CalNonprofits Insurance Services

Five Things to Consider with Out-of-State Employees

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Five Things to Consider with Out-of-State Employees, published May 20, 2021 by CalNonprofits Insurance Services – Our work lives have changed forever; many employees wish to remain working remotely, some have taken the opportunity to relocate, and the ability to hire remote workers opens up new talent pools. If you are considering hiring remote workers or allowing permanent remote work arrangements, make sure you are aware of the implications for out-of-state employees as it adds a level of complexity to your human resource management. 

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It is critical that you understand that every state has different requirements, so you should investigate and consult with labor and/or tax attorneys. If you have employees working on a temporary basis in other states, you will want to be sure you have met the legal and compliance requirements as some states have very short time requirements for charging/paying income taxes in their state.

It is important to ask the right questions when investigating requirements for out-of-state employees. Some questions to consider:   Do you know the minimum wage for that area?  What/when will payroll and income taxes for that state be triggered/due? How is the out-of-state employee covered under your workers’ compensation policy? Asking appropriate questions will help when developing your remote work policy or evaluating out-of-state employee arrangements put into place on a temporary basis as a result of the COVID-19 Pandemic.

This article covers five things you should consider if you have or might have out-of-state employees:

1.    Document work arrangements

As with most things, it’s always best to have remote work arrangements in writing.  It’s important that all parties understand expectations.

  • Determine normal duties & responsibilities
  • Detail working hours/schedule
  • Designate hours of availability for office contact, and response time window
  • Discuss use of company equipment & materials
  • Modify your employee handbook, or create other state addendums that include state-specific rules

2.    Check for State/County/City requirements

It’s not just the state rules you need to know, many cities and counties have their own regulations!  It is also important to follow the law regarding how to count employees for specific regulations.  For example, FMLA (Family Leave Medical Act), has you count the number of employees within a 75-mile radius of the main worksite.  Employees working from home are not exempt – their worksite is NOT their home, but rather the office to which they report and receive their work assignments. Some questions to ask:

  • Does tax nexus exist for the state where remote work occurs? (Nonprofits may need to pay sales or business income taxes for certain noncharitable business activities. Some states have waived tax nexus if an employee is temporarily working remotely due to COVID-19).
  • Posting/notice requirements
  • Wages (specific cities or counties may have minimum wages different than at the state level).
  • Leave laws (Paid Sick Leave, Family/Medical Leave, Pregnancy Leave)
  • Timekeeping/overtime/meal periods
  • Reimbursement for telework expenses (required in some states)
  • Benefits
  • Protected groups of employees (are there additional protections for certain groups of employees at the city, state, or county level of the remote location?)

3.    Investigate tax and payroll requirements (including unemployment)

Each state handles payroll and income taxes differently.  Some states even have mutual agreements with each other. An employer with multiple states involved pays taxes to a specified state under these mutual agreements. It is important to check for the following to determine state requirements for income and & payroll withholding taxes:

  • Have you applied the 4 tests to determine which state to withhold and report taxes for SDI, UI, and ETT? (See Multistate Employment Fact Sheet)
  • What are the “length of stay” qualifications for determining state residency for PIT withholding and reporting? (Some states require income tax withholding even if an employee resides for just one day in that state while others have a minimum number of days for “length of stay” qualification).
  • Is the employer eligible to request tax reciprocity or an off-setting tax credit for the out of state employee? This allows for the employer to include the employee on the employer’s resident state income tax reporting. Employers must request this arrangement writing.
  • Will you need to register as a foreign corporation (e.g. other state employer)?

4.    Determine workers’ compensation requirements

If you have employees (no matter where they are working from), they must be covered under workers’ compensation. An employer typically establishes coverage in the state in which the employee is working.  Some states, called monopolistic states, require that you purchase coverage through a state-run insurance fund vs. private insurance. Also, these states do not include employer liability coverage (typically included in private insurance policies).  This will leave you exposed to work-related injury lawsuits. We strongly recommend additional stop-gap coverage.

  • Investigate how to obtain workers’ compensation insurance for other states
  • Check sections 3A and 3C on your current policy to see which states are covered/excluded
  • Add additional states to an existing policy (if allowed)
  • Purchase a separate policy (if required)
  • Consider stop-gap coverage if covering North Dakota, Ohio, Washington and/or Wyoming

5.    Work/Business License/Permits

Certain operations require a permit in the location where work is performed. You should check with local and state agencies for business permit requirements to stay in compliance with each city/state where employees are working.

Hiring employees in other states will always have pros and cons – just do your due diligence before making a commitment! To request a consultation click below.


Resources:

Implications of Having Employees Work Out-of-State

EDD Information Sheet – Multistate Employment

Out-of-State Remote Work Creates Tax Headaches for Employers (shrm.org)

State Labor Offices Directory

State Tax Agencies

ThinkHR State Law Overviews/  (Must be logged in – choose Comply > State Laws)


 

About the Author

  • Founded in 1984 as a subsidiary of the California Association of Nonprofits (CalNonprofits), CalNonprofits Insurance Services was established during a time of diminishing insurance options for nonprofits. One of the driving reasons for establishing the association was to use the collective influence of the sector to secure more stable and quality insurance. We have developed, and are known for, our wide spectrum of services reflecting expertise in both the insurance and nonprofit sectors, our superior customer service, and our development of exclusive insurance products, including a highly successful dental and vision trust. We insure more than 1,200 nonprofit organizations throughout California and we are the only California brokerage specializing in insurance for nonprofits. Our clients range from newly established nonprofits all the way to venerable organizations with multiple locations statewide.

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