The significant increase in remote workers due to COVID-19 has created unanticipated new challenges and questions for many employers, including: What are the state business qualifications, licensure, tax and employment law compliance implications for employing remote out-of-state workers?
The new work-from-home model ushered in over the last nine months has led many workers to disperse from the states where their employers are physically located to new jurisdictions. These cross-border work arrangements raise tax and employment law issues for employers and employees alike.
Employers “Doing Business”
Employers with facilities in only a single state may nevertheless have multiple obligations in other states. Pre-COVID, those obligations were typically known and planned; remote work across state lines opens new exposure.
In general, an entity is deemed to be “doing business” in any state where it has a non-insignificant and non-temporary business presence. Work performed by Company employees may be a sufficient nexus or presence for imposition of foreign-state regulation.
- Qualification to do Business; Licensure: Registration in the home state of an enterprise does not necessarily allow that business to have a significant and continuous presence in another state yet avoid regulation. The enterprise may need to file for qualification to be permitted to maintain a presence. Similarly, if an enterprise is, or its workers are, required to be licensed to do business or provide a service in the home state is it not unlikely that licensure in the foreign state may be required or advisable. Other unanticipated state-specific or even locality-specific obligations may also arise.
- Taxation: Doing business in a foreign state almost certainly imposes on the enterprise tax reporting and liability obligations of the foreign state – this of course is a state revenue issue. Doing business in a foreign state can subject the employer to that state’s various tax obligations including income, gross receipts, unemployment, and sales and use taxes.
- Tax Withholding and Remittance: Typically, the employer’s tax withholding obligation is owed to the jurisdiction where taxed work is actually performed. However, this general rule is subject to numerous exceptions, state-to-state reciprocity agreements, and fact-specific rulings or other considerations.
Note that some states have temporarily waived certain tax obligations for out-of-state employers with employees temporarily working remotely as a result of the pandemic. Nevertheless, even in those states the “home state” employer may still have to withhold and remit foreign-state income taxes on behalf of their out-of-state employees.
- Workers’ Compensation: Every state requires every employee to be covered by workers’ disability compensation insurance. Coverage may, or may not, follow the remote worker, and the particular situation of each remote worker’s duties in light of the laws of each involved foreign state need to be considered. Liability may be managed by limitation of duties and/or securing appropriate state-specific insurance coverage.
Tax Issues for Employees
Remote-working employees who during the pandemic are working in a new state, or newly working in multiple states, will need to consider the resulting tax consequences. This may be a benefit or liability. The writer’s son, a resident of high-tax-rate New York City who worked in Michigan for five months as the pandemic unfolded, may be able to claim earnings during that period to be taxed only in Michigan. Many persons are and may for an extended period be working away from their home state, creating a spiderweb of reporting and taxing concerns for them and their employers.
Labor and Employment Law Issues
Labor and employment laws are a combination of federal and state regulation. Federal law, where exclusive, has the advantage of being uniform across state lines. However, it is hard to identify an area of federal exclusivity – overtime, wage/hour, labor relations, employment discrimination, and other subjects all are nearly universally governed by overlapping state and federal rules, and there is essentially no consistency between federal, home state, and foreign state laws, regulations, and principles. Caveat emptor!
Seek Help for These Complex Issues
Having a remote workforce creates unanticipated and sometimes novel issues. Navigating those situations in our experience has requires an effective partnership between the enterprise and counsel.
If you have any questions, please contact Dave Houston or your Fraser Trebilcock attorney.
This alert serves as a general summary, and does not constitute legal guidance. All statements made in this article should be verified by counsel retained specifically for that purpose. Please contact us with any specific questions.
We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.
Fraser Trebilcock Shareholder Dave Houston has over 40 years of experience representing employers in planning, counseling, and litigating virtually all employment claims and disputes including labor relations (NLRB and MERC), wage and overtime, and employment discrimination, and negotiation of union contracts. He has authored numerous publications regarding employment issues. You can reach him at 517.377.0855 or firstname.lastname@example.org.