State and Local Income Tax and Employment Law Implications for Remote Workers During COVID-19

by Law Week Contributor

By Nancy Strelau and Christine Samsel
BROWNSTEIN HYATT FARBER SCHRECK

COVID-19 has drastically changed how and where employees work, with many now working from their homes or other remote locations. These temporary (and sometimes longer-term) teleworking arrangements raise questions about how state and local income tax and employment laws should apply to employees who live and work in different jurisdictions.

For example, think of many large metropolitan areas — Washington, D.C. based employers may have employees residing in Maryland or Virginia, and New York City based employers may have employees residing in New Jersey, Connecticut or Pennsylvania. It also may be that although one state may be the situs for the employer’s operations and the employee’s residence, they may be in different local jurisdictions — e.g., employers with operations in Los Angeles may have employees resident in California but outside the city or county limits. And an employer faces similar issues if an employee has temporarily relocated to another state that is neither the state in which the employer’s operations are located nor the employee’s resident state (for instance, to shelter with family).

State and local governments have responded with guidance addressing the effect of temporary teleworking situations on state and local taxes and employment laws. In addition to analyzing these temporary teleworking rules, employers need to consider the ramifications if teleworking becomes part of employees’ longer-term work conditions.

STATE INCOME TAX WITHHOLDING

Many state income tax wage withholding rules depend on whether an employee lives in the same state in which he or she works. Local tax jurisdictions often apply similar rules, but for brevity, we refer solely to state tax laws.

Withholding by the Employee’s Home State. The general rule is that if an employer’s business operations and an employee’s principal residence are in the same state, state income tax withholding is required on all wages earned by the employee within and outside of the employee’s home state. Many states also take the position that when work is primarily performed from an employee’s home, the employee’s home is a regular place of business. State resident income tax withholding therefore applies in the employee’s home state in such instances.

Withholding by the Employee’s Work State. The general rule is that if an employer does not have business operations in the employee’s home state, state income tax withholding is required only on wages earned by the employee in the employee’s work state. Some states (e.g., Connecticut, Delaware, Nebraska, New York, Pennsylvania) have a “convenience of the employer” rule that affects state income tax withholding depending on whether the employee is working in a state other than the employee’s work state for the employee’s own convenience or out of necessity to carry out employer-assigned job duties.

But what is a state’s position with respect to an employee who is temporarily working from home (or elsewhere) due to the COVID-19 national emergency? Many states and local tax jurisdictions have issued special guidance addressing how state tax withholding rules apply when an employee is temporarily teleworking due to the COVID-19 emergency. The guidance varies widely, and some states have yet to issue guidance, leaving employers in a quandary. Employers must examine the rules of each employee’s home state and work state to determine if it is properly withholding and reporting income taxes; failure to do so could result in monetary penalties.

OTHER TAXES

Similar conundrums exist with respect to employment taxes. And employers need to think about whether the employee’s home state will assert nexus for other business taxes (e.g., sales and use tax, corporate income tax). Also of concern is whether the employer must comply with the workers’ compensation requirements of the employee’s home state.

REPORTING OF WAGES FOR UNEMPLOYMENT INSURANCE

Fortunately, for purposes of wage reporting for state unemployment insurance purposes, a uniform standard applies with the result that, for most employees temporarily working from home in connection with COVID-19, employers continue to pay unemployment insurance to the state where the employee normally works rather than to the employee’s home state. This outcome would change if the telework arrangement lasts for an extended period or is made permanent.

EMPLOYMENT ISSUES

From an employment standpoint, allowing employees to telework for an extended period of time is essentially akin to opening a satellite location in the jurisdiction in which the employee resides, raising a host of additional employment considerations, most of which will be governed by applicable state law. Among them, there may be requirements to register to do business in the state from which the employee is teleworking, as well as workers’ compensation and liability insurance coverage issues.

Employers need to consider compliance with local ordinances, public health orders and executive orders regarding coronavirus health and safety, workplace protections, etc., job protections such as reinstatement rights and lawful off-duty conduct statutes, state and local benefits issues (such as the San Francisco Health Care Security Ordinance and state and local paid sick leave and other leave laws). Wage-and-hour laws may vary with respect to such things as minimum wage, daily overtime and meal and rest periods, and employee exemption standards can vary from state to state (e.g., California applies a “quantitative” test, whereby employees must perform exempt work for more than 50% of their working time, versus many other jurisdictions’ “qualitative” test).

Notices to employees and required postings, contents of pay stubs, timing of compensation payments during and upon termination of employment and what must be paid out upon termination vary from state to state, as do expense reimbursement requirements, which may include home office expenses such as phone and internet service, equipment, supplies like ink and paper, and expenses incurred in traveling to the employer’s facilities if and when required. Employers also should consider enforceability of restrictive covenants, such as noncompetes, requirements and restrictions with respect to various employment policies, and the contents of separation and release agreements. In addition, local WARN Act requirements and federal WARN Act considerations (e.g., where the employee is “counted” for WARN Act trigger purposes) can be implicated, along with a myriad of other issues.

The bottom line is that employers must look to state, county and city requirements to determine what laws apply to employees residing in — and working remotely from — other jurisdictions. This is a new frontier, and we expect states and localities to address these issues going forward; right now, though, the situation is murky. What employers can expect is that, at some point, “temporary” remote work necessitated by the crisis will no longer be deemed “temporary,” and compliance with local laws will be required.

What can employers do now? First and foremost, ensure that employees are providing timely information about where they are residing while teleworking. Employers then can make a determination — taking into account the factors outlined above, among others — as to whether employees will be permitted to continue teleworking. Employers also can consider whether compensation will remain at the same rate (e.g., employees who normally work in New York City who relocate to an area with a lower cost of living) and whether the same benefits need to be provided (such as commuting allowances). And, of course, if the arrangement is planned to be temporary, that should be made clear to employees up front. As always, employers must keep abreast of new developments; this is a rapidly changing area of law.

— Nancy Strelau and Christine Samsel are shareholders at Brownstein Hyatt Farber Schreck

This article appears in the Aug. 3 issue of Law Week Colorado. To read other articles from that issue, order a copy online.