From Virtual to Legal: A Guide for Entrepreneurs on Navigating Compliance Requirements for Remote Employees

The way we work has drastically changed, with more people than ever before now working from home due to the COVID-19 pandemic. However, even before the pandemic, there were millions of Americans who worked remotely at least part-time.

As we transition back to normal, many companies are offering their employees the option to continue working from home, either full-time or part-time. With this new way of working comes a need for entrepreneurs to understand the labor laws that apply to remote employees.

The COVID-19 pandemic has forced many companies to adopt remote work as the new norm. While remote work has numerous benefits, such as access to a larger talent pool and cost savings, it also comes with compliance requirements that employers must meet. These include business taxes, workers’ compensation, and other regulations that employers must adhere to. Entrepreneurs who lack HR departments or an understanding of the implications of having remote employees can be caught off guard.

To help you maintain compliance, here is a go-to guide on labor laws for remote employees.

• Payroll Requirements:

Maintaining compliance with payroll regulations is crucial for any business with remote employees, but it can be particularly tricky for those located near state borders, those expanding into new states, and those who have employees working remotely. According to the “physical presence” rule, employees pay taxes in the state where they perform their work. However, some states have entered into reciprocal agreements related to withholding tax.

Remote employees may also encounter double taxation if they are subject to income tax in both their resident and work states. If an employee works remotely only for a few days, payroll regulations become even more complex and may require the advice of a tax expert.

• Foreign Qualification:

When a corporation or limited liability company has employees working in a state different from the state it was formed in, the concept of “foreign qualification” comes into play. It refers to obtaining the authority to do business in that particular state. This may be necessary if the business has a physical presence or regularly conducts business in that state. Once qualified, the company will also have additional compliance obligations, such as designating and maintaining a registered agent, who can receive legal documents on behalf of the business.

• Licenses for Remote Employees:

In some municipalities, remote employees who work from home may be required to obtain a home occupation permit. Some states have strict licensing and permitting requirements, particularly at the local level, and failing to obtain the necessary permits may result in issues such as audit letters and notices of delinquency. As remote work becomes more prevalent and employees gain more independence, the lines between operating a business out of the home and working remotely become increasingly blurred. As such, it’s important to check with the local zoning laws in your employee’s city or county to see if a permit is required.

• Considerations for Tax Nexus:

When a business has a presence in a state other than its primary location, it is said to have a “tax nexus.” This presence can result in the business becoming subject to that state’s tax laws, including sales and income taxes.

If you have remote out-of-state employees, your business may be considered to have a tax nexus in their state, depending on the type of work they do and the length of time they work there. This can have significant tax implications, and it’s essential to consult with a tax advisor to ensure compliance with the relevant state laws. Failure to comply can result in penalties and legal consequences for your business.

• Remote Worker Classifications:

Employers may be tempted to classify their remote workers as independent contractors in order to save on payroll taxes and other labor costs. However, it’s important to understand that just because a worker is remote or works from home does not automatically mean they are an independent contractor.

Courts take a variety of factors into consideration when determining whether a worker is an employee or an independent contractor, including the nature of the work, the economic relationship between the parties, and the level of control the employer has over the worker. This evaluation can be complex, and the criteria for classification may vary depending on the state.

It’s crucial for employers to properly classify their remote workers to avoid legal issues and penalties. Seeking the advice of an employment law expert can help ensure that your business is making the correct classification of your remote workers.

• Data Security and Privacy:

As your business expands with the addition of remote employees, the risk of cyber-attacks and data breaches increases. Your network becomes vulnerable through mobile devices, wireless networks, and inadvertent exposure of data in public places.

To mitigate such risks, it’s crucial to establish and enforce strong security policies and guidelines. Additionally, it’s important to be aware of cross-border data transfer regulations and understand the consequences of sharing sensitive information about international clients with remote workers.

• Worker’s Compensation:

Workers’ compensation is a requirement for most businesses to provide coverage for their employees in case of any work-related injury. However, it can be a bit complicated when it comes to remote workers. Each state has different laws and regulations regarding what can be considered a work-related injury for remote employees.

To avoid any confusion, it’s important to establish clear guidelines and boundaries around the job duties and work hours of your remote employees. This will help you differentiate between what constitutes a work-related injury and what doesn’t, making the process smoother and easier for everyone involved.

• Unemployment Insurance:

In most cases, if you have employees who conduct business in a state, you are required to pay premiums for that state’s unemployment insurance. For instance, if your business is located in State A but you have remote employees working from home in State B, you will typically need to register with the state unemployment office in State B. Failure to comply with these regulations may result in penalties.

• Hybrid Employees:

As businesses adapt to the changing landscape of work, many employees are now considered hybrid workers. This means that they work in a combination of different locations, including both the office and remote locations. Some hybrid workers may work in more than one state, which can create challenges for businesses when it comes to tax compliance.

Unlike remote workers who tend to work from a fixed location, hybrid workers may be constantly on the move, working from different locations and in different states. This creates complexity when it comes to tracking and reporting their earnings for tax purposes.

Businesses that employ hybrid workers should ensure they have robust systems in place to accurately track their employees’ time and location, as well as compliance with tax laws in each state where their employees work. It is important to consult with tax experts to ensure proper compliance and avoid potential legal and financial consequences.

• Document Working Arrangements Properly:

If you operate a multinational business and you have remote or hybrid workers outside the U.S., you may need to amend existing employment contracts or create new ones. The pandemic has seen several countries pass new telework laws. These require specific documentation for remote workers.

As you hire new employees, consider adding language to your offer letters and contracts of employment that clarifies working arrangements and expectations of new hires

In Conclusion

Complying with labor laws for remote employees can be a complex task, as laws vary by state and country and are subject to change over time. This can be a source of stress for entrepreneurs who need to ensure that their business is operating legally.

However, platforms like Voyager Partners can make it easier for employers to comply with remote employee labor laws. Voyager Partners offers solutions for setting up and managing a remote workforce across different countries, including employment contract generation, multi-country payroll, multi-currency payments, and legal compliance.

Moreover, Voyager Partners’ solutions allow organizations to efficiently hire and engage with overseas employees without the need to set up a local entity. This means that Voyager Partners can serve as the legal employer for your remote workers, simplifying the legal compliance process for your business.