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.