As COVID-19 vaccines continue to be rolled out across the United States, many employers that shifted to remote work environments at the onset of the pandemic still have employees working from home. While some employers intend to transition back to the regular workplace once the environment improves, many intend to maintain a remote workforce for the longer term.
Although remote work arrangements increase talent pools and enhance flexibility for current employees, they create a number of employment and tax challenges for employers. This article sets out key considerations for employers and answers a number of FAQs.
Formalise remote work policies
Employers should proactively review their manuals and policies to ensure that they provide for longer-term remote work. For the employer's protection, policies should make clear:
- which employees are eligible for remote work;
- whether remote work is strictly voluntary or a perquisite;
- the employer's expectations and the parameters of employees' responsibility to self-report if they move out of state;
- the policies on timekeeping for non-exempt hourly employees; and
- the process for tracking employee locations and which days they are working remotely.
Pay special attention to non-exempt remote workers
A significant uptick in wage and hour claims is anticipated as remote work continues. Clear and concise policies and effective training for managers and supervisors are essential to ensure that remote hourly workers have proper supervision while maintaining certain protections. It can be challenging to monitor overtime, protected break times and clocking in and out in a remote environment. Further, employers should ensure that their policies and practices comply with state and local laws.
Consider state-by-state impact of telecommuting workforce
Employers should tread carefully when adjusting salaries for location. For example, a remote worker based in San Francisco has different salary needs than someone who has relocated to Montana. Varying states bring a patchwork of wage and hour laws in addition to specific tax implications.
Wage and hour complexities
Certain states have particular laws in place with regard to overtime and other scheduling particularities. For example, Arkansas, California, Colorado and Nevada have daily overtime laws and certain states require wages to be paid on a specific schedule.
Payroll taxes
States generally require employers to withhold taxes based on where the employee performs services for the employer. As many employees are now working, on a full or part-time basis, in a different state than where they were originally performing services, or in a state where the employer has no physical office, employers may need to withhold more than one state's income tax for a given employee.
Corporation and business tax liability
The presence of employees in the state generally provides the state jurisdiction to impose corporate income and franchise taxes on the employer. Although a handful of states released guidance providing that the presence of remote employees in the state due to the COVID-19 pandemic would not alone cause out-of-state taxpayers to establish nexus in the state, as the pandemic comes to an end, states will likely return to their prior practices. Thus, it is prudent that employers now analyse where their employees are working in order to determine whether the employer will have reporting obligations that did not previously exist.
Local taxes
Telecommuting employees may also have an impact on locally imposed (eg, gross receipts) taxes. For example, if an employer's local tax obligation is based on the number of employees working in the jurisdiction, that tax may decrease if employees are allowed to work remotely. Conversely, when employees are allowed to regularly work from home in cities and towns where the employer previously had no designated office, that presence may be enough for the local taxing authority to consider the employer as 'doing business' in its jurisdiction, requiring registration and payment of local taxes and licensing fees.
Tip 1
Employers should start tracking where their employees are working. They should develop a system that works for their organisation and begin tracking their employees' location going forward.
Tip 2
Employers should implement a remote work policy and consider entering into a remote work agreement, to ensure mutual understanding of expectations for remote work. Some important considerations when drafting a remote work policy are as follows:
- The policy should detail where employees can work (are any states 'off limits')?
- The policy should define remote work eligibility. Is remote work available to all employees or only certain positions?
- The policy should set expectations (including hours, availability and performance).
- Employers should confirm whether the remote work arrangement is temporary or permanent.
- Employers should amend or require employees to sign confidentiality or proprietary information agreements or restrictive covenants.
- Employers should determine other costs or procedures relating to remote work. Is a reimbursement policy needed? Is it possible to provide unused equipment from the workplace?
- Employees should understand that compensation may be affected depending on the remote work location.
- Employers should update job descriptions to reflect the requirements as they relate to remote work.
Tip 3
Employers should ensure that the workforce (eg, human resources, managers and staff) are aware of and trained on remote work policies and procedures – from data protection and IT security to repercussions for violating the policy.
Tip 4
Employers should be aware of danger zones and use caution if allowing employees to work remotely from outside the United States, where at-will employment rules do not apply. Compensation may also be subject to adjustment depending on where employees are located.
Tip 5
Employers should consider partnering with various service providers (eg, professional employer organisations, executive staffing companies, payroll providers and insurance brokers) to assist with compliance for remote work arrangements.
What if an employee is living or staying in California temporarily and has not formally moved there?
If the employee works in California for one week or more, they will be covered by its overtime laws. The longer that the employee stays in California, the more of its laws will apply.
Does it matter if the employee is in another state temporarily or do they have to move with the intent of becoming a resident of another state?
The longer that an employee works in another state, the more likely they are to be covered by its laws. As mentioned above, in California, an employee would be covered in a short amount of time.
What constitutes 'residency' for purposes of analysing in which state an employee is located? If an employee moves to a different state on a temporary basis, what (if any) legal issues arise? What constitutes 'temporary'?
Unfortunately, there is no uniform test for residency. Some states have a bright-line rule based on certain factors, while others analyse residency on a case-by-case basis depending on the individual facts and circumstances.
If a new hire has not travelled to their employer's New York office in 2021, may New York assert the convenience of the employer rule and require withholding for the days worked remotely?
New York's convenience of the employer rule applies only to employees who work partly in and partly outside New York. So, if the new hire does not physically work in New York at all during 2021, the convenience of the employer rule should not apply.
Is there a threshold for when working from home requires local rules to apply?
Typically, there is a threshold that must be met before a person or entity will be deemed to be doing business in a local jurisdiction for tax purposes. That threshold could be based on:
- the number of employees in the jurisdiction;
- the payroll paid in the jurisdiction;
- the gross receipts from that jurisdiction; or
- some other metric.
There is no uniform rule, so it is important that employers know the city, county and state where their employees are working, so that an accurate assessment can be made with regard to potential local taxes.
If a new employee will not work in their employer's New York office until Autumn 2021, should withholding start after their first day in the New York office or at the beginning of the tax year?
If the employee is based in another office or can satisfy that they are working from home in a 'bona fide office', as defined in the New York Tax Department's guidance, New York withholding will likely be required starting when the employee is assigned to and begins working in the New York office in Autumn 2021.
If a New York State employer allows an employee to move to another state and work from home, does that cause those wages to be taxed only by the employee's resident state?
It depends on the application of the convenience of the employer rule. If the employee is assigned to or based in a New York office and comes to New York to work occasionally (more than 14 days), New York withholding requirements could apply (assuming that the home office is not a 'bona fide office', as defined in the New York Tax Department's guidance). If the employee does not come to New York at all, or comes to New York for 14 days or less, New York withholding probably does not apply.
