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The Perils of Multistate Employment

A patchwork of state laws poses challenges for HR.

May  CoverXYZ Manufacturing Inc. has grown steadily and now has more than 2,000 employees in 22 states and expanding international operations. An industry upturn has inspired a hiring initiative, although recruiters have been careful to avoid bad hires by employing methods such as background checks. Many staff additions will be in the sales, marketing and technical support departments, and these employees will travel domestically and internationally to call on and support customers.

Compliance Dilemma

XYZ Manufacturing's HR director has become increasingly concerned about the growing number of employees living and working in other states, and understands that compliance with only federal laws and the company's home-state laws may not suffice.

I asked several experienced labor and employment attorneys about this concern. What should XYZ Manufacturing be worried about? Although we lack space to cover all possible perils, this article explores several important ones: background checks, leaves of absence, compensation, immigration and taxes.

Background Checks

In a 2010 Society for Human Resource Management survey, 92 percent of responding HR professionals indicated that their companies conduct criminal background checks and 87 percent indicated that their companies conduct credit background checks on applicants for some or all positions.

Most background checks are covered by the federal Fair Credit Reporting Act (FCRA) and various state mini-FCRAs. Despite the term "credit" in their titles, these laws apply to all types of background checks—criminal, motor vehicle, employment or professional references—if they are conducted through a fee-paid third party known as a consumer reporting agency.

The federal and state laws create a complex set of requirements, with costly penalties possible for each instance of noncompliance. In March 2011, a national employer settled for $5.9 million after the employer allegedly failed to wait a reasonable amount of time after receiving background check results before taking adverse action. In April 2011, another national employer settled for $2.6 million after it allegedly obtained background checks without first securing applicant consent.

XYZ Manufacturing has the challenge of complying with the FCRA and state background check laws in the 22 states where it has facilities. It also needs to review the state laws where the applicants reside when they apply and where they reside when the background checks are run.

The U.S. Equal Employment Opportunity Commission has long held that background checks must be job-related and consistent with business necessity. But in recent months, the commission has stepped up its interest in background checks, holding public meetings in 2011 on the subject of credit and criminal background checks and hinting at new guidance on background checks as early as this summer.

Stephen Woods, an Ogletree Deakins shareholder in Greenville, S.C., and head of the firm's Background Check Advice Group, says, "Background check class actions are one of the new hot types of lawsuits being filed by plaintiffs' attorneys, because of the number and variety of federal and state requirements. Employers should take another look at their background check processes in light of the new crop of lawsuits."

Leaves of Absence

Previously, multistate employers could rely on the fact that compliance with the federal Family and Medical Leave Act (FMLA) sufficed. However, leaves of absence have become the target of many state and local legislative initiatives. Although the FMLA does not require paid time off, state laws in California and New Jersey require paid time off in certain circumstances. And, local ordinances requiring paid time off are on the books in San Francisco and Washington, D.C. Philadelphia requires paid leave only for city contractors and subcontractors.

James Paul, a shareholder in Ogletree Deakins' St. Louis office, warns that employers can easily overlook state or local requirements by focusing only on FMLA responsibilities. Many state laws replicate the act's reasons for protected leave, but employers' compliance is triggered at lower thresholds than the FMLA's threshold of 50 employees.

Many states also grant statutory protections to employees for circumstances not usually covered by the federal law. Illinois, for example, has particularly detailed domestic violence, school visitation, military leave and blood donation laws. Other states have even broader organ and bone marrow donation laws for public and private employees.

Other frequently overlooked state law differences concern workers' compensation benefits and job protection. Any time a leave of absence is based on an underlying work-related injury or accident, employers must comply with the FMLA. The act's requirements are almost always triggered when an employee cannot work due to work-related injuries or illnesses. But employers also should check workers' compensation laws in the state where the employee works.

Some state laws prohibit a discharge directly linked to an employee's claim for workers' compensation benefits, and restrict whether and how an employer may change benefits or employment status. Oklahoma, for example, prevents termination of group health insurance benefits and termination of employment during any period of temporary total disability—even if the employer has otherwise valid reasons for discharge.

Other state laws can prohibit an employer from requiring employees to use accrued paid time off during a workers' compensation leave—even though the federal law generally allows such a requirement. Accrued paid time off is considered "earned wages" in some states but not in others, causing additional legal concerns for HR and payroll departments.

Many states grant statutory protections to employees for circumstances not usually covered by federal law.

Yet another potential pitfall lurks in state disability discrimination laws, which are similar to the federal Americans with Disabilities Act, and can require leaves beyond the FMLA's 12 weeks when doing so would be a "reasonable accommodation."

Paul explains that "it is much less costly for XYZ Manufacturing to do its homework on the front end and ensure state and local compliance with leave laws when compared to the very expensive and risky defense of litigation when the company overlooks an applicable state law."


As more states, such as California, adopt state wage and hour laws and regulations, multistate employers will find compliance more complicated. Multistate employers can no longer assume that compliance with the Fair Labor Standards Act shields them from liability for wage and hour violations. Multistate employers should conduct audits in each state where they have employees, not just facilities, to determine compliance.

According to Betsy Johnson, a shareholder in Ogletree Deakins' Los Angeles office, the key areas of focus for federal and state compliance review are:

Payroll practices, such as meal and rest periods, payment of wages at termination, payment of commissions and bonuses, uniforms and employee expenses, deductions from wages, and itemized wage statements.

Calculation of overtime, including daily overtime where applicable, "rounding" policies and the "fluctuating" workweek.

Calculation of the "regular rate" and what must be included in the regular rate for overtime purposes.

Off-the-clock work, including travel time, on-call and standby time, "reporting time" where applicable, and time spent in meetings and training.

Misclassification of exempt and nonexempt status, and misclassification of independent contractor status.

Johnson's suggestion for XYZ Manufacturing's HR director: "The best defense to a state or federal compliance audit or potential litigation is to conduct internal audits and fix any problems before a governmental agency comes knocking on your door."


The U.S. government's requirements for complying with employment eligibility verification laws can be confusing, but now multistate employers must be careful navigating the diverse state requirements. For example, employers in Louisiana must either use E-Verify or retain copies of a limited set of identity and work authorization documents. In South Carolina, employers may no longer confirm new workers' employment authorization with a driver's license or state identification card. In Tennessee, employers must use E-Verify or request a valid Tennessee driver's license or photo identification card, or a driver's license from another state where the license requirements are at least as strict as those in Tennessee.

Even temporary travel through certain states can potentially cause multistate compliance problems.

Even temporary travel through certain states can potentially cause multistate compliance problems. For example, a Mercedes executive ran afoul of Alabama's immigration law requiring police officers to arrest individuals without proper residency identification. Pulled over for driving a rental car without adequate license plates, the executive could produce only German identification documents, an unacceptable form of identification under the state's law. The executive was detained and had to appear in municipal court with his immigration documents to have the charges dropped.

Arizona's immigration law has caused similar business travel disruption. A commercial truck driver was questioned about his identity and status after entering an Arizona weigh station. Although he provided his commercial driver's license and Social Security number, he was taken into custody and released only after producing his U.S. birth certificate.

Leigh Ganchan, a shareholder in Ogletree Deakins' Houston office, observes that multistate employers should "be proactive about identifying individual state requirements regarding identity and immigration documents, and make sure employees are aware of the potential for having to present these to law enforcement officials even during routine traffic stops."


Forty-one states, plus the District of Columbia and Puerto Rico, have state income tax laws. The U.S. Supreme Court has held that a state may tax all the income of its residents, even income earned in another state. XYZ Manufacturing's employees could thus face a double-tax dilemma; the company may be required to withhold income taxes to both an employee's home state and the state where the wages were earned.

Fortunately, according to Preston Burch, a shareholder in Ogletree Deakins' Columbia, S.C., office, states have taken various approaches to avoid multistate withholding. Burch explains that double withholding can be avoided by using one of the following methods:

  • The resident state does not withhold taxes on wages earned while working in another state.
  • The resident state withholds taxes if the other state imposes no income taxes.
  • The resident state withholds taxes if, and only to the extent that, the other state's withholding is lower than the resident state's withholding.
  • Some states have reciprocity agreements with other states not to withhold income taxes on employees from a resident state working in the other state.
  • Some states do not tax the nonresident until he or she has worked a certain amount of time or earned a certain amount of wages in that state.
  • The state where the employee works may require that income be allocated to determine an employer's state withholding tax liability.

For multistate employers, Burch recommends "checking the state income tax withholding laws of a state in which an employee will be working before the employee begins working there. In addition, the employer should check whether the cities and counties in which employees work have their own income tax withholding requirements."

The 21st century perils and pitfalls of multistate employment are plentiful. However, the best advice for dealing with them comes from the 18th century and Benjamin Franklin: "An ounce of prevention is worth a pound of cure.

The author is a shareholder with Ogletree Deakins in Portland, Ore., and author of The Star Profile: A Management Tool to Unleash Employee Potential (Davies-Black Publishing, 2008). He can be reached at

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