5 Compliance Considerations for Companies with a Remote Workforce

What is a 10-letter word that begins with the letter C that sends shivers down the spines of leaders of companies, both large and small? If you said “compliance,” congrats, you get a cookie.

With remote and hybrid work arrangements for employees being the norm rather than the exception these days, compliance challenges for employers have ratcheted up. Now more than ever, business leaders and human resources professionals must have a firm grasp on things like payroll and state employment rules, state and local tax laws, and workers’ compensation if their company has employees working remotely throughout the U.S.

“Companies that turn a blind eye to where their employees are actually working could very well be subject to penalties for failure to pay taxes, late fee assessments for late filings, or not having paid wages correctly. Just ignoring these issues doesn’t make them go away,” Brian Shenker, a principal in the Long Island, NY, office of law firm Jackson Lewis, said in a June 2022 interview. “Small or technical wage and hour violations under the Fair Labor Standards Act (FLSA), for example, can lead to substantial exposure—even class action exposure—so companies need to be aware of these issues.”

So as not to be the recipient of litigation from a remote employee who believes they have been wronged, here is an overview of some remote work compliance best practices that companies should consider.

Wage and hour requirements

Businesses that have nonexempt employees—workers who are entitled to earn the federal minimum wage (currently $7.25 per hour) and qualify for overtime pay—must adhere to timekeeping requirements under the FLSA.

Employers are required to keep records of, among other things:

• Time and day of week when an employee’s workweek begins.
• Hours an employee worked each day.
• Total hours an employee worked each workweek.
• The employee’s regular hourly pay rate.
• The employee’s total overtime earnings for the workweek.

For overtime, Shenker said, “The general rule is that all nonexempt employees are entitled to time and a half for hours worked over 40, and failure to pay that rate or not paying for all hours that were worked, such as issues with off-the-clock work, will result in substantial overtime monies being owed.”

A Field Assistance Bulletin issued by the U.S. Department of Labor in August 2020 clarified that compensable time under the FLSA—defined as any hours an employee is requested or allowed to work, including telework or remote work—includes any time during which the employer knows or has reason to believe work is being performed.

However, an employer is not required to pay for work that “it did not know about and had no reason to know about.” The key point is whether, through reasonable diligence, the employer should have had actual or constructive knowledge that compensable work was being performed.

Given the compliance hurdles presented by remote work arrangements, the bulletin noted that “one way an employer may exercise such reasonable diligence is by providing a reasonable reporting procedure for nonscheduled time” and then compensate employees for all reported hours of work.

Bottom line: Employers must exercise reasonable diligence by establishing clear expectations regarding an employee’s remote work schedule, including whether a flex schedule is being adopted, noted law firm Lewis Brisbois in an August 2020 legal brief. Employers also must develop written timekeeping policies and procedures that address how remote employees should accurately record hours worked, including how to report unscheduled hours.

Companies that do not have timekeeping policies or do not use tools like employee time-tracking software could end up being caught in the middle of an hours-worked dispute.

“If an employer doesn’t have records, an employee can say they worked 70, 80 hours in a week. It might not be reasonable, and it might be far from reality, but without contemporaneous time records, the Department of Labor and the courts will likely accept what the employee is saying unless there’s specific evidence to the contrary,” Shenker said. “So, in combating these potential penalties and wages owed, time records are a key.”

Many time-tracking software solutions have clock-in, clock-out functionality, which mimics an in-person office setting. They also calculate hourly totals based on the employer’s payroll policies, including overtime, and track changes to hours data to help companies stay compliant with wage and hour regulations.

Also, keep in mind that some states set higher standards for minimum wage and salaries for exempt employees than what is set in the FLSA. If the company is based in one state and a remote worker is in another state, different minimum wage rates may apply, according to a blog by the website The HR Team.

“In many cases, it’s determined by the jurisdiction in which employees perform the work. If more than one law covers a worker, generally the law more generous to the employee would apply,” the blog states. “For example, if an employee is covered by both a state and local minimum wage, the higher minimum wage would apply.”

It is also important for employers to remember that payroll requirements vary by state. According to The HR Team blog post, “Companies will need to stay abreast of applicable state and local filing deadlines, tax rates, and tax changes, in addition to federal laws. State and local laws may also vary when it comes to the information that must appear on paystubs; payday frequency requirements; whether unused, accrued vacation must be paid out upon termination of employment; and pay rules as they relate to the timing of payment of final wages upon separation of employment.”

State tax withholding

Remote work has made tax withholding a little trickier because if an employee works remotely in another state than the one in which the company is based, where do you withhold taxes?

Most states require businesses to withhold state taxes for the state their employee is doing work in, which is referred to as the physical presence rule. For example, if the company’s headquarters is in State 1 but a remote employee works from home in State 2, the company is required to withhold unemployment and state taxes in State 2, under the physical presence rule, even if the company does not have a physical office there. But there are exceptions, according to Wolters Kluwer.

“Some states that border each other have entered into reciprocal agreements related to allowing an employee who lives in one state but works in a neighboring state to have their withholding tax paid to the work state,” Wolters Kluwer said. As of 2022, 16 states—Arizona, Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Montana, New Jersey, North Dakota, Ohio, Pennsylvania, Virginia, West Virginia, and Wisconsin—as well as the District of Columbia have reciprocal tax agreements in place.

But in other states the law is different. Several states—including Arkansas, Delaware, Nebraska, and New York—have the “convenience of the employer” rule, which says if an employer requires an employee to work out of state of residency, tax withholding is taken only in the state where the employee is based. However, if the employee chooses to work out of state, rather than being required to do so, he or she may be subject to tax in both states—the employer’s location and the employee’s location. States’ interpretations of the law are constantly changing to adapt to how employees are working, Barry Sunshine, CPA, CGMA, a senior tax partner with public accounting firm Janover LLC, said in a February 2022 article for AccountingWEB.

The convenience of the employer rule will determine how much nonresident remote employees will be taxed on their income. For example, a company based in a state that has the rule, like New York, with an employee working remotely from Florida, which does not have the rule, is required to withhold New York state income tax from all wages paid to the employee. However, these rules vary depending on the state, he said.

Many companies are now actively hiring remote employees, some of whom live and work outside of the state where the company has its office. Sunshine said companies must be diligent in keeping track of where their employees perform their services.

“Some companies are finding that they now employ 10 remote employees working from 10 different states. These companies need to review where these employees are performing services to see whether they should be filing state returns in those states,” he added.

The convenience of the employer rule only applies to employees, so employers may get a tax break depending on where their remote employees work, Sunshine said. For example, an employer based in a high tax-rate state, such as California or New York, which has employees working remotely from states with lower income tax rates might end up paying less in taxes if most of its employees work from those states.

Workers’ compensation

Most states require that businesses provide workers’ compensation coverage for their employees. Remote employees can still be covered under workers’ compensation if they’re injured at home, but the injury must meet certain requirements.

The Occupational Safety and Health Administration said, “Injuries and illnesses that occur while an employee is working at home, including work in a home office, will be considered work-related if the injury or illness occurs while the employee is performing work for pay or compensation in the home, and the injury or illness is directly related to the performance of work rather than to the general home environment or setting.”

When employees are working in an office, it is much easier to make sure their workspace is ergonomically compliant. But with remote employees it is harder to monitor, and injuries can occur in the home office, like physical fatigue and neck and back pain from sitting in front of a computer for too long.

Employers can help prevent work-related home injuries by providing employees with the right training, like offering a refresher on proper ergonomics for remote workers or making an ergonomic checklist to share with employees via email or on the company’s intranet.

Another recommendation: Employers should document any injury with a written statement from the employee and photos of the injury and job site, if possible. The statement should explain whether the injury happened during employment, which may be less clear if employees are working from home. One key test is whether the activity being performed at the time of the injury provides some benefit to the employer.

Unemployment insurance

According to Wolters Kluwer, if a company has at least one employee who conducts business in a state, then that company is generally required to pay premiums for state unemployment insurance.

“So, if your workplace is situated in State A but an employee or employees work from home in State B, you must generally register with the state unemployment office of State B. A failure to do so may bring penalties for noncompliance,” Wolters Kluwer said.

Employment posters

Many federal, state, and local employment laws require employers to display posters in the workplace outlining workers’ rights. Depending on the applicable state posting requirement, companies should consider providing postings electronically or to mail hard copies that staff members can post at their remote worksites, according to The HR Team.

Keep in mind that employers must inform employees of where and how to access the posters electronically.

“Posting a notice on a company website or intranet is not sufficient unless the employer already posts similar postings in such a manner on a regular basis,” Susan Gross Sholinsky, an attorney in the New York City office of Epstein Becker Green, said in an article by the Society for Human Resource Management. “Posting on an unknown or little-known website is the equivalent of posting a hard-copy poster in an inconspicuous location and fails to meet the federal requirements.”