August 1, 2021 | Category: Compliance, Employment

When the pandemic first started in 2020, many companies transitioned to a remote work model.  In many cases, this involved quite a bit of work and expense on the back end.  Companies had to provide equipment, internet/database/CRM access, make sure everything was secure, and still maintain a professional atmosphere.

While many employees enjoyed this remote work environment, some enjoyed it a little bit too much, and moved themselves to another state, altogether, without telling their employer.  In some cases, the business only found out when they began calling employees back into the office earlier this year and were told “I can’t come back to the office.  I moved to Missouri last October!”

This may sound amusing, but it’s anything but when it comes to the position an employer may find themselves in when this happens.  What many employers fail to realize is that remote employees are generally subject to the laws of the state where they are physically located and perform the work. In the legal world, this concept is known as situs. As such, allowing an employee to work remotely from another state opens a company up to additional liability that it did not have before.

Prior to agreeing to allowing an employee to work remotely from another state, there are certain factors all companies should take into consideration.

First, if your company has an employee working remotely in another state, it may be necessary for the company to register to do business in the state that the remote worker is working in. If so, the company will have annual filing obligations in the state the remote worker is in and the company may need to hire a registered agent (i.e., an authorized third party located within the state designated to receive correspondence on the company’s behalf). Further, there are some cities and/or counties that require workers who work at home obtain a home occupation permit. Therefore, if you have a remote worker working out of their home in another state, the company may need to obtain additional permits depending on local laws.

Companies also have to comply with the employment laws of the state that the remote worker is working in. Employment laws differ state by state and include, but are not limited to, minimum wage, leave entitlements, posting requirements, payday requirements, paycheck delivery, state disability insurance, overtime, and breaks. If a company fails to comply with state employment laws the company can end up being liable for lost wages, penalties, noneconomic damages, and attorneys’ fees. An employer should examine the state’s (and possibly county and/or city) employment laws where the remote worker wants to work to determine the specific laws that would apply to that employee.

Another important consideration to keep in mind with remote workers is workers’ compensation. Generally, most states require employers to provide workers’ compensation insurance with some limited exceptions. Due to the situs rule, the workers’ compensation laws of the state where the remote worker is actually working apply.

Just like employment laws, workers’ compensation coverage obligations vary by state law. Certain states have reciprocal agreements with other states about when and how they accept out-of-state workers’ compensation insurance. Under these reciprocal agreements, employers are allowed to bring employees temporarily into state from the reciprocal state without purchasing in-state workers’ compensation insurance. However, since reciprocal agreements are generally for employees temporarily in the state, these agreements may not apply to a remote worker who intends to work in the state for an extended period of time.

Last, but certainly not least, there are also tax implications when an employee works remotely from another state. An employee working for an extended period in another state, even if it is only on a part-time basis, can be considered sufficient contact with a state to subject the employer to the state’s tax obligations, which can include 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, like an employee working at a trade show or a convention in another state, generally there is no such relief with respect to remote workers.

The decision to allow an employee to work remotely from another state is a complicated one. Any employer who is considering allowing an employee to work remotely from another state should take time and do the research so that they are fully understand what the implications will be for their business.   Due to the complexity of having an employee work remotely from another state, employers may be justified in saying no to these arrangements. However, if an employer does agree to an employee working remotely from another state, they should make sure to have written policies in place for remote workers and a clear understanding between the employer and employee should be in place.