Multistate Labor and Employment Law Compliance with Rise of Remote Workers
The COVID-19 pandemic thrust remote working arrangements into the limelight with approximately 70% of U.S. workers working from home in April 2020.1 While the numbers have decreased as COVID-19 vaccines increased in availability and governments relaxed pandemic restrictions, the upward trend in remote working is likely to remain. Additionally, with the rise of the COVID-19 Delta variant and shortage of workers, many employers are maintaining remote working flexibility to not only address employee health concerns but also remain competitive in the labor market where a greater number of employers are advertising remote working as a perk. More than 25% of U.S. workers expect remote working to continue throughout 2021, and one study predicts that remote working levels, including fully remote positions, will remain at nearly twice pre-pandemic levels through 2025.2 Some areas of the economy, particularly white-collar workers in sectors such as computer sciences and finance, are maintaining full-time remote working rates above 65%.3 One of the many impacts of this dramatic increase in remote employment is that a significant number of U.S. workers are, possibly for the first time, no longer required to live in a particular city or state because of their job. Localities around the country are even offering thousands of dollars to individuals willing to move to their town or city to attract future talent.4 This article addresses the potential considerations and pitfalls facing employers that find themselves employing individuals who are now, or in the future will be, living and working in other states.
Employers’ first order of business should be to establish clear guidelines and policies regarding remote work, including policies relevant to hours, availability, work product, communication, timekeeping and compensation. These remote work policies should also include provisions requiring that employees provide advance notice of any changes of address, particularly when the move would take the employee to another state. This notice is essentially to permit employers to address anything from availability concerns, to ensuring compliance with state and local tax and employment statutes.
State and Local Taxes
As those familiar with operating across multiple states already know, there is no one-size-fits-all answer to potential tax and payroll questions impacting remote work performed across state lines. Having remote employees in another state may also trigger business registration and tax filing obligations. Generally, a business has tax reporting and payment obligations in a state where it is considered to be “doing business.” This typically requires an analysis of the nature of the business conducted in the state, the number of employees and their functions, and the duration of the work in the state. Therefore, having remote employees working in a state may establish sufficient contact with a state for a business to be considered to be “doing business” in the state and impose new business registration and tax reporting obligations. Additionally, state and local income taxation of service income is generally based on where the services are performed and where the individual resides. Some states, however, tax income based on where the employer is located.
For example, New York State takes the position that an out-of-state employee who regularly commutes to work in New York but then temporarily works remotely in a different state remains subject to New York tax unless a number of complex requirements are satisfied. States such as Connecticut and Pennsylvania also base service income on employer location. Therefore, many employers in states like New York, Connecticut and Pennsylvania are expected to withhold employee income taxes under these rules. On the other hand, in the majority of states, tax is based on where the services are performed. Therefore, if an employee is working remotely then it would follow that the tax should be based on where the employee is located. In either case, advance notice from the employee is critical to ensure that the employer is able to comply with its withholding obligations.
Workers’ Compensation and Unemployment Insurance Obligations
Remote workers who move to another state may also impact an employer’s obligations under workers’ compensation insurance and unemployment insurance, which are governed by state law. Employers usually must obtain workers’ compensation insurance in the state where the employee is actually working. It may be the case that the workers’ compensation laws in the employer’s state would not apply to the employee working remotely in another state. The same also applies to unemployment insurance, where the out-of-state employee would likely trigger the state’s requirements that the employer register for and pay unemployment insurance premiums through that state’s particular unemployment insurance program. Failure to do so may expose the employer to liability, including penalties for noncompliance with the state’s unemployment insurance laws.
State and Local Employment Laws
Remote employees are generally subject to the laws of the city and state where they are physically located and perform work. Depending on state law and conflict of law principles, there may be exceptions for employees who are temporarily located in a state or not considered based within a state. However, employees that relocate permanently to another city or state will not be exempt. Critically, even within the same state, local ordinances on matters such as paid sick leave may differ considerably. For example, Pennsylvania has no statewide statute requiring paid sick leave, but paid sick leave is required by the City of Philadelphia. With employees working remotely outside their usual office locations, employers may need to familiarize themselves with the state and local employment laws of each jurisdiction where it employs individuals. Failure to comply with state and local workplace posting requirements, leave entitlements, wage and hour laws, etc., can result in significant potential liability.
Issues as mundane as an employer’s obligation to reimburse employees for the cost of equipment associated with remote work vary considerably from jurisdiction to jurisdiction. For example, California and Illinois provide broad reimbursement requirements, defined as “all necessary expenditures” incurred by the employee in direct consequence of the discharge of his or her duties.5 Less broad in terms of applicability, D.C.’s Municipal Regulations require reimbursement for “the cost of purchasing and maintaining any tools required of the employee in the performance of the business of the employer.”6 Less populous jurisdictions, e.g., Montana, North Dakota and South Dakota, strike a middle ground between the two, requiring reimbursement for all expenses that are necessarily incurred as a direct consequence of the employee discharging their duties.7 Other potential areas that are subject to being overlooked by inexperienced employers are wage statement requirements and an employee’s right to inspect their personnel records.
State and local leave law entitlements also vary depending upon the number of employees within the state, duration of leave and type of leave available. Wage and hour laws vary by state and may offer more generous minimum wage, overtime, and rest and meal break benefits. Similarly, legislation regarding pre-employment questions and discrimination protections, particularly those relating to the question of disability accommodations, vary considerably between jurisdictions.
In light of the potential compliance minefield presented by the prospect of employing remote workers across the country, employers may ask: “Is all this hassle really worth it?” Ultimately, the decision to allow employees to work remotely from another state is up to the employer and depends on the particular facts and circumstances of each employment situation. Employers may be justified in saying no to such arrangements, but there may be significant trade-offs with respect to the employer’s ability to hire/retain competitive talent.8 Furthermore, once an employer permits out-of-state work for one employee, the employer must be mindful in granting/denying it to others, as allowing it for one employee but denying it to another could potentially be considered discriminatory.
Employers should seek guidance regarding drafting remote work policies and navigating the interactions between state and local laws that arise through the expansion of remote work. SGR’s Labor and Employment counsel across the country are well versed in state labor and employment laws and are ready and able to assist with navigating the evolving landscape.
4 See, e.g., https://ascendwv.com/the-offer/; https://liveandworkinmaine.com/opportunity-maine/; https://livebaltimore.com/resident-resources/financial-incentives/buying-into-baltimore/#.We5GOVtSzDc; https://tulsaremote.com/#hero; https://findingnwa.com/incentive/.
5 See 820 ILCS 115/9.5; California Labor Code § 2802.
6 See D.C. Mun. Reg. tit. 7, § 910.1.
7 See Mont. Code Ann. § 39-2-701; S.D. Codified Laws § 60-2-1.
8 See, e.g., https://www.bloomberg.com/news/articles/2021-06-01/return-to-office-employees-are-quitting-instead-of-giving-up-work-from-home?sref=lAVQtUwz; https://www.businessinsider.com/quit-job-flexible-remote-working-from-home-return-to-office-2021-6; https://www.census.gov/library/stories/2021/03/working-from-home-during-the-pandemic.html.