In a nutshell, when remote work crosses state lines, it can be hazardous to employers – in ways that aren't necessarily apparent.
Most employers have experienced changes in workforce arrangements as a result of the COVID national health emergency. Many employees demonstrated that they can effectively work from anywhere. For the most part, this meant working from a home office. However, the "work from anywhere" concept has been taken literally by a growing number of workers, who may now be working from a variety of locations, such as vacation homes, or with relatives in other states.
Remote work is well-established generally, but the implications of work locations crossing state lines is not well understood. If not properly managed, many circumstances could create significant new administrative burdens or other problems for employers.
This article discusses certain considerations of "working from anywhere" such as tax withholding, Workers' Compensation, Unemployment Insurance, benefits, Wage and Hour laws and emerging laws such as privacy and paid leave. Examples of potential problems are offered, as well as suggestions on what employers can do to manage fluid remote work arrangements.
Remote work arrangements are currently viewed as a new benefit that employers can offer to attract and retain talent. However, there may be limits. Not all employers may be able to reasonably permit employees to work from any U.S. state. (Other concerns may apply to international remote work arrangements, but we will focus on U.S. implications.)
In a nutshell, when remote work crosses state lines, it can be hazardous to employers – in ways that aren't necessarily apparent.
As background, employers withhold applicable state and local income taxes based primarily on where an employee performs services – meaning their physical location – and sometimes, secondarily, where the employee lives. Some states have reciprocity agreements which permit withholding in a single state. These might be relevant and helpful – but less than half the states have them.
Employers must observe longstanding but complex laws and regulations which define how long an employee can be temporarily present in a state for work purposes before the employer is required to withhold income tax. Becoming liable for tax withholding means that if the employer doesn't withhold tax from wages, the state can collect the tax from the employer.
Temporary presence rules are diverse, often involving a number of days present in state (such as 14 or 30), or an earnings amount, or some combination. For example, someone would need to work for 12 days in Maine or earn more than $3,000 before withholding is required. In many states, a nonresident employee's wages are subject to income tax on the first day of travel to the state for business purposes. A few examples of recent legislation include:
- Utah SB 39, enacted March 2, 2022, provided a threshold of 20 days before wages are subject to taxation. However, this threshold only applies if the employee's state of residence provides a similar exclusion or has no income tax. The 20-day rule also does not apply to athletes, entertainers or key employees, who are employees earning more than $130,000 annually or are in the top 50 highest-paid employees of the employer.
- Montana HB 447, enacted May 18, 2023, established a 30-day safe harbor for non-resident employees who travel to Montana to perform work duties. However, this excludes professional athletes, entertainers and persons of prominence who are paid on a per-event basis, construction services and key employees, who are employees earning over $500,000 annually.
- West Virginia HB 2026, enacted March 30, 2021, established a 30-day threshold for non-resident employees working in the state, with similar exclusions (i.e., athletes, entertainers and persons of prominence), with the additional requirement that the nonresident individual's state of residence must provide a corresponding 30-day withholding threshold or not impose an individual income tax.
Employees who are excluded from the number-of-days thresholds above (i.e., athletes, entertainers, key employees) are generally subject to tax on the first day worked in a state.
It is difficult for employers to remain aware of each state's specific rules and thresholds, but employers are accountable for compliance with all state withholding rules and may become liable for any taxes not withheld in accordance with state/local law. As in the above examples, employers will need to track and understand diverse 'sourcing' rules; whether a reciprocity agreement applies, and whether remote employees are working in states that have a corresponding rule.
"Convenience of the Employer" Rules
At least six states (and certain municipalities) maintain a "convenience of the employer" rule, which deem employees working from out-of-state for an in-state employer to owe state income tax primarily to the state in which the employer is located, unless working outside the state is required by the employer. Employers must withhold accordingly, and affected employees often need to file income tax returns in two states. Connecticut, Delaware, Nebraska, New Jersey, New York and Pennsylvania maintain this "Convenience of Employer" rule. In these states, such employees are taxed in the state in which the employer is located, again unless the employer requires such services to be performed out-of-state. There are several variations on rules and enforcement. For example:
- New York audit letters specify that earnings are taxable to New York unless the taxpayer is working from a bona fide office of the employer located out of state, as opposed to telecommuting from a home office outside of New York.
- In July 2023, New Jersey adopted AB 4694 (P.L.2023, c.125) to establish a "convenience of the employer" sourcing rule for nonresident employee wages, but only with respect to states that maintain the same "convenience of the employer" rule, i.e., DE, NE and NY.
- New Jersey has a reciprocity agreement with Pennsylvania which exempts residents of these states from withholding for services performed in the other state.
- Similarly, like New Jersey, Connecticut adopted a "convenience of the employer' rule which only applies to workers in states that maintain the same "convenience of the employer" rule, i.e., Connecticut residents working for Delaware, Nebraska or New York employers. Therefore, New Jersey will not apply its "convenience of the employer" policy to Connecticut residents working remotely for NJ employers.
State and local corporate or business activity taxes
A separate concern, if employees are working in different states, may be the biggest consideration: State corporate or other business activity taxes can apply, if even a single employee is working in a state. In effect, if an employer did not previously have a recognized legal presence in a state, but one employee starts working from there, this can trigger entirely new registration requirements and tax liabilities. It may be necessary to register with the secretary of state and relevant tax authorities, provide a registered agent address, and pay corporate and business activity taxes, sales taxes and employment taxes, including employee withholding. There are often state and local licenses and business permits as well.
Some states waived this "nexus" test for employees working from home due to COVID, but these provisions have expired. Also, state corporate tax apportionment calculations are often based on a company's payroll in the state, so remote workers can change the amount of corporate taxes due.
Companies that are considering permitting employees to work anywhere (especially in states in which the employer is not already registered) should consult with their corporate tax department and tax counsel. An organization could inadvertently create entirely new legal and tax obligations where none exist today by permitting employees to work from anywhere.
State wage & hour and other laws vary significantly and apply immediately
Generally, employees working remotely are subject to the laws of the state where they work – immediately. Employers could inadvertently become liable for diverse state benefit programs or mandates, such as paid leave requirements, minimum wage, required disclosures, diverse wage statement requirements and so on.
For example, California employees are paid overtime if they work more than eight hours in a day, and double time in excess of 12 hours in day. California paid sick leave, and meal and rest break premiums must be paid using an employee's "regular rate of pay."
New York Department of Labor officials explained their views on cross-border work arrangements, noting that all New York laws apply immediately if employees work remotely in the state. Unlike tax withholding compliance, there is no applicability threshold in Wage & Hour laws; no provision for temporary or part-time presence that would excuse an employer from compliance.
Other laws may also apply immediately or may be different from the state laws that currently apply. A few examples include:
- Transportation taxes (withheld from wages)
- Different tax treatment of employee benefits
- Garnishment restrictions/limits
- Family/Sick and COVID leave requirements
- Worker classification (i.e., employees versus independent contractors)
- Disability insurance (California, New Jersey, New York, Rhode Island, etc. ...)
- Pay Equity laws and reporting (California, Illinois …)
- Background screening restrictions
One fast-evolving Issue is employer monitoring practices and employee privacy. Several states have enacted legislation and others are considering measures. On the one hand, employers have a legitimate interest in and a duty to monitor employee activities, such as to ensure that wages are paid for all time worked. Employers also monitor productivity, ensuring that employees remain engaged and efficient, and that key business objectives are met. Monitoring may be necessary to enable quality assurance and security, and to protect intellectual property.
On the other hand, some monitoring may be viewed as intrusive, and evolving privacy laws may restrict employers' ability to monitor employees. California's Privacy Rights Act (CPRA) became effective for employees in 2023. As another example, employers in New York must disclose any form of electronic monitoring, such as internet access and videoconferencing, to new hires under a law which became effective in 2022. Such laws are diverse and generally apply to state residents and workers present in the state.
Another issue is that state licensing may be a consideration in industries that are subject to licensing (such as construction contractors, financial counseling, insurance sales, etc.). Employers and employees may need to seek licenses in any state in which employees are now working.
All such laws and others may apply immediately once an employee begins to work in a different state. Employers are responsible for knowing where their employees are and observing applicable laws. Among the action steps suggested later will be a process to determine the impact of an employee working in a state in which the employer might not already be present and familiar with the laws. There should also be a defined process by which employers identify state changes and apply appropriate coding changes so that the various systems (such as payroll) recognize which state's laws apply.
State unemployment insurance reporting and tax
In contrast to the complex state and local income tax withholding laws, federal law provides for standardized tests in all states to determine which state should receive Unemployment Insurance taxes and wage reports. In contrast to state withholding, wage and tax reports are generally reported to one state even if an employee splits their time between two or more states on an ongoing basis.
The objective of "localization of work" provisions in state Unemployment Insurance laws is to cover under one state law all of the service performed by an individual for one employer, wherever work is performed. The hierarchy follows:
- Services are localized within a state, or services performed outside the state are incidental, temporary or transitory.
- If service is not localized in one state:
- base of operations; or
- the place from which services are directed or controlled; or
- the individual's residence state
Source: U.S. DOL UI Program Letter 20-02, Localization of Work Provisions
In essence, an employer would not report wages and taxes to more than one state in any quarter, other than employees relocating permanently in mid-quarter. This is generally true even if an employee is permanently working in one state for two or three days per week and another state for the remaining days, on an ongoing basis.
Employers must generally cover employees under Workers' Compensation policies based on where they are working. If employees are in another state, a policy addendum may be needed, which could be an added expense.
However, claims management is generally unchanged. Employers should still document any injury with a written statement from the employee, and photos of the injury and job site if possible. The statement should explain whether the injury was in the course of employment, which may be less clear if employees are working from home. One key test is whether the activity being performed at the time of injury provides some benefit to the employer. As a recommendation, be sure to require a separate dedicated work area and clear working hours and break times.
Employee health & welfare benefits
Employee benefits are another question to raise with the employee benefits department and/or insurers. What happens if an employee works far away from the employer's established health care network?
How this might become a problem
State Labor/Workforce departments or tax agencies may not automatically know that an employee is working in their state. What tends to happen is that an employee may file a complaint or a claim for benefits, such as unemployment insurance or state disability benefits. Typically, the individual in a new state may learn about new benefits to which they are now entitled – such as paid family leave.
As an example, say someone who normally works in Pennsylvania begins working from their vacation home in New Jersey. They may learn that New Jersey State disability law covers maternity and apply for benefits. The employer may not even be aware that the employee has been working from New Jersey. Upon receipt of a claim, the New Jersey Department of Labor might contact the employer, since their wages were never reported to New Jersey. The Labor Department might notify the Department of Taxation, which may have no record of wages or withholding. This could lead to audits and fines.
What employers should do now
- First, understand how the employer knows or could know where employees are working, other than relying on employees to report any location changes. Employers are legally responsible for knowing and applying the relevant laws. There may be technical solutions and potential flags to raise questions. Travel and expense systems are examples where you might be able to detect activity across state lines, but there are others.
- Adopt and communicate a policy requiring employees to notify the company in advance of any work location changes.
- Establish an assessment and approval process, involving the Tax Department, Legal, HR etc. Document the process to evaluate requests to ensure consistent treatment. This would also involve a research component. Upon notice that an individual is working from a new state, a deliberate effort should be made to identify all relevant laws that may apply in any state in which the employer is not already present.
- Develop a policy and approach on when to recognize state changes, when to re-code employees for tax purposes, Wage & Hour, Workers' Compensation and other applicable requirements.
ADP compliance resources
ADP maintains a staff of dedicated professionals who carefully monitor federal and state legislative and regulatory measures affecting employment-related human resource, payroll, tax and benefits administration, and help ensure that ADP systems are updated as relevant laws evolve. For the latest on how federal and state tax law changes may impact your business, visit the ADP Eye on Washington Web page located at www.adp.com/regulatorynews.
ADP is committed to assisting businesses with increased compliance requirements resulting from rapidly evolving legislation. Our goal is to help minimize your administrative burden across the entire spectrum of employment-related payroll, tax, HR and benefits, so that you can focus on running your business. This information is provided as a courtesy to assist in your understanding of the impact of certain regulatory requirements and should not be construed as tax or legal advice. Such information is by nature subject to revision and may not be the most current information available. ADP encourages readers to consult with appropriate legal and/or tax advisors. Please be advised that calls to and from ADP may be monitored or recorded.
If you have any questions regarding our services, please call 855-466-0790.
One ADP Boulevard, Roseland, NJ 07068
Updated on November 13, 2023