During a recent employment law webinar, Haynsworth Sinkler Boyd’s Chris Gantt-Sorenson and Tyler Gilliam discussed considerations for employers who employ out-of-state remote workers. To help employers ensure that they are compliant with various states’ business, tax, and employment law regimes, Chris and Tyler prepared the following out-of-state employee compliance checklist.
1. Business Registration Requirements
Employers must always evaluate whether hiring an employee in a given state means the employer is “conducting business” in that state. The answer to this query varies state-by-state but often depends on the employee’s role within the company and the services they are providing to the company or its clients. Companies that are deemed to be “conducting business” in a given state must register with the Secretary of State, or equivalent, often by obtaining a “Certificate of Authority to Transact Business.”
2. Payroll Tax Requirements and Withholding Considerations
Employers in states with an income tax, like South Carolina, have state payroll tax withholding, payment and reporting obligations. Evaluate payroll tax requirements and, if applicable, register with the state’s tax authority.
What payroll tax requirements do employers have (if any) with respect to remote workers that work and/or live in different states? It is important to know both your company characteristics and determine facts for each remote worker by reviewing and answering the following:
Where is the employer’s business headquarters based on the filing from the Secretary of State? You can always check the Secretary of State database or its equivalent and search for your company’s legal name to confirm where it is incorporated.
Employer Nexus States
Determine which states employers have “minimum contacts” with creating a “nexus” for tax purposes. “Nexus” amounts to the level of minimum contact between a taxpayer and a state sufficient to subject the taxpayer to the taxing jurisdiction of a state.
The answer to this query varies state-by-state and thus requires a state-by-state analysis. For example, an employer doing business in a state has nexus in that state and is subject to that state’s tax rules even if it has no employees working in that state. Additionally, having employees working in a state remotely can also create nexus. Consider income tax on receipts from nexus states, gross receipts taxes, sales taxes, etc.
Do the employer’s state and employee’s work state or residence state have a reciprocity agreement? If so, that reciprocity agreement may trump general rules and provide relief. As it stands right now, South Carolina does not have any reciprocity agreements in place.
Employee Working States (EWS)
What is the employee’s working state(s)? In other words, where is the employee performing services? Consider where the employee’s feet are on the ground when they do the work. It could be more than one state. To make these determinations, it is critical to understand and track the allocation of time where the employee is working down to the percentage of time in different states. Employers with remote workers out of state may need to create reporting requirements in a company database to properly track this information or require employees to keep a log of when and where they are performing services. This information directly informs withholding obligations. In some cases, and depending on the state’s threshold, an employee’s working time in a state may be considered “de minimis,” requiring no withholding in that state.
Employee Residence States (ERS)
What is the employee’s state(s) of residence for tax purposes? It is important for employees to establish domicile. If you are unsure, it may be worthwhile to create a questionnaire asking the following questions so you can determine the tax-home for remote employees or employees with multiple homes:
- Where is your primary residence?
- Where is your car registered?
- In which state are you registered to vote?
- What state issued your driver’s license?
- How much time are you spending in South Carolina versus North Carolina, for example?
Assume you must withhold in states where employees are working more than de minimis amounts. Ensure you register with tax authorities where you must withhold/have created nexus.
3. Register with the state’s unemployment insurance administration
The Department of Labor’s Localization of Work Provisions created a uniform 4-factor test to determine which state’s wages should be reported and unemployment insurance paid, though any contradicting state law would override application of this test.
- Where services are performed
- Base of operations
- Place of direction and control
- Residence of employee
If you have an employee performing services in a state, you must ensure that you are registered with that state’s unemployment division and report whatever the state requires. State Unemployment Insurance (UI) Tax varies by state, which may reduce FUTA tax liability.
Some states require contributions to Job Development/Workforce funds in addition to Unemployment Insurance, so employers should ensure there aren’t any additional requirements other than unemployment insurance requirements.
4. Comply with State Employment Laws
Employers permitting an employee to work remotely outside of the work situs should consider the additional employment law categories:
- State wage laws
- Don’t forget to have an existing employee who relocates to another state complete a new W-4 and update the payroll company
- At-will employment
- Use of AI in hiring
- Ban-the-box laws
- Pre-employment background checks or drug screenings
- Some states prohibit or restrict testing for marijuana
- Insurance Requirements
- Business Insurance, Professional Liability, Commercial Auto Insurance
- Add new state to worker’s compensation policy
- Healthcare or Disability
- Family Leave Insurance (FLI)
- Paid Time Off
- Disability Leave and/or Insurance Requirements
- Jury Duty Leave
- Employment Rights
- H-1B Employees
Employers who determine they will proceed with hiring remote workers who work out-of-state should also enter into written remote work agreements that clearly delineate expectations touching on these aspects:
- Written agreement with employee approved for remote work and conditions under which it might be revoked
- Equipment use policy
- Confirm agreement does not alter the at-will nature of the employment relationship
- Timekeeping requirements for non-exempt employees
- Software use policy
Employers are well advised to consider a number of factors before foraying into hiring out-of-state remote workers, such as how remote work would impact productivity and organizational efficiency, security and privacy concerns, and overall employee satisfaction. Lastly, since employees in some businesses could potentially begin working remotely in another state without advising the employer, an employer should also require employees to notify the employer before the employee begins working remotely from another state.
For a deeper dive into this conversation, click here to watch the webinar recording.