Companies
and employees alike fully grasp the implications of a permanent remote option. Business
owners are swiftly realizing that they can secure the best talent from anywhere
while saving money on things like a centralized office staffed with exclusively
local talent. However, the physical place where an employee performs services
matters in three core areas:
Before
establishing a remote work model, companies should understand the full impact
of remote workers on these complex areas. Savvy business owners will develop a
comprehensive remote work model that keeps their business competitive and
avoids any nasty surprises and unnecessary complexity.
Many
businesses have accommodated the desire for more flexibility without fully understanding
the effect it will have on their corporate governance. Companies should be
aware of the consequences of having a workforce that spans state lines.
Business
owners must consider if a remote employee in one state will cause the company
to establish a connection to that state. If it does, your company is considered
to be “doing business” in that state. “Doing
business” is defined differently in each state, but in general, if your company
has employees who are physically located in another state on a regular basis,
that constitutes “doing business” there.
Why does this matter? Because any company “doing business” in a state must also be qualified to do business in that state—meaning you’ll likely need to register your business with the state, file regular reports, and pay the associated fees and taxes. You may have to hire a registered agent in that state, adding additional costs.
This is all routine maintenance for large, multinational corporations. But what about small-to-mid-sized businesses? If a company allows remote workers in other states, that could create connections to multiple other states, resulting in expensive and burdensome mandatory corporate governance obligations.
The
same issue applies to corporate income and other business taxes. When it comes
to taxes, states typically look to the connection between that business and the
state. This is important in the tax world because, under the Constitution,
states must establish a connection between a taxpayer and the state to impose
taxes. Having an employee located in that state could create the required connection
for taxes.
Beyond
that, cities and states have their own requirements about how work performed inside
their boundaries affects taxation. This can create a significant tax burden for
businesses.
Like
corporate governance concerns, tax problems arise when an employee relocates to
an area where the company didn’t previously have a physical location. Those
moves can have implications for income and sales taxes, depending on the local
and state rules involved.
For
example, a local business that previously had all its employees in one place
could be venturing into a complex situation if its workers scatter to numerous
locations under a permanent remote work arrangement. Even in a single metro
area there can be a number of different jurisdictions; their varying rules can
be complicated to untangle.
The difficult part for employers is monitoring so many different local rules and ordinances—including those that conflict. This could prove particularly challenging for companies using a hybrid model, where a worker’s location could vary every day.
The
laws of the state where employees are physically located while performing work will
govern the employment relationship. This can have significant impact on wages,
overtime, and employee leave.
Wage-and-hour
laws can be distinctly local for employment compliance. Many states have their
own minimum wage and overtime regulations. Even cities have gotten into the
regulatory act, requiring significantly higher minimum wages for hourly workers
within city and regional areas.
For
example, Seattle small businesses must pay hourly employees a minimum wage of $17.27/hour
beginning January 1, 2022. That’s nearly $3/hour more than the Washington state
minimum wage of $14.49/hour beginning 2022, and more than double the
federal hourly wage of $7.25. This example is not an outlier; many cities and
states have equally beneficial wage-and-hour laws. The employee is entitled to the higher wage
rate.
Every business must know where its employees are located so it can make the proper withholdings. Without that knowledge, an employer cannot calculate, withhold, and pay the correct amounts for income taxes, as well as assessments for unemployment, disability, workers comp, and other state-specific mandates.
Wages
aren’t the only subject of local regulation. Other laws, such as sick leave,
disability leave, and even family leave can change regionally. This can impact preexisting
company leave policies. State licensing laws could also affect where employees can
lawfully perform services. And, some insurance plans may be geographically limited,
so you’ll want to understand how that might impact your business.
The
pandemic has caused many employees to relocate—some temporarily, some permanently—to
locations considered safe or convenient. For some, the lure of affordable
housing and the ease of working remotely made the decision to relocate natural
and obvious. Perhaps some of your employees moved far away from their offices
since the start of the pandemic and didn’t tell you. Your business might
unknowingly be out of compliance. However, t’s important to find out, because business
owners are obligated to ensure that the company complies with all state and local
regulations.
Ask
employees to identify their physical work location, and require that they notify
you when they change their work location. Many companies ask their employees to
establish their primary location up front and let the company know if that
changes. Others require employees to record their location each time they access
a network. Whatever you decide, it’s wise for companies to regularly ask the
location question and to require certification of the response.
Take
some time to develop a thorough understanding of how remote workers will impact
your business in the areas of corporate governance, tax, and employment. Using
that as a framework, develop a remote work model that supports your employees, aligns
with your business goals, and has a manageable level of complexity for your
business. Here are some best practices to consider as you develop your company’s
remote or hybrid workplace model.
Companies should bring both short and long-term business
goals to the forefront and work with employees to find a balance between
productivity, flexibility, and achieving those goals.
Companies need to consider the different personalities and
life situations of their employees. Some workers may crave the camaraderie of
being on-site with colleagues. Others may prefer a more flexible arrangement to
avoid a grueling commute or accommodate family responsibilities.
Consider a trial period to see how your model works in
practice. Be open to being informed by the process; you may want to adjust
based on experience. Make it clear that you’re test driving the remote work
model, and give employees opportunity to provide input.
Consider creating an approval and tracking process for remote
employees. This could include a list of acceptable locations, such as places
where the company has a physical presence and is already qualified to do
business there.
It’s essential for every business to communicate the
expectations under your new remote work model. Though shifting community health
data continues to make it difficult to pinpoint an exact return-to-work date,
it’s helpful to have defined expectations for how often an employee should be
in the office. It might also be helpful to train employees on performance
expectations, workflow, and reporting structure under the new model.
More than 90% of U.S. employees hope to work in a hybrid or remote capacity for the foreseeable future. A well-developed model is clearly necessary to attract top talent and remain competitive. As the workplace continues to evolve, businesses must protect themselves from unanticipated corporate governance
responsibilities, unforeseen tax obligations, and unfamiliar employment laws. Whatever approach your company takes, you can develop a remote work model that is competitive and
that protects your business.
Lumin Law can help you understand how these considerations
impact your business and develop a remote work model that aligns with your
company’s values and supports your business goals. Please reach out and arrange
a time for us to connect.