Remote working: New legal risks and realities

The pandemic-fueled “Great Resignation” has reshaped the world of work. In today’s hyper-competitive job market, workers now enjoy more leverage to decide when and where they want to work, forcing many employers to make dramatic changes to their business models.

A new norm—and new consequences

Employee expectations have changed; remote work and flexible scheduling are no longer the exceptions. The shift away from what has traditionally been in-office work has forced employers to rethink how they attract and retain talent.

Related: Workplace flexibility is the key to attracting and retaining workers

Once considered an accommodation for a disability or an occasional personal need, work-from-home arrangements are quickly becoming an acceptable norm for companies as they compete for talent. Work that was office-based pre-pandemic is still being done remotely, and the post-pandemic return-to-the-office surge—once considered inevitable—is no longer a given. As new COVID variants have emerged, businesses have put return-to-office plans on hold or scrapped them altogether.

With remote and hybrid workforces here to stay, employers have to grapple with new legal risks and realities. Having employees working remotely, both temporarily and permanently, in another state or in multiple states creates new compliance burdens and may trigger unintended liabilities. Two years into the pandemic, businesses are still getting tripped up over which laws govern their employees.

How federal laws apply

With few exceptions, federal labor and employment laws apply regardless of the geographic location of U.S.-based employees, whether they work in-office or remotely. Thus, few of those laws specifically address how remote workers fit into their broader application. Among the more notable exceptions are the Family and Medical Leave Act (FMLA) and the Worker Adjustment and Retraining Notification Act (WARN).

Related: DOL to focus enforcement efforts on FMLA, FLSA retaliation

FMLA guarantees job-protected, unpaid leave to eligible employees for certain enumerated reasons such as the birth of a child or to care for their own or an immediate family member’s serious health condition. It also provides some military family leave entitlements. Only employees employed at a worksite where the company has 50 or more employees within 75 miles of the site, and satisfy certain service requirements, are eligible for FMLA leave.

Federal regulations expressly address the eligibility of employees who work at home, providing that an employee’s personal residence is not a worksite for FMLA purposes. Rather, their worksite is the office to which they report and from which they receive their work assignments. Thus, if the office to which a remote worker reports meets the 50-employee threshold, they would be eligible for FMLA leave provided they satisfy the statutory service requirements.

The WARN Act sets forth certain advance notice requirements for businesses that are closing locations or implementing large-scale reductions in force. Generally, employment losses of at least 50 or more employees at a single site of employment during any 30-day period are needed to trigger the statute. Like the FMLA, the WARN Act’s regulations expressly address how remote workers fit into the equation. The regulations clarify that the single site of employment for remote workers is the location “to which they are assigned as their home base,” “from which their work is assigned,” or “to which they report.” Thus, in the current remote-work environment, even a reduction in force that impacts only remote workers may trigger a WARN Act event.

The state-and-local laws patchwork—Traps for the unwary

The pandemic opened up new possibilities for individuals to work from home, but also presented new challenges for businesses as they struggled to adapt to the evolving legal landscape.

Related: Remote work: 5 logistical issues companies need to address

Many states and localities created new employer obligations and employee entitlements in other areas as the pandemic-induced shift to remote work persisted. Among other things, changes in paid leave and anti-discrimination laws, wage and hour laws, notice and posting obligations, ban-the-box laws, the legalization of marijuana and restrictions on pre-employment testing, and workplace health and safety protocols created compliance traps for the unwary employer. Despite their best efforts, businesses have had a difficult task navigating the evolving patchwork of state and local laws.

Employers whose geographic footprint changed as the pandemic continued must be especially mindful of expanding state and local requirements and how employees working remotely, whether temporarily or permanently, can trigger registration, licensing and other statutory requirements. In large measure, state and local laws regulate the employer-employee relationship. The basic determination of whether an individual is an employee or an independent contractor often hinges on where they work rather than where they reside, as states rely on different tests to determine employment status. Misclassification did not take a holiday for COVID, and it can be expensive.

Regardless of where employees work, state and local laws continue to regulate basic wage and hour matters including equal pay protections, minimum wage, overtime, and wage payment, and wage transparency laws. Employer obligations extend to contributing to statutory coverages such as Unemployment Insurance, and in some states Workers’ Compensation and Short-term Disability, where states set the rules and pay out the benefit. Whether non-compete agreements are allowed, enforced or barred, or the ability of employees to access their personnel files, also depends on state law.

Some states regulate whether unused PTO must be paid out or carryover is allowed while others leave it to the employer to decide. Some states mandate paid sick leave and/or paid family leave while others do not. Whether and the extent to which employers must reimburse workers for costs associated with working remotely (e.g., cell phone, internet, extra broadband, electricity, etc.) is similarly determined by state law.

The taxing state of tax withholding

Greater workforce mobility has also imposed additional administrative burdens on employers. While employees have embraced the flexibility and economic savings of remote work, employers face significant tax withholding and reporting challenges. Although remote work and “work from anywhere” policies may offer companies enhanced employee recruitment and retention, they can present considerable complexities. Generally, federal tax laws are consistent regardless of where an employee resides or performs work, whereas state and local income tax laws vary by jurisdiction. Factors that impact state and local tax withholding can include the service location, residence of the employee, and the employer’s business locations.

Virtually every state has its own requirements for income tax withholding, except for Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming, which have no state-level personal income tax. Generally, state income tax withholding is based on where the employee performs service rather than the employee’s state of residence.

If the remote employee works in a state where the employer has business operations, withholding is relatively simple. The employer withholds and remits income taxes as it would do if the employee were not working remotely. It becomes more complicated when the employee performs services in a state where the employer does not have business operations. In these instances, the employer would need to register with the state and follow the state’s withholding and remittance laws.

When an employee resides in a state where the employer has a place of business, but services are performed in another state, withholding can be complex. Some states, such as Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania, have a rule of convenience for income tax and withholding. Rules of convenience may require withholding based on the state of residence (where the employer has a business location) rather than the state in which the services are performed.

Navigating the dhifting currents

States are scrambling to keep pace with the dynamic shift from in-office to remote working. Early in the pandemic, some states chose not to assert certain tax obligations for temporarily remote workers, but those waivers have largely ended. Recently, states like Arizona have issued guidance on remote worker taxation and withholding, and Delaware has issued guidance on remote worker wage reporting. Other states are expected to follow suit to avoid losing tax revenue and clarify state requirements. Also, remote working can impact state unemployment compensation and state leave tax obligations.

Employers should consider how state and local tax obligations will be satisfied when considering remote worker policies. Coordinating with the employer’s payroll provider is essential to comply with the myriad of state and local laws. Employers should know where services are performed and have procedures to track the locations where employees perform their work and their residency status since this can impact state withholding requirements.

The pandemic has changed how America works. Navigating the ebb and flow of remote work and greater worker mobility has created new complexities and compliance risks for employers over the past 24 months. This seismic shift of work away from in-office settings has triggered employment, tax, and other compliance challenges. As companies look to adapt their operations and adjust their business models to avoid a turnover tsunami, employers must not lose sight of the compliance complexities and potential pitfalls in reshaping the world of work.

Laurie DuChateau leads Buck’s U.S. compliance consulting practice and has more than 25 years of experience in employee benefits law. Nancy Vary is a director in Buck’s compliance consulting practice and has more than 25 years of experience in labor and employment law.