexibility will continue in some form. It seems like we now have a much more personal, individualized experience than everyone being in the office five days a week, 9 am to 5 pm.

Kim Sartin Employment and Compensation Partner, London

"The expectation of employees and workers is that that flexibility will continue, and some businesses are struggling with that to a degree. In some circumstances, they don't want to provide as much flexibility anymore. These tensions have been widely reported in the press. On the other side of the coin..."

Kim Sartin Employment and Compensation Partner, London

Conclusion

Organizations are no doubt navigating the current economic moment with a view to managing immediate concerns. These challenges are further compounded by new employee expectations around flexible working arrangements and talent strain arising from the pandemic. However, as the environment necessitates layoffs and restructurings for some, taking a longer-term view to the lasting impacts on overall inclusion and diversity progress and talent retention efforts is essential — as is understanding various interdependencies across employment, tax, real estate and more. Proactive and holistic approaches to commercial issues can also help to ease the impacts of economic volatility so that you can focus on shaping your workforce of the future.

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For more on how Technology, Media and Telecommunications companies can navigate workforce reductions,

In a global survey of tax leaders, 67% agreed that transformational changes impacting business operating models are affecting their organization's tax exposure, giving rise to transfer pricing complexity and indirect tax liabilities, and 61% of respondents say that tax teams are playing catch up as a result of fundamental changes to their organizations.

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Building your flexible future

Explore our Workforce Redesign Publication

Building your flexible future