There were so many interesting topics to write about this Memorial Day weekend. Americans are snapping up RV’s to go on vacation, calling them “Covid Campers”. Tech companies are driving the stock market but trading at scary multiples. Amazon has about half the revenue of Wal-Mart but trades at a valuation over 3 times as high, despite the fact that it’s web services are the real profit driver. For its part, I learned the story this weekend of how Wal-Mart itself has a former Amazon employee as head of e-commerce who, if you believe the media hype, has a grudge against Jeff Bezos and Amazon for buying and then shuttering his start up.

All these things I would have liked to write about but the one that really moved me to write was Facebook and it’s evolving work from home policy. Mark Zuckerberg made an announcement concerning the official Facebook stance on working from home the other day which may start to shape how many of us change out behavior in regards to how we work.

This isn’t significant just because Facebook is such an important company for thousands of employees, it matters because Facebook is a leading US and global company and has the privilege of being able to set a work culture agenda that many others may copy. This means it’s decisions may be copied by thousands of other companies, affecting millions of workers. Just like Jack Welch and GE set the standard for efficiency in corporate America in the 80’s and 90’s, Facebook is trying to be at the leading edge of efficiency and talent attraction and retention in the 21st century.

The Changes

As with every company policy, the devil is in the details. The details are where you see the real motivations behind Facebook’s move, no matter what their media relations team or press releases say. The significant details that they released on their work from home plan are the following:

• Location – You can work from home where you like for the rest of the year. On January 1, 2021 however, you will have to declare your location and the company will then adjust your pay based on their calculation of the cost of living there.

• Expansion – Plans to expand physical locations will go ahead as scheduled with a new location in Hudson Yards in New York City, with significantly less attention than Amazon received for its “HQ2” which ended disastrously. Facebook will aim to have 50% of its workforce working remotely in 10 years while after July 4th, only 25% of staff will actually report to the physical location.

The Reasons

There may be any number of reasons the company gives to explain why they are embracing such a radical change but just like any other corporation, the main driver is profit. There are some other benefits to both employees and employers but from the viewpoint of the company, the following reasons are why they want to see half their staff eventually work from home.

• Cost – Facebook will have employees notify headquarters of their work location by January 1st next year and they will adjust pay based on their location. Their hope is likely that workers move to smaller and cheaper cities so that they can save on salaries. Compared to their Bay Area headquarters, which has one of the highest living expenses in the country, other locations could offer significant cost reductions in salaries for the firm. As of 2016, the top 3 most expensive metro areas in terms of cost of living are all in the Bay Area and offer a drastically different cost of living compared to other locations.Source: Business Insider. Let’s take the extreme example of a worker deciding to move from the Santa Clara area, the most expensive in the nation, to the cheapest, Beckley West Virginia. Facebook will now adjust pay to a local cost of living scale. The average salary is about $120,000 at Facebook. If we assume this is based off of the Santa Clara cost of living, an adjustment to Beckley would be 62% of the cost of living of Santa Clara. Adjusting the salary locally would mean a worker residing there and working for Facebook would have their pay adjusted down to $74,398, a savings of 38% on pay for Facebook.

• Talent Retention – Talent retention is the ting to the yang of lowering pay. It’s mostly about money but not for every worker. As workers age and start to have families their needs from employers change. They may need more money but they also may need more flexibility. Working from home provides that flexibility and being location neutral will allow workers to work from locations where housing is cheaper and space for families to grow bigger. It’s this reason that I see growth in smaller metro areas close to major job hubs as well as the suburbs and exurbs of those hubs as new growth areas for residential housing.

• Wider Talent Pool – Read this as cheaper talent pool. Companies discovered this long ago with outsourcing to China and India for low skilled jobs but Facebook is betting they may be able to tap the heartland of the US for tech talent that, for whatever reason, doesn’t want to come to the big city. Of these three factors, I think this will be the least relevant. Why? Because knowledge hubs attract people to cluster with others who share their interests and ambitions. Banks have discovered this when they try to cut costs by moving away from financial hubs like New York. It may be cheaper, but it isn’t easy to find someone who specializes in structured, exotic derivative sales in Indiana.

The Issues This May Create

This will expose and maybe even worsen the rift between the two tiered economic system we have in the country and in the world. Imagine highly paid engineers descending on Phoenix from LA due to its lower cost of living and driving up home prices there, potentially pricing out local workers not involved in the tech industry. The tech workers may reside in a new location but human nature says they are likely to cluster together. Companies tend to hire people that fit within their “culture” and no matter if people live in Phoenix or Austin, they still tend to conform to the culture of their primary employer in order to be able to work there. This risks just spreading across the country the inequality that has its focal point in the Bay Area. There are arguments for and against this type of dispersion but I doubt it will be the great equalizer the company will make it out to be.

State Taxes – This could potentially create an issue which starts to erode the tax base of the states where these companies reside. Workers would be right to start to scrutinize more closely state and property taxes and those that are most about their bottom line, could start to make an effort to move from high tax states to low tax ones. 9 states currently do not have any state income tax.

Source: Business Insider

Of these 9 states, 7 of them don’t tax investment income either. These states may be set to reap the benefits of more white collar tele-commuting workers deciding to live there. States like Texas, Nevada and Florida may be big winners, while New Jersey, California and New York the losers.

If you factor in property taxes to the above calculation, Western states and a few Southern states also come into the mix of looking very attractive.

Source: The Tax Foundation

International – What about working from another country? It’s entirely within a US citizen’s ability to work from an even cheaper place than West Virginia and still manage to do the same work. How would an employer deal with this? What if a worker kept a residence in a “cheap” part of the US but actually lived in rural Thailand for most of the year. Would this matter? Would the company care? Would they even encourage it? I could see a scenario even further down the road where companies like Facebook opened up Bahamas and Dubai hubs for their workers because workers there aren’t taxed. If a US worker were to stay outside the US 11 months of the year and have their income in one of these locations, they could in theory, pay little or no taxes. In fact, due to telecommuting, one may only have tax residence in these places but live in another country entirely. For example, let’s say a US worker has tax residence in Bahamas, but stays in much cheaper Mexico throughout the year. They may travel to Bahamas from time to time from Mexico but only enter the US for less than the 30 days maximum in order to not have their income taxed onshore. This could create a scenario where the worker lives in one low cost country, is paid in a tax free one and is a citizen of a rich, high tax country. Our tax systems, both state and national, are not designed with this type of work arrangement in mind. Too many cases like I described above and you could see pressure to change the rules.

Finally, if you have ever worked for a subsidiary or branch of a foreign company, you may know that head office workers tend to have an advantage over those in further away locations. We could potentially see this start to play out with those that go to the office in expensive locations and those that work from home. This may create a two tiered system within the company itself. Those making the decisions becoming more and more isolated from their colleagues who work from home and making decisions that don’t align with their interests.

Conclusion

Despite the downsides, I am here for the experiment and am ready to embrace it. If you are considering working from home permanently, keep in mind that companies always have an eye on costs and your salaried position is their cost. Approaching your decision keeping in mind your own interest is key to how you manage your employer via work from home going forward. Facebook and others may talk nice, but the name of the game is cutting costs and staying on top.

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