Walter R. Calvert
Walter R. Calvert is a partner at Venable, LLP, in Baltimore.
The proliferation of remote work during the pandemic has created new flexibility for association employers and their teams. But the prospect of maintaining remote employees for the long term also raises complex tax and employment law issues that management must evaluate.
The explosion in the number of association workers who now perform their jobs remotely as a result of the pandemic has brought to light a number of state and local issues for employers that have long been simmering. In particular, newly remote employees may render their employers subject to the tax and employment laws of jurisdictions where they previously had little or no presence.
Where remote work has proven to be an effective alternative to traditional workplaces, many employees may expect to be allowed to continue working elsewhere even after it is safe to return to the office, so it is critical for employers to understand the legal implications of continued telework. Following is an overview of key concerns in the areas of state and local tax and employment law compliance for employers with remote workers.
Merely having an employee working for an extended period in another state (even on a part-time basis) can be considered sufficient contact or “nexus” with a state to subject the employer to the state's taxes, including income tax withholding, unemployment insurance premiums, income or receipts tax on the employer, and sales/use tax. While a state may provide for relief from tax reporting and payment obligations for temporary contacts with the state (such as tradeshows and conventions), for the most part there is no such relief with respect to remote workers.
Some states have recently provided temporary relief for employers with employees working remotely due to the pandemic, but it is not clear how long that relief will remain in effect. Much of that relief has been merely extensions to return filing or payment dates. In addition, rules vary widely by state; each state’s rules must be considered independently wherever a remote employee is located.
Once an employer has determined that it has nexus with a particular state, the next inquiry is whether the employer has a filing or payment obligation. As part of the registration process with a state, a nonprofit organization may need to file an exemption application to establish its entitlement to exemption from state and local taxes.
Once an employer has determined that it has nexus with a particular state, the next inquiry is whether the employer has a filing or payment obligation.
When an employee’s work location changes to a different state, the employer and the employee will need to jointly reevaluate which state to designate for purposes of withholding income taxes and state unemployment taxes with respect to the employee’s compensation. Typically, income tax withholding is based on the location where the employee performs the work, even if the employee resides in a different state—unless there is a reciprocity agreement between the organization’s state of residence and the state where the employee works. Unemployment insurance premiums typically are paid to the state where the work is performed.
If an employee works entirely within one state for the year, taxes generally are paid to that state, even if the employer's headquarters or the employee's usual office is located elsewhere. But again, the rules vary by state, and several states have rules that vary from these generally applicable themes regarding to which state an employer should make payroll tax payments.
In addition to the potential tax implications of a remote workforce resulting from the pandemic, employers should also consider any entitlements and protections that state and local employment laws may afford to its newly remote employees.
Even before the pandemic, employers who regularly hired remote employees (or who regularly agreed to remote work arrangements) had to ensure compliance with state and local employment laws that applied to those employees. Specifically, when an employer permits an employee to regularly work remotely from a state or locality where it does not have existing employees, it must review—and revise if necessary—its employment policies to ensure the employee receives the entitlements provided by state and local law. Remote work arrangements resulting from the pandemic have made this an issue for many more employers that now have employees working in jurisdictions where they previously had no employees.
Employers should invest the time and resources needed to review their current policies to determine whether they provide the same level of benefits required by the state and local laws applicable to its remote employees.
Many state and local employment laws afford a higher level of benefits than federal law, including paid sick leave, a higher minimum wage, and unpaid or paid medical leave or benefits. For example, under California wage-and-hour law and guidance, employees are entitled to the payment of accrued, unused vacation leave upon separation from the employer. In contrast, most states permit employer policies providing that a departing employee forfeits such leave.
Employers that do not comply with state and local employment laws risk significant potential liability, including monetary penalties. Employers should invest the time and resources needed to review their current policies to determine whether they provide the same level of benefits required by the state and local laws applicable to its remote employees. However, employers should not assume that every state and local law applies to a remote employee. Many such laws apply only if the employer has a certain number of employees, either in the particular jurisdiction or in totality.
Organizations that have not gone to fully remote operations during the pandemic are cautioned against denying requests to work remotely solely because the organization prefers not to be subject to a particular state or local law that provides more generous employee benefits. Doing so could lead to potential discrimination and health and safety claims—as well as to employee relations issues. Rather, notwithstanding other legal obligations, as a best practice, employers should offer the opportunity for remote work arrangements based on objective job-related criteria, such as job duties, organizational job level, or employee performance.
Remote work in various forms is likely here to stay, along with the complex legal issues that it brings to organizations. These issues should be thoughtfully addressed by management in associations with remote employees.