Since the COVID-19 pandemic, employees working from home (WFH) have created a host of new wrinkles for employers, many of which are still being ironed out.
For employees, the WFH option can be safer (less chances of contracting COVID) and easier (no more commute); for employers, WFH reduces the cost of overhead and can result in happier, more productive employees.
While it may sound easy to simply hire a worker on the other side of the country, there are several legal questions for employers who want to recruit and hire an out-of-state employee who will WFH. The following are some of the important issues that employers should consider.
- Recruiting. Looking for a new employee beyond state lines appears to present a limitless supply of potential new workers. But employers need to familiarize themselves with the laws of the state where the applicant lives, particularly with regard to issues such as background checks, criminal record searches and compensation.
Several states – including New Jersey and New York – prohibit employers from inquiring about a job applicant’s salary, benefits and other compensation history.
Other factors may make certain locations a more advantageous space to find new WFH hires.
Some states offer financial incentives to remote workers. Alabama, Georgia, Oklahoma and West Virginia offer bonuses to entice remote workers, ranging from reimbursement of moving expenses to $12,000 in cash (West Virginia will pay $10,000 divided over the course of 12 months with $2,000 paid at the end of the second year in residence).
- Employee benefits and protections. Once an out-of-state employee has been hired to WFH, employers have a whole new list of individual state laws to learn. Each state has its own variations on employee benefits as well as legal protections – and in many cases, additional differences at the county and/or municipal level.
These differences can present the possibility of additional liability for employers on issues such as paid sick leave, paid family leave, minimum wage, disability, unemployment and vacation days, among others.
State laws on minimum wage vary widely, along with differences for tip credits and minimum salary thresholds for exemptions. The current minimum wage in Texas is $7.25 per hour, for example, while New York’s minimum wage is $11.00.
Paid family leave is now mandatory (or will be soon) in California, Colorado, Connecticut, Massachusetts, New Jersey, New York, Oregon, Rhode Island, Washington and Washington, D.C.
As for overtime, most states follow the standard payment of time-and-a-half for hours worked over 40 in a workweek, but a handful (including California) have more stringent requirements, while some states (California again) mandate that earned vacation days never expire.
Without a physical location in the state where a WFH employee resides and a breakroom to hang various notices, an employer must still remember to fulfill poster and notification obligations as well as various mandatory trainings. Remote employees do not need to tape posters up on their walls to satisfy state laws, but employers do need to provide certain information and documentation to out-of-state WFH employees to achieve compliance by sharing – and updating – federal, state and local notices.
Even if an employer has a single WFH employee in another state, workers’ compensation insurance is necessary, along with registration with the appropriate state agency. Some states have their own fund that employers must contribute into, while a third-party insurance company will suffice in others.
In addition, each state has different laws on employee protections, sometimes with variations at the local level. Employers should be careful to consider state, county and/or municipal statutes and regulations with regard to noncompete agreements, discrimination and retaliation protections and the requirements to legally terminate an employee.
- Tax implications. Employees must be registered for tax purposes in the state where they reside, which means the company itself needs to register its presence in those states for tax purposes. That potentially newfound “tax nexus” to another state may mean sales and use taxes, income taxes and franchise taxes for the employer as well, depending on the requirements of the other state. The failure to properly register and pay the appropriate taxes can result in fines and penalties.
The registration process requires paperwork, time and patience, as it can take several weeks for an employee and the employer to be property registered. And some states – Pennsylvania, for example – also have local city or township registration requirements in addition to those at the state level.
Employers may also be subject to higher corporate income tax rates, which is calculated in part based on the employee’s role and seniority. So a WFH executive in a state with a high tax rate may cost an employer more money than a lower-level WFH employee in that state.
WFH employees themselves may face a tax conundrum with the “convenience of employer” rule that applies in seven states. In Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York and Pennsylvania, if an employee works in a different state than her employer by choice – not because the job mandates – then the employer’s state has the right to tax her, and the employer would be required to withhold taxes from her paycheck in both her home state and the employer’s.
Alternatively, some states have reciprocity agreements that expressly forbid this double taxation. A total of 16 states and Washington, D.C. have such deals, where an employee who lives in Wisconsin and works for an Illinois employer, for example, only pays income taxes in Wisconsin. States that have reached such agreements typically share a border, although Arizona has gone above and beyond, with reciprocity in California, Indiana, Oregon and Virginia.
One additional complication: some states have issued temporary guidance to deal with the out-of-state WFH situation during COVID. Alabama and Georgia stated that they would not enforce payroll withholding requirements for employees who are temporarily working from home due to government-mandated stay-at-home orders; Connecticut said that employees WFH due to the pandemic is a necessity for work but New York reached the opposite conclusion, stating that it is for the employee’s convenience.
Employers should consider all of the legal ramifications before hiring an out-of-state WFH employee.