New hires and current employees alike are asking for more flexibility in where they perform their work—not just at home versus the office but also working remotely from out of state or even out of the country. These requests may be permanent or temporary in nature (for example, temporarily working at a vacation destination for the summer or permanently splitting the workweek or month between states where one works and lives), but they all amount to state employment and tax law compliance issues the employer should be aware of when providing this benefit.
In general, the state in which the work is physically being performed is the governing state for employment laws, including wage and hour laws and required leave laws. Some states won't consider short, temporary stays by employees to be covered work, but others do. Employers will need to abide by each state's requirements to be in compliance.
State tax laws can be complicated if an employee works and/or lives in more than one state, both for employer obligations and individual income tax liability. Employers will need to track the duration an employee works in any location to help ensure the employer complies with all tax requirements. See Out-of-State Remote Work Creates Tax Headaches for Employers, Expert Q&A: Resolving Tax-Filing Issues for Remote Workers and the American Payroll Association's Multistate Taxation guide.
While not an exhaustive list, below are some of the major compliance concerns and workforce considerations to be aware of when employees are allowed to work from anywhere. Many state-specific laws can be found using SHRM's Multistate Laws Comparison Tool.
Licensing and Taxes
- Licensing. Employers may need a state and local license to do business in the state in which an employee performs work. Check with state and local departments of revenue or commerce to find information on how to secure required business licenses.
- Payroll taxes. Wages earned by employees are generally subject to the payroll tax requirements of the state in which the work is performed. Employers will need a state ID number to withhold, report and remit state taxes, and they must be aware of applicable employment tax rules and filing requirements in that state. For example, unemployment insurance taxes are generally only filed for one state, based on the localization of the work.
- Personal state income tax. This can be complicated for employees who may end up with double taxation issues if they are not aware of the state requirements. Some states, such as New York, have what is known as a "convenience of the employer rule," which means anyone working for a New York employer who works out of state will owe New York state taxes for those days, unless the individual is truly required to work remotely by the employer. The other state might not offer a credit (known as reciprocity) and might also tax those same wages. Part-year resident income tax returns may need to be filed for multiple states if the employee changed locations during the year.
- Wage and hour requirements. Each state will have its own wage and hour requirements that must be complied with, such as:
- Minimum wage rates, which may be higher than the federal rate or the rate in the company's headquarters state.
- Exempt employee salary requirements greater than what the FLSA requires, or some federal exemptions not being recognized.
- Daily overtime pay requirements versus weekly, and possible double-time pay requirements where applicable.
- Wage deduction requirements that would prohibit certain deductions from pay without employee written consent.
- Paid vacation/paid time off payout or carryover requirements.
- Timing of paychecks, pay statement information requirements and direct deposit laws.
- Expense reimbursement, which some states will require for all business-related expenses such as internet fees and utility bills.
- Salary adjustment. Some employers may adjust salaries based on geographical location, such as reducing a New York-based employee's salary when they decide to move to a location with a lower cost of living like Idaho. Employers will need to determine if this type of policy will be appropriate for their workforce. See Remote Workers Expect Pay to Reflect Their Locations.
Mandatory and Voluntary Benefits
- Group health benefits. If the employee is enrolled in the group health plan, in-network providers may not be available outside of the headquarters state, which may cause employees to experience higher out-of-pocket costs or to drop coverage unless the provider network is extended to their area. See Rethinking Employee Benefits for Permanently Remote Workers.
- Workers' compensation. Generally, employers are required to have workers' compensation coverage in the state in which the employee is physically working. Failure to do so could result in liability for the employer and fines for noncompliance.
- Paid and unpaid leave requirements. These are many and varied, including:
- Family and medical leave.
- Paid family leave.
- Paid sick leave.
- Pregnancy disability leave.
- Mandatory short-term disability insurance.
- Other state-required leaves such as those related to domestic violence, voting, school activities, organ donation, military leave, jury duty and bereavement.
General Employment Laws
- Hiring requirements. Each state may have various requirements, such as:
- Prohibitions on asking applicants for criminal or salary history before hire.
- The validity of noncompete agreements.
- New hire paperwork and reporting.
- Independent contractor requirements.
- Employment posters. Each state will have its own individual employment law posters that are required to be provided to employees, including those working from home.
- Drug testing. State laws will vary, such as California not allowing random drug testing and Maine only allowing drug testing when a written policy is approved by the state Department of Labor.
- Nondiscrimination laws. In addition to the protected classes under federal law, states may have additional categories protected against discrimination. These might include categories such as marital and/or family status, political beliefs, ancestry, medical or recreational marijuana use, personal appearance, smoking, or being a victim of domestic violence.
- Handbooks. Employers will need to decide whether more than one employee handbook version is needed. Many employers will create just one handbook that meets the most generous requirements for all states in which they have employees, while others have one main handbook with state-specific attachments for company policies that differ for workers in other states.
While a few U.S. laws are extraterritorial for U.S. citizens working abroad, the laws of the country the work is performed in will govern in all circumstances. Employers need to comply with all business licensing, taxation and employment laws of that country, including regional and local laws. U.S. citizens working abroad must file a U.S. tax return and may also owe taxes where they work, unless they qualify for certain earned income exclusions or credits.