While many companies initially embraced remote work as a makeshift measure to conform to COVID-19 mandates, the arrangement has become deeply rooted in America’s corporate culture. Today, companies have more remote workers believing that work-from-home policies are now a must-have, not a nice-to-have.
As of February 2023, 12.1% of full-time employees in the U.S. worked 100% remotely, while 28.3% worked under a hybrid arrangement. For employees, working remotely is a privilege with more perks than obligations. But for companies, remote work policies can birth a whole new set of legal and tax implications.
Before U.S. employers fully adopt work-from-anywhere arrangements, they should be aware of the possible complications so they can avoid costly and time-intensive legal, administrative, and tax burdens.
Read on for a detailed breakdown of possible legal issues faced by U.S.-based companies with remote work policies.
State Tax Obligations
Tax obligations are perhaps the most complex burden for companies with a remote workforce. Except in the nine states with no income tax (Texas, Alaska, Florida, Tennessee, South Dakota, Nevada, Wyoming, Washington, and New Hampshire), businesses must withhold and pay state income tax on their employees’ salaries.
Remote workers operating in a different state than their employer create an income tax nexus for the company. Depending on a state’s apportionment formula, a nexus can mean substantial tax liabilities for employers.
Unless telecommuting employees operate from a state with a tax reciprocity agreement or have a nexus waiver in place, they’ll expose their employers to additional tax obligations, including:
State and Local Corporate Income Tax
Besides paying federal corporate income tax, companies also pay state income tax except in Ohio, Wyoming, Texas, Washington, South Dakota, and Nevada. A remote worker can trigger a state and local corporate tax nexus in states where the company isn’t registered.
The Telebright Corp. v. Dir., New Jersey Div. of Taxation case is a perfect example of how remote workers can expose their employer to additional tax liabilities. Telebright Corp employed one remote worker in New Jersey while its primary place of business remained in Maryland and had no other engagements in New Jersey.
Telebright argued that it wasn’t liable for New Jersey’s corporate business tax as it wasn’t doing business in New Jersey. The court ruled against Telebright, holding that the company was in fact doing business in New Jersey by virtue of the remote employee there.
Employers must withhold and pay state income tax and unemployment insurance. By default, state and local income tax withholding regulations require that taxes be withheld for the jurisdiction where the worker offered services.
When employees work and live in the same state where their company is registered, employers simply remit payroll tax to that state. But when employees telecommute from different states, employers must remit income tax to those states as well.
However, employers should consider the following factors before remitting payroll tax for their telecommuting employees:
- Temporary presence rules: Companies should know how long an employee must work in a state before they’re mandated to withhold income tax.
- Convenience of the employer rule: This says that employers are only liable for payroll tax in a different state if they have instructed employees to telecommute from there for work reasons. If the employee telecommutes for personal convenience, the employer must remit income tax to their registered location. States such Ohio, New York, and Massachusetts follow this rule.
- Reciprocal agreements: This is an arrangement between states that exempts nonresident workers from paying income tax to their employer’s state. It prevents double taxation, in which employees pay income tax to their resident state and the state where their employer is registered.
Excise and Gross Receipts Tax
Gross receipts taxes are bad news for companies because they lead to tax pyramiding, the taxation of the same good or service multiple times. A remote employee working in a state such as Delaware and Tennessee with a gross receipts tax can subject their company to this. This can be an unfair position, especially if the company is registered in a state with no gross receipts tax.
Business Tangible Personal Property (TPP) Taxes
States such as Texas and Virginia tax business inventory, including office equipment and machinery. Telecommuting employees may expose an employer to TPP taxes if the company issues them office equipment.
Credits and Incentives
States and cities often offer tax incentives to employers who meet certain conditions that help the local economy, such as employing a large number of in-state workers.
With work-from-anywhere models, companies can fail to meet such conditions and miss the promised tax breaks. Additionally, remote workers can disqualify companies from enjoying the benefits of the Interstate Income Act of 1995.
This legislation says that companies selling tangible personal property in a state where they only take orders and ship products from outside the state shouldn’t pay that state’s income tax. If a remote employee does more than take orders in that state, a company loses its Interstate Income Act protection.
These tax implications can be burdensome for companies, especially when they have multiple workers telecommuting from different states. Fortunately, a professional employer organization like Resourcing Edge can help employers craft strong work-from-anywhere policies to protect them from undesirable legal consequences.
If a company intentionally hires an out-of-state worker to expand its operations in a particular state, it will be subject to that state’s jurisdiction. This means the out-of-state employer must adhere to all laws and regulations of their employees’ remote state. These include:
- Anti-discrimination laws
- Garnishment restrictions
- Worker classification
- Background screening restrictions
- Disability insurance
- Privacy laws
- State licensing
Wage and Hour Laws
Remote employees are subject to the labor laws of the state in which they work. Companies with work-from-anywhere policies must consider the wage and hour laws of their employees’ telecommuting state. Employers should prioritize these two provisions:
Companies should know:
- The state’s minimum wage
- Whether localities within the state are allowed to implement separate minimum wage laws
- Payroll practices and paycheck delivery regulations
- Required disclosures
- Diverse wage requirements
- Overtime pay mandates
Worker Protection Policies
Employers should know:
- State-granted rights for pregnant and breastfeeding women
- Provisions for paid sick and family leave
- Provisions for pay secrecy, no salary history, and no pay
- Termination rights
Understanding state wage policies enables companies to remain in compliance and avoid pay disputes and claims.
Workers’ compensation policies cover employees for injuries they sustain in the course of their jobs. For remote workers in different states, employers only need a policy addendum to cover them. Claim management is the main issue plaguing workers’ compensation when it comes to remote employees.
Companies must clearly define what at-home injuries are covered. They must distinguish what it means for injuries to happen “in the course of” and “arose out of” to avoid ambiguity when claims arise.
For instance, if a remote employee trips on a wet floor in their home office when working, injuries sustained would be deemed to have happened “in the course of” employment. However, the injuries cannot be said to have “arisen out of” employment because the worker could have still tripped on their wet office floor before taking the remote job.
Work-from-anywhere policies should shed light on such gray areas in remote workers’ compensation to sniff out wrong claims and avoid non-payment of valid claims.
Welfare and Health Benefits
Sometimes it’s impossible for companies to extend health benefits to remote employees outside their healthcare network. Also, employees may relocate to a state whose laws offer more welfare and health benefits.
For instance, California offers up to eight weeks of paid leave for new parents. Other states like Florida and Delaware don’t offer leave benefits outside the Family and Medical Leave Act of 1993. All things being equal, a company with a remote employee in California will spend more on employee health benefits.
Employers have observed a high turnover rate among remote workers as companies continue spicing up their remote offerings. Most remote workers, especially those not on permanent or full-time employment contracts, don’t hesitate to jump ship when the grass is greener elsewhere.
Companies have turned to restrictive covenants to protect their customers and business secrets from resigning remote workers. These are contractual agreements that safeguard an employer’s legitimate trade interests.
Employers in states like California that have outlawed restrictive covenants may use a workaround and include “choice of law” conditions in their employment contracts. They can also restrict workers from telecommuting in states with unfavorable business protection regulations.
Make Resourcing Edge Your Partner and Fret No More
We know all of the legal and tax considerations for companies that need to implement a sound work-from-anywhere policy. There’s a lot of research involved to navigate the pertinent state and local labor and wage laws.
With backing from the acclaimed OneDigital firm, Resourcing Edge has the expertise and resources to conduct detailed legal and tax research and advise you on your work-from-anywhere policy.
Contact us today and let us tune up your remote work policy or build one from scratch.