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Legal Compliance for Out-of-State Remote Workers

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COVID-19 has made working from home commonplace, with many identifiable benefits from operating with a mostly remote workforce. Since COVID-19 relegated workers across America to home offices, nonprofit and other employers have realized significant costs savings with a smaller office footprint and also greater opportunities for attracting top-tier job candidates outside their ordinary geographical reach. Such benefits may transform remote work from a temporary solution, to address for workers’ health and prevent the spread of the coronavirus, into predominantly more long-term remote work arrangements. 

As employers evaluate whether remote work is a viable, long-term work arrangement for their staff, they should also address the plethora of legal compliance issues presented by out-of-state remote work arrangements. The following sections address key employment law considerations for employers extending or authorizing permanent remote work for employees who will work from home in a state other than the state where the employer’s office is located. 

Foreign Business Qualification

Foreign business qualification becomes a relevant consideration when a nonprofit corporation has employees working in a “foreign state,” that is, any state other than the state in which the nonprofit was incorporated. Depending on the activity or sort of work performed by the remote worker, the number of remote workers in the foreign state, and how long they will be working in that state, the nonprofit may need to “qualify” to do business in the foreign state.

Foreign qualification involves applying for authority to do business in the foreign state. The process usually requires filing an application for certificate of authority, along with proof of good standing in the state of incorporation, with the foreign state’s department of state. Once qualified, the organization will face additional state compliance requirements such as filing annual or biennial reports and designating and maintaining a registered agent.[1]

This requirement often becomes apparent when an employer seeks to set up state payroll tax withholding – only to find out that it needs a foreign business registration number. Payroll companies can sometimes assist with such registration, although legal counsel may be warranted to confirm this requirement and to consider related legal compliance measures as follows.

Payroll Requirements – Withholding Taxes and Unemployment Insurance

When employees are working in another state, employment-related taxes should be paid in that state – subject to some exceptions. The general rule, known as the “physical presence” rule, dictates that withholding tax is paid to the state in which the work is performed. For instance, an Illinois-based nonprofit corporation that hires a permanent employee to work exclusively from her home office in Virginia should register with the Virginia Department of Taxation for a withholding tax account and withhold wages for Virginia state taxes, not Illinois.

But the general rule does not apply in all states. In some states, remote workers are subject to income tax in the state in which they reside and work as well as the state where the employer operates. The analysis is more complicated for remote workers who split their work time between the nonprofit’s office and their out-of-state home. 

Additionally, a nonprofit with remote workers in other states may need register with other states’ unemployment compensation agencies. Notably, however, many states provide an exemption for Section 501 (C)(3) nonprofits with less thanfour employees. For nonprofit employers that are subject to unemployment taxes, they may elect between making contributions to the state’s unemployment insurance trust fund or reimbursing the trust fund for only benefits actually paid out. As a contributing employer, the nonprofit employer pays into the state’s unemployment insurance trust fund on a quarterly basis, essentially as a tax. As a reimbursing employer, the nonprofit reimburses the fund only for the monetary amount charged to its account, dollar-for-dollar, if and when an employee is laid off or discharged (other than “for cause,” which is judged very strictly against the employer).[2]

Workers’ Compensation and Disability Insurance Benefits  

Additionally, most states require employers, including nonprofit entities, to provide workers’ compensation insurance coverage for their employees. This may be as simple as contacting the nonprofit’s current workers’ compensation insurance carrier and obtaining an extension of coverage to the out-of-state employee. Other states, however, require employers to apply for and obtain coverage directly through a designated state agency. 

Separately, a small minority of states also require employers to obtain disability insurance, which covers employees when an off-the-job accident or injury precludes work. Coverage may be obtained through a disability benefits insurance carrier authorized by the state workers’ compensation board to write such policies. As with the required workers’ compensation coverage, nonprofit employers may wish to consult their current carrier to see it is authorized to write a disability insurance policy to extend coverage to the out-of-state remote worker. 

New Hire Reporting

Some states also require employers to report newly hired or re-hired employees who work in the state to a state directory within 20 days of their hire or re-hire date. An employer’s payroll service should be well equipped to handle such legal compliance requirement.

Wage and Hour Issues

As another important consideration, the wage and hour laws of the state where the remote employee is working will typically govern the employment relationship between the employer and the out-of-state remote worker. This is important because state laws vary when it comes to overtime pay for non-exempt employees, minimum wage, and paid leave entitlements due employees, and the minimum thresholds in the state where the remote worker is located may be quite different from the wages and paid leave benefits otherwise provided to in-state employees who report to the office each day. A failure to identify and account for these differences could result in a violation of the foreign state’s wage and labor laws and accompanying penalties. 

Employee Handbooks, with Remote Work Policies

Finally, keep in mind that employees are covered by the laws of the state and localities in which they physically work. Consequently, an employer’s personnel handbook should be in compliance with these additionally applicable employment laws. While state laws may be uniform in many respects, significant differences may exist such as with respect to how paid vacation days are treated, paid sick leave,[3] and other state-specific benefits.

Employees handbooks may otherwise warrant updating to provide for remote work arrangements, whether as an across-the-board policy or on a job-specific basis. For more information about practical aspects of remote work arrangements, including job suitability, technology, home environment, work time tracking, accountability, communications, job performance, and safety, see our blog on COVID-19 Workplaces: Changes for Policies, Protocols, and Employee Handbooks here.

Remote work arrangements offer very real and tangible benefits to employers and their staff, especially as the COVID-19 pandemic continues. But remote work also requires careful attention to legal compliance issues, particularly when work is performed out-of-state.

[1] A registered agent is an authorized third party with a physical address in the state where legal documents may be received on behalf of the nonprofit corporation. For more information, see our blog on Registered Agent Basics.

[2] For more information about unemployment insurance for nonprofit employers, see our blog on Unemployment Taxes for Nonprofits. 

[3] For more information about paid sick leave laws, see our blog on COVID-19 Unemployment Benefits FAQs.

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