The COVID-19 pandemic changed the way many employers view remote work. Those who had a positive experience may be considering making telecommuting a permanent part of their workplace, but must be aware of the dangers lurking for employers who fail to take into consideration employment and tax compliance associated with remote work. Many states have overlooked temporary remote arrangements necessitated by the pandemic, but will not excuse compliance if remote work continues going forward.
Many aspects of the employment relationship are governed by state (and sometimes county or city) laws and regulations. Wage and hour, paid and unpaid leave requirements, meal and rest break requirements, paycheck timing, and anti-discrimination rules all can be governed by state or local law. In a traditional employment setting, the employee works at a single site, usually an office or other workplace where the employer has a base of operations. In such a case, the employer and employee are subject to employment laws of the local area where the worksite is located, regardless of where the employee lives. When an employee works remotely, in most cases, the employment laws where the employee is physically located will govern, rather than the laws of the employer’s worksite (if one even exists). Thus, an employer with a base of operations in one state, but with five employees working from home in five different states, will need to be aware of not only the employment laws where the office is located, but the employment laws of those five states. Employers may find themselves with the obligation to provide remote employees with different benefits, such as paid sick leave, that they do not offer to in-person workers. Employers with employees in states such as California and New York may find that their levels of pay are not sufficient to meet the state law requirements for employees to be exempt from overtime. In addition to the compliance issues, employers will need to consider the employee relations impacts of such differences. As state and local employment laws continue to proliferate, compliance will only become more difficult as time goes by.
The dangers do not end with employment law compliance. Having remote employees can have significant tax consequences for employers. Employers may have obligations to withhold for income tax purposes and pay unemployment taxes in remote employees’ home states. The tax consequences of remote employees may be even more significant, however, if “nexus” is created in a state. The presence of even one remote employee in a state, particularly in combination with other factors, may be sufficient to create a “nexus” with that state, making the employer potentially subject to requirements to register to do business, as well as income tax, gross receipts tax, and/or sales tax obligations. In addition to state-level tax consequences, the presence of a remote employee can also trigger income tax, gross receipts tax, or sales tax obligations at the local level.
As noted, many states have either formally or informally overlooked remote work that was a direct result of COVID-19. As a result, employers have been relatively free to permit employees to work from home or other locations without incurring legal risk. However, as states of emergency are being lifted and employees are no longer required to work remotely for health and safety reasons, states are expected to step up compliance efforts. Employers should take action to understand where employees are working now in order to evaluate the risk, and should carefully consider whether to permit employees to continue to work remotely, particularly on a full-time basis and particularly in certain states, with an eye toward the legal compliance associated with that choice.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.
[View source.]
