Navigating the New Normal: Essential Considerations for Employers of Multistate Remote Workers

In this post-COVID-19 world, remote work continues to rise across the United States, and it is becoming increasingly more common for employers to permit their employees to work from home, either fully or through hybrid work schedules. As employers navigate this landscape and update their remote work policies, there are several key areas employers should keep in mind.

Classification of Remote Workers

Some employers prefer to classify their remote workers as independent contractors based on the level of autonomy they have when working from home or another remote location. However, an employer’s lack of direct control over a remote worker’s daily activities is merely one consideration in determining a worker’s status as an employee or independent contractor. Because evaluating whether a worker is an independent contractor can be a nuanced determination and misclassification claims can be costly, employers should be cautious when determining the classification of remote workers.

Employers should also consider whether their remote workers are exempt or non-exempt under the Fair Labor Standards Act (FLSA). While exempt employees are not entitled to overtime pay, non-exempt employees must receive overtime compensation for hours worked beyond forty (40) in a workweek under the FLSA. It is crucial for employers to ensure their remote workers are properly classified and paid overtime wages in the event they are entitled to such.

Wage and Hour Compliance

Although a remote workforce can be beneficial, it can create some challenges with respect to wage and hour compliance, including monitoring hours worked and determining the applicable minimum wage, overtime rates, and employee benefits.

Generally, employees who work remotely are subject to the laws of the state where they work. By employing a remote worker in another state, employers could inadvertently become liable for state benefit programs, such as paid leave requirements, minimum wage, overtime requirements, and so on.

Further, employers with remote workers in multiple states, should ensure they are complying with applicable federal and state laws. As noted above, the FLSA entitles employees to receive overtime compensation for hours worked beyond 40 in a workweek. The FLSA also requires employees to be paid minimum wage at the federal rate of $7.25 an hour. However, some states have higher minimum wage requirements and different overtime requirements. For example, in California, the state minimum wage is $16 an hour. Moreover, California employees are paid overtime at a rate of one and one-half (1.5) times their regular rate of pay if they work more than eight (8) hours in a day, and overtime at a rate of two (2) times their regular rate of pay if they work in excess of twelve (12) hours in day.

For these reasons, accurately monitoring and recording remote employees’ location and work hours is critical. Employers should implement policies that provide clear guidelines on expected work hours, establish policies for overtime, require employees to record all hours worked, and prohibit unrecorded worktime to ensure compliance with wage and hour laws. Employers should also ensure they are accurately and periodically tracking the location of their remote employees to ensure compliance with applicable state employment laws.

Tax Considerations

Employers with remote workers may also face tax compliance implications. Employers should determine the tax obligations and reporting requirements in the states where their remote workers are located. Some factors that may influence an employer’s tax withholding, reporting, or corporate tax obligations include the employee’s physical location, applicable state tax laws, and the employer’s business presence in the states where remote employees work.

Generally, employers withhold taxes for the state in which the remote employee performs services, however, some states have different laws subjecting employers to income tax withholding obligations in the state in which the remote employee works and the state in which the employer operates. For example, an employer based in South Carolina that has a remote employee in Georgia is likely to have a tax withholding obligation in Georgia, in addition to its tax withholding obligations for its South Carolina employees.

In addition to potential tax withholding obligations, an employer with multistate remote workers may be subject to multiple states’ tax laws based merely on the worker’s presence. Because some states find that the presence of remote workers in their state constitutes “presence” of the employer in the state for corporate tax purposes, even a single remote worker can impose state corporate tax obligations on an employer. Typically, this arises in situations where an employer has a remote worker in a state where the employer has not previously engaged in business. For example, an employer generally has a tax nexus or “presence” in Texas if it has an employee working there. The presence of the employee, including a remote employee, could subject the employer to the Texas franchise tax.

Employers should determine the tax laws of the states in which their remote employees work to ensure compliance with any applicable tax withholding, reporting, or corporate tax requirements. Because an employer’s lack of knowledge regarding a remote employee’s location will not excuse it from its tax withholding or corporate tax obligations, employers should implement a policy requiring employees to immediately update their contact information with the employer in the event of relocation, regardless of whether such relocation is to another state.

Confidentiality and Data Security

In connection with their employment, remote workers may receive sensitive, confidential, or proprietary information. To maintain confidentiality and data security, employers should implement policies to properly secure and protect sensitive, confidential, and proprietary company information. To ensure remote workers adhere to company data security protocols, employers should present remote workers with its policies regarding confidential and proprietary information and remind them of their continuing obligations. Employers should also consider requiring appropriate remote employees to enter into confidentiality agreements. 

Restrictive Covenants

The enforcement of restrictive covenants is generally governed by state law—despite the Federal Trade Commission’s attempt to ban noncompete agreements earlier this year. For employers who use restrictive covenants, such as non-compete agreements and non-solicitation agreements, a state-specific determination is required for each state in which a remote worker performs services. For example, restrictive covenants are generally enforceable in Texas provided they are reasonable in scope and duration, protect a legitimate interest of the employer, and are supported by sufficient consideration. Restrictive covenants are typically enforceable in Florida as well. However, an enforceable restrictive covenant in Florida may not be enforceable in Texas due to differing reasonableness requirements in scope and duration. Thus, permitting an employee to work remotely in Texas for a Florida employer may nullify the protections afforded by the restrictive covenants. Employers may deal with this by including an enforceable “choice of venue” provision in the agreement containing the restrictive covenants.

KRCL’s labor and employment team is available and ready to help with any questions or concerns your company may have about navigating the legal landscape with respect to multistate remote workers.  

Labor and Employment, Remote Work