Labor laws depend on the jurisdiction from which your employee works, not your organization’s location.
You may need to adjust benefits for an employee working in another state.
Tax laws vary by state, and employers with employees working in other states may create new tax or insurance liabilities.
Carefully consider how remote employees working internationally may be subject to additional requirements regarding the right to work and taxation.
When many businesses made the swift decision to embrace remote work due to COVID-19, the future was uncertain. Nearly a year later, with the pandemic still uncontrolled, what was initially a quick call to stabilize operations has become the new normal.
Employers are now much more likely to allow (or even require) their employees to work remotely, on a part-time or permanent basis. While employees may enjoy the flexibility that this allows, employers must grapple with compliance costs and administrative burdens related to insurance, HR, organizational policies, and federal, state, and international tax considerations. As these changes may likely stay, it’s important for employers that previously discouraged or disallowed telecommuting to prepare for the possible longevity of these administrative challenges.
Human resources considerations
Labor laws depend on the state from which an employee works. Since an employee’s physical location is considered their work location, be aware of the employment requirements of that state (or city), as they can vary greatly. For example, some cities or states have mandatory paid sick time, disability benefits, and training on employee rights and anti-harassment.
Workers’ compensation insurance is another important consideration, as each state has different requirements. If your employee works remotely in a state different from the organization’s headquarters or common work location, you must determine if you need to provide coverage in that state. If so, work with your insurance agent to update your policy and notify employees of potential benefits in the case of injury or illness.
Similarly, out-of-state telecommuters require special considerations regarding the payment of payroll taxes. You must remit payroll taxes to the state in which an employee is physically working. This means employers may need to set up and pay unemployment taxes in states they hadn’t previously.
Accordingly, while you’re adjusting to a more remote workforce, review your current policies, handbook, and employee benefit plans. You may need to make adjustments to meet the needs of your organization and your employees.
State tax considerations
Telecommuting raises numerous questions about income tax withholding and the assertion of nexus for other business taxes (e.g., sales and use tax, corporate income tax). Consider the following as you adapt to remote work.
The term nexus generally refers to the nature and frequency of contact an out-of-state organization has in a state before it becomes subject to that state’s tax laws and jurisdiction. For sales tax purposes, a physical presence is not required. So: does the presence of an employee working from home create taxable nexus for the employer in that state? With the nexus thresholds so low, most states have said that the presence of one to six telecommuters in the state would obligate an out-of-state organization to file income taxes.
Some states, however, have provided guidance that suggests telecommuters who are in the state due to state orders would not create nexus. Similarly, some states have not issued any guidance — the presumption in these cases is that a telecommuter would create nexus for other business taxes.
State income tax
Personal income taxes further complicate matters. Which state is owed income tax when an employee is telecommuting from an out-of-state location? Is it possible that states could have contradictory rules, creating a double tax situation for many employees?
Based on current guidance, the answers to many questions are murky at best. Some states have not changed telecommuting employees’ income tax (or the employer’s withholding) obligations, in which case the tax still goes to the employer’s state (i.e., the state where the employee regularly worked prior to the pandemic). But a few states intend to continue applying the physical-presence rule and impose tax on remote employees. As this sets the stage for a potential double tax for those who straddle two states, consulting with a professional is recommended.
Global employment considerations
State borders aren’t the only ones your employees may be crossing. When workers cross international borders there can be business, regulatory, and tax implications for both you and your employee. While there has been some sparse short-term relief for employees stranded by COVID-19, employers and employees in other parts of the globe are mostly left to their own devices when navigating local laws and tax treaties.
The right to work
When evaluating international remote work, begin with the “right to work” question. While many countries allow for a 90-day “tourist” visit, this greatly limits the type and amount of business activity allowed. A specific work permit or visa is often needed to work regularly or continuously in a foreign country. If you allow employees to work remotely from an international location, explore possible special licensure requirements for both the business and individual.
Remember that while laws in the U.S. tend to favor employers, most foreign jurisdiction employment laws favor employees. You may need to alter your policies to adhere to local laws regarding working conditions and hours, paid time off, licensure for certain professions, severance, and other benefits. An ounce of prevention is worth a pound of cure, so consider the use of trusted employment counsel as you navigate this new normal.
After sorting through foreign employment requirements, also consider tax complexities. Similar to state nexus, an income tax presence or permanent establishment can be created internationally based on certain employee activities that would require taxes to be registered, filed, and paid to the foreign jurisdiction. While international income taxes require a close eye, pay even more attention to payroll taxes; a missed payroll tax obligation for an employee generally carries steep penalties and interest.
Some jurisdictions have treaties with the U.S. that afford companies with short-term mobile employees relief from creating an income tax presence and payroll obligation — if the activities are limited and conducted for no more than 183 days. As with international employment considerations, seek professional advice to help mitigate risk and establish a successful remote employee experience.
How we can help
CLA can provide guidance to help you mitigate unintended exposure, including evaluating compliance with various business, human resources, and tax matters of your remote workforce.
Dave Van Allen, Kim Orsolits, Dustin Hubbard and David Springsteen.