In response to employee demands, many employers are expanding remote work options implemented during the pandemic on a more permanent basis. However, as companies focus on retaining and attracting talent in this competitive labor market, they should be thoughtful of the legal risks they may be creating and how to navigate these risks.
The Fair Labor Standards Act requires that overtime eligible, or “non-exempt,” employees’ time worked is accurately and contemporaneously tracked. When people work remotely, it is important that they understand their role in timekeeping and are provided a single, universal methodology for recording their time. Long gone are the days of physical punch clocks, so employers must provide appropriate tools and training to ensure compliance with the FLSA and state wage and hour laws.
Employers should require non-exempt employees to record and report their time worked each day. This should be accomplished through a single timekeeping mechanism that is available both while in the office and when working remotely.
Additionally, employers should provide training to ensure employees understand how to use the timekeeping tool, and should review their policies to ensure that they make explicit that workers are responsible for entering their time accurately on a daily basis. These policies can make clear that not only is accurate timekeeping a requirement; it is also essential to ensuring employees are paid properly for their work.
When employees relocate to new jurisdictions, even on a hybrid basis, employers must review applicable wage and hour laws and adapt their processes accordingly. For example, some states require overtime to be calculated on a daily basis or provide different rates of pay for overtime worked. This may require technical changes to the timekeeping tool and also more specific training for employees who work in multiple locations.
Further, an employer may even be required to change its payroll methods, since, for example, while some states permit monthly wage payments for exempt employees, others require employees to be paid at least semi-monthly.
As employees begin to utilize their homes for work, some have expected support for the expenses associated with maintaining a home office. Existing laws on expense reimbursement differ from state to state, but none were created in contemplation of remote work, particularly at this scale. This can create uncertainty for employers about which expenses are reimbursable, and how much employers are responsible for reimbursing.
Some employers may have provided one-time stipends to assist employees in setting up home offices at the outset of the pandemic, but this approach does not address continuing expenses including internet connectivity and supplies. Many of the homes that have turned into home workspaces were equipped with high-speed internet before the pandemic, which has caused employers to question whether they are now responsible for assuming these costs.
In addition, how an employer manages expense reimbursement can have tax implications. Finally, any expense reimbursement policy should separately reference the availability of special equipment as an accommodation for a disability.
Aside from logistical concerns about wage payment and expense reimbursement, employers should be mindful that employment laws are different from state to state, and even in many cases from city to city.
When employees work remotely in a new state, an employer may become subject to rules around wage notices, notice posting, sick time, paid family leave, and more. Furthermore, a restrictive covenant such as a noncompete may no longer be enforceable. Finally, employers may become required to provide harassment avoidance training, or to include pay ranges or disclaimers about hiring individuals with criminal histories in their job postings.
Income taxes. Generally, an employer may be required to register and withhold income tax — and an employee may be required to pay income tax and file a return — in each state where the employee performs services over the course of a year. While some states grant exceptions to taxation and/or withholding, based on de minimis earnings or time spent in the state, other states, with a so-called “convenience of the employer rule”, can impose tax on 100% of the employee’s earnings without regard to the place services are performed.
Many states provide credits for taxes paid to other states. The result of all these rules is that an employee working in a state for even a single day could give rise to an income tax withholding and payment obligation in that state.
For those employers with remote or telecommuting employees, the disparate rules among the states impose a staggeringly complex and costly compliance burden. On several occasions since 2006, federal legislation was proposed to address this burden, but failed each time.
On Jan. 21, 2021, the Mobile Workforce State Income Tax Simplification Act of 2021 (“Act”) was introduced. The Act is designed to limit the authority of states to tax certain income of employees for employment duties performed in other states, with certain limited exceptions. It generally prohibits the wages or other remuneration earned by an employee who performs employment duties in more than one state from being subject to income tax in any state other than:
The Act exempts also employers from state income tax withholding and information reporting requirements for employees not subject to income tax in that state.
These issues are especially relevant nowadays because states have become more active in policing tax compliance for mobile employees, and many states have more tools at their disposal to track employee movement and to audit and assess such taxes.
Employment taxes. It is important for employers to evaluate not only income tax withholding obligations, but also employment tax obligations. Unlike income taxes, which can be paid to many states, contributions required by state unemployment insurance laws, state disability insurance, paid family leave, etc., are designed so that payment is made to — and benefits are available from — a single state. That state then covers all of the services performed by an individual for one employer, wherever performed.
All states follow a four-step test to determine to which state an employer is required to pay state employment taxes. Importantly, this state may not be the same state to which personal income taxes are withheld and paid.
The facets of the test, which are applied in sequential order until an applicable threshold is met, are generally:
Employer nexus. Aside from income and employment taxes, an employer must also consider whether it must register to do business in a state due to an employee performing services from that state. According to a Bloomberg survey in July 2020, 36 state tax departments have indicated that having just one employee telecommuting from their state will create a “nexus” between the employer and the state.
Once “nexus” is established, the employer may be required to qualify to do business in that state, and may be subject to state corporate income, franchise tax and sales tax, reporting and payment obligations. Having nexus could create an additional tax burden on the employer.
To ensure that they remain compliant with the rules of all locations in which their employees work, employers must first ensure they know where their employees are. Employers should ensure their HR records have accurate and up-to-date information about employees’ home locations, and can impose policies requiring employees to update this information and specifically inform the company before moving to a new state.
Once employers are aware of their employees’ whereabouts, they can address requests to work remotely from new locations with appropriate guidance from legal and tax advisors on whether this will expose the company to additional risks, and if so, how to navigate these risks.