Although there has been a national shift to have employees return to the office in person, remote work continues to be prevalent. Indeed, a recent McKinsey employee survey showed that 58% of American workers had the opportunity to work from home at least one day a week, 35% of American workers had the opportunity to work from home five days a week, and 87% of employees wanted to take advantage of work flexibility options. Now that remote work has been routinely offered as a benefit, it will be difficult—if not impossible—to take away. If remote work is here to stay (and it probably is), there are some key considerations for employers to keep in mind.
First, foreign state taxes may apply, even if only a single employee is working in the state. Depending on the state, the employer may be required to register as an employer with the Secretary of State. Further, the employer will almost certainly be required to register with the state tax authority to pay corporate and business activity taxes, sales tax, and employment taxes, to include employee tax withholdings. There may also be state and local licenses and business permits required as well. It’s important to keep in mind that each state has its own tax scheme and definition of a “resident,” so a detailed state-by-state analysis will be required.
Second, while state tax or registration requirements may not be required for work performed in another state, employees working and physically present in another state are (generally) immediately subject to the employment laws of that state. This includes wage and hour statutes, leave requirements, employee disclosures, tax treatment of employee benefits, garnishment restrictions, background screening, and employee privacy. All to say, legally compliant policies and handbooks in an employer’s home state may be unenforceable in another state, which will require the employer to have differing policies depending on where the remote worker is located.
Third, an employer with remote workers will need to pay unemployment insurance for the location where the remote worker is physically located. The U.S. Department of Labor has provided that where the “localization of work” is performed determines which state receives an employer’s unemployment insurance payments. The U.S. Department of Labor, thankfully, has developed a hierarchy to determine where unemployment insurance is paid. If the services are localized within a state, or services performed outside the state are incidental, temporary or transitory, then unemployment is paid to the state where the services are localized. But if the services are not localized to a particular state, then unemployment is paid to: (1) the base of operations; (2) the place from which services are directed or controlled; or (3) the individual’s state of residence. For example, if an employee is employed by an Oklahoma corporation, the employee is a Texas resident, and all work is performed in Arkansas, then the employee is covered by Arkansas law and the employer will pay Arkansas unemployment insurance.
Fourth, an employer needs to have workers’ compensation coverage in place for where the employee is physically located. This can usually be accomplished through an insurance policy addendum. It is recommended, however, that an employer continue to use standard policies to document workplace injuries, e.g., written statement and photographs of the injury. Because it can be difficult to determine if the injury occurred within the course of employment for an employee working from home, it is recommended that employers require dedicated work areas and break/mealtimes.
Finally, the burden is on the employer to know where its employees are physically performing their work duties. Failure to do so could lead to labor complaints and tax issues. Employers should therefore have a remote work policy in place that includes a requirement that employees report the physical location where work is performed. Employers can also consider using IT solutions to monitor where an employee is working (for example, monitoring an employee’s IP address to determine physical location).
Remote work is probably here to stay. And for good reason—it is a great benefit to offer for recruitment and retention. So keep up with the times. Employers must be flexible and revisit their policies annually to ensure compliance with other state’s requirements and seek guidance from local legal counsel when necessary.
If you have questions regarding remote work and state requirements, contact Evan Way or another member of the Labor & Employment Practice Group.