Remote workers: tax and employment landmines for companies to navigate
The pandemic is ending, or at least there is light at the end of the tunnel as vaccines are administered and employees return to the office. Where are they? The “workplace” landscape has constantly changed as remote working, at least in some form, is here to stay. Both employees and employers see the benefits of working remotely – reduced overhead, larger hiring pool, flexibility, no commuting, improved morale, and more.. – and determine the details of remote working in the future, whether employees will work entirely remotely or on a hybrid schedule. While workers and management are enthusiastic, human resources and tax / accounting departments must navigate new legal landmines, often landmines they did not even know existed. The changes are coming fast and furiously and it feels like you’ve been drinking from a regulation fire hose for the past 18 months.
What do workers and taxes have in common? Both are among the biggest expenses for many employers and among the biggest sources of liability if not properly managed. By “properly managed” we mean not only compliance with applicable laws, but also collaboration between accounting and human resources professionals when compliance issues overlap. The moment a worker walks through the door (even the proverbial “door” to the home in a remote work scenario), there are legal consequences under tax and labor laws. And the location of a remote employee’s office door can play a major role in determining these legal consequences.
As employers are set to begin another year of unprecedented challenges under yet a new administration, this alert underscores that the problems are not entirely new. What has changed is the lens through which employers must view them given the changing workplace and the way work is now done.
When an employee works from home or from anywhere other than the employer’s premises or a dedicated office space, especially when the remote work takes place in a different state than the premises or the employer’s offices, a myriad of tax and employment problems arise:
- In which state (or even local jurisdiction) should income taxes be withheld and remitted?
- To which state should we pay unemployment taxes?
- Has the company created a link, and therefore potential new state income reporting obligations, in a new jurisdiction?
- Does the company have to register to “do business” in the new state / locality?
- Does the new state have its own law on wages and hours, and does it apply?
- Do different minimum wage or overtime requirements apply? Are exempt employees still exempt under the new state law?
- When is the employee’s last paycheck due?
- Does the state or local government impose paid sick, disability, family or maternity leave and do these requirements apply?
- Do you need to heed the new state’s laws regarding employment-related agreements, such as separation agreements and restrictive covenants?
Withholding tax – As a general rule, employers withhold and remit at the employee’s request based on the information provided by the employee on the W-4 form and indicate the equivalent. However, the determination by the employee will largely depend on the state in which the employee will be primarily working. Employers should ask employees for up-to-date retention information, especially if those employees start or continue to work remotely.
Unemployment taxes – There are various “tests” that states use to determine the appropriate jurisdiction for which an employer must pay unemployment taxes. In general, the hierarchy of testing is (i) location of service, (ii) base of operations, (iii) direction and control, and (iv) residence. Many employers mistakenly assume that unemployment must be paid to the state where the employee withheld income tax. Sometimes it does, but unemployment taxes and income taxes have different rules for determining the appropriate jurisdiction where they should be paid.
State Nexus and Business Registration – Business registration signals a state that a business is “doing business” in the state and will therefore have to meet certain requirements such as having a registered agent (to agree to the service process in the event of a lawsuit) , file income tax returns, etc. Just having an employee in a state does not by default create a bond (or connection with) the state to a threshold requiring the company to register to do business. In the past, individual state pre-pandemic guidelines have typically focused on multi-factor testing, especially if:
- sales / revenues are generated within the state;
- the business-owned personal property and equipment is located in the state (this may require further analysis for home office equipment); and
- whether the employees are permanently located in the state.
This is a rapidly evolving area of state law / regulation that needs to be watched closely, especially as businesses grow and expand, and establish new labor policies to distance.
The riddle of the cover – State employment laws are not uniform in their coverage provisions, though they specifically address coverage. By coverage we mean the language or provision of a given law defining who is subject to its requirements or who receives its benefits. Some employment laws base coverage on an employer having a threshold number of employees (company-wide or statewide). Some are less specific and use terms like “Louisiana employee,” which begs the question of what it means when a person living in Louisiana works from home for a Texas business that does not have facilities or services. other employees in Louisiana. You can see how sensitive the issue of coverage can be, and it is an issue that must be assessed in the context of the specific law, ordinance or regulation in question. The variation between state and local laws means that there may be a patchwork of policies and practices in place to comply with those laws depending on the number of states involved. Developing a uniform policy may not be impossible, but it will require a solid understanding of the different laws and a decision on whether to comply with the more stringent requirements across borders or adopt a more state-specific approach.
Salary and hour – When an exempt office worker begins working remotely, even if the work is performed in the same condition, you must determine if the duties or compensation structure of the position have changed in a way that would affect the status of the employee. exemption. For a non-exempt employee, the process of determining compensable working time in a full or partial remote setting should also be assessed. In a recent notice letter, the US Department of Labor has addressed the issue of commuting time compensation for a non-exempt remote / office hybrid employee. When an employee transfers to telecommuting from another state, the state’s Wages and Hours Act may impose different rules for minimum wage, overtime, compensable hours, and exemptions, which may require a change. further action by employer to comply with applicable law.
Sick leave and paid family leave laws – States and local governments have started to enact their own laws and ordinances requiring paid leave for sickness, disability, family, maternity and other similar types of leave. For example, in Texas alone, at least three communities have passed such ordinances and court challenges have followed. In addition to the coverage conundrum mentioned above, employers face the compliance conundrum of attempting to write a uniform manual or set of policies to cover various labor law requirements.
Employment-related agreements – Some states require that specific provisions be included in certain types of employment contracts. For example, California requires that separation or separation agreements contain a specific provision to be valid. Choice of law clauses, an agreement between the parties choosing the specific state law that will apply to their agreement, are not valid or enforceable in all states. Louisiana, for example, does not allow their application unless the employee accepts or ratifies the choice of law provision after the dispute arises. Restrictive covenants are governed by the principles of state law, so it is important when drafting such agreements to consider from the outset which law will apply. If an employee who works in an employer’s office in Mississippi signs a non-compete agreement containing a Mississippi choice of law clause, then begins working entirely from home in Louisiana, Mississippi or Louisiana law s will it apply? If the non-compete agreement was drafted to meet the requirements of Mississippi law but Louisiana law has different requirements, will the agreement be enforceable?
What can you do now? Well, you can avoid many of the existential questions that will inevitably arise if you implement a remote work program without considering these legal issues by establishing formal communication between and within your accounting and HR teams. bringing together to review legal compliance issues related to your employees. Start by evaluating tax forms, understanding where everyone works, even remotely, and examining the policies, processes and forms that govern the employment relationship from cradle to grave. Determine if they need to be updated given the realities of where and how your employees work now. Hire a tax advisor and employment counselor to help you with the more difficult legal issues such as coverage and compliance with conflicting or varied multi-state requirements. Understand that the situation is fluid and that states (and even local jurisdictions) are constantly proposing new legislation and guidance. Issues and relevant rules should be reviewed regularly to ensure that company policies remain compliant in a rapidly changing environment.