Navigating the maze of state-by-state requirements for remote workers
Once novel, 16% of U.S. companies are fully remote today, with remote roles making up 15% of job opportunities. And while more of the workforce is moving towards a hybrid approach, remote work is likely to remain a fixture in the modern workplace.
Remote work poses particular benefits to small businesses, who may not be able to offer employees attractive perks associated with big offices or may have a difficult time competing for local talent, but can draw from a large, more affordable talent pool of remote workers.
But the age of remote work also raises challenges for small businesses employing out-of-state workers. These businesses may lack the legal departments or teams of tax professionals but are still held to the same legal and regulatory requirements as larger businesses.
Here’s what small businesses should consider when hiring out-of-state
Some small businesses are playing catchup to the complicated landscape of state requirements and, indeed, there are myriad factors to consider when employing out-of-state remote workers.
Business activity taxes: Every state has its own rules and thresholds for determining a business’s tax obligations—obligations that may or may not be triggered by employing workers in that state and/or offering services in the state. The Tax Foundation’s State Business Tax Climate Index is a great high-level resource for assessing the most challenging and most streamlined tax structures. The Tax Foundation also offers an interactive tool for business owners to explore potential tax liabilities on a state-level.
State unemployment insurance: When hiring out-of-state workers, businesses may be required to contribute to state unemployment insurance programs. This information can be found either through states’ departments of labor or offices of unemployment insurance. Payroll companies like ADP and Paychex can also help businesses meet this requirement. Typically, businesses need to register in a state before processing the payroll. And depending on the state, registration could take a few weeks, so be sure you check before onboarding a new out-of-state employee.
Wage and hour laws: States also have their own wage laws and requirements, including different minimum wage rates, overtime provisions and specified meal periods. Compliance with state-specific reporting and payment obligations is essential in order to avoid penalties and legal actions. Resources like the Department of Labor maintain a record of basic state-level minimum wage and premium pay requirements, but most businesses will need to dig a little deeper to understand everything that’s required. The best (and easiest) strategy is to create some parity across your workforce so all employees receive equal benefits.
Workers’ compensation: Remote workers are generally covered by workers’ compensation insurance, which provides benefits for work-related injuries or illnesses. Businesses are responsible for keeping track of workers’ compensation requirements for each state where remote workers are located. It’s a good idea to upgrade your statutory insurance, which includes workers compensation and disability insurance, to national plans that ensure all employees get the appropriate coverage.
Health and welfare benefits: Health insurance and benefits are important hiring and talent retention tools, but state regulations and insurance marketplaces can complicate this offering. Small businesses may be eligible for certain programs that help them navigate and satisfy these requirements like the Small Business Health Care Tax Credit and SHOP coverage. Most benefits providers also offer national plans that provide equal coverage options to employees from every state. Working with a knowledgeable insurance broker vs. trying to navigate this on your own can be a game changer.
How to manage your business’s exposure
Step 1: Make a plan
There are several steps that small businesses can take internally to get their arms around their out-of-state legal and compliance obligations and create a process to manage that exposure.
Businesses that may be a little behind in this area should begin by getting organized. Compile a list of employees’ residences and start to loosely map out the state laws and requirements you need to get familiar with.
Next, you need to establish clear and current procedures. This includes remote work policies that address areas like work hours, overtime and performance expectations. Be sure to communicate the requirement for employees to let you know if they move out of state (or out of the country) so that you can track future changes in your liability. Proper payroll and tax procedures are also essential to maintaining your compliance and taxes going forward.
Finally, designate a person or team within your organization that can take ownership of monitoring this area. Plan to check in with them regularly for updates on how you can better mitigate risk and improve your business’s policies over the long-term.
Step 2: Invest in support resources
While many small businesses may have lean resources, this is one area where investing in external support can really pay off. Enlisting the help of an expert can save your business time and money by avoiding potential violations.
Consider employing legal counsel, a small business advisor or a tax consultant to help you manage multi-state employment. They can provide guidance on compliance issues and insurance coverage, interpret regulations and ensure your business is adhering to relevant state laws. HR and payroll outsourced providers also offer helpful services that reflect differing state-level requirements.
The bottom line
The widespread adoption of remote work has introduced new opportunities as well as complexities for business owners. Today’s businesses must be prepared to navigate the intricates of employing out-of-state remote workers. A proactive approach that draws on expert advice and outsourced providers or technologies can help businesses ensure compliance, mitigate risk and build successful remote teams across state lines.