As the COVID-19 pandemic lurches on, many employers, including postsecondary institutions, are navigating the reality of what many feel is the future of work: remote employment. By the end of 2021, its predicted that over a quarter of the workforce will remain remote. Furthermore, its estimated that 36.2 million Americans will work remotely by 2025, an increase of 16.8 million people from pre-pandemic rates. While these are astounding statistics, many higher education leaders nationwide are trying to consolidate the necessity of remote work, even as our society pushes into a new culture of work modality. Whether that future means more hybrid or fully remote employment options, these leaders are struggling to preserve some semblance of their traditional campus or organizational cultures or find a balance to move forward. It’s an unenviable position.
Presumably, with more flexible work options in a growing, digitized economy, increased interest and opportunities for movement will follow. Recruitment and worker mobility outside of the institution’s physical location or state may carry implications for both short and long-term work arrangements. Regardless of intentionality or emergency response, an increase to an institution’s out-of-state footprint triggers a critical reality and complexity of our country: We are one country, comprised of 54 unique states and territories, each with their own laws and regulations. States maintain a role and authority to oversee activities within their respective borders.
Management of faculty, instructors, and/or staff in multiple jurisdictions necessitates the need to be mindful of and comply with complex legal issues. Today we will discuss some of the many issues pertaining to a multistate workforce. Employment laws are nuanced and ever-changing. Institutions will be well-served to bring together a group of campus stakeholders to align interests, consider the investment and steps to obtain compliance.
Shifting the question – Do you know where your employees are?
Sound familiar? If you are a champion of state authorization for distance learning, you may be sheepishly grinning as you recall the key question… “Do I know where my students are?”
A multi-state workforce follows a similar principle to traditional state authorization: institutions who engage in activities outside of their primary state must comply with rules and regulations pursuant to the conditions wherever they may be operating. Instead of focusing on “physical presence” as our standard terminology, we’ll shift to the term “Nexus,” by which we mean ‘a relationship or connection between two or more entities which creates a legal presence.’ In tax law, it’s a relationship between a taxing authority, such as a state, and a business. Like traditional state authorization, parameters as to what constitutes that “nexus” will vary widely among U.S. states and territories, ranging from:
- owning or leasing a property,
- deriving income,
- storing products or supplies,
- engaging contract employees,
- threshold of employees in a locality,
- an employee working from a home office, etc.
Employee location, or the presence of their home office, is the critical first piece of information to pursue a tangible step on the path to compliance, establishing an initial approval (registration) to operate in a particular locality.
Many institutions will be familiar with some business registration practices, including those which govern “interstate commerce” and are not covered through reciprocity. State oversight of these registration functions will vary by location, and responsibility may fall to the Department of Labor or Treasury, Secretary of State, etc. Non-profit entities may qualify for an exemption, however bonding or other requirements may still be in effect. In many cases, unless the organization obtains and maintains all required state tax exemptions, it may be treated as a for-profit entity. It is likely that a business services, counsel, or other campus office may already be familiar with registration requirements and state-by-state contacts.
Temporary exemptions in response to COVID-19
In response to the challenges of COVID-19, some states offered flexibility and guidance to both employees and employers to accommodate temporary adjustments due to remote work orders.
Many of these are tied to “State of Emergency” orders, and may have expired. Employers should anticipate state variation and should not assume that flexibility has been granted, or will continue into the future.
For example, New Jersey has offered guidance and notice resuming out-of-state corporation registration and tax effective October 1, 2021.
Classification is the key to decoding a variety of provisions related to taxation, state employment laws, and benefits. In addition to the Fair Labor Standards Act (FLSA), states maintain their own provisions to regulate respective, and in some cases, stricter classification criteria. Simply because an employee is exempt under federal law, does not mean that they follow that same classification under state law. Parameters may stipulate or address wage requirements (nonexempt, exempt, contractor), overtime rules, recordkeeping standards, unemployment, or other leave scenarios, etc. Failure to accurately classify an employee may result in wage penalties, back taxes, back payments to the employee, etc. Misclassification becomes a more complex issue where independent contracting is concerned.
Classification may be particularly impactful when seeking to hire instructional or administrative staff. For example, the U.S. Department of Labor provided FLSA guidance in 2018 addressing “white-collar exemptions” for postsecondary operations, including instruction and student employment. The guidance explains the basis for wage and overtime in several scenarios. However, it also emphasizes that when state law differs from FLSA, an employer must comply with the standard most protective to employees.
Peeling back the layers of taxation
Authority to conduct business
As previously mentioned, when an employee is working outside the state borders of the employer’s base of operations, it may require the employer to pursue a registration in a particular locality. The registration requirement is critical to establishing employer contributions to fund state programs or compliance with mandates such as unemployment insurance, family or other leave programs, disability or workers compensation.
Both the employer and employee may be subject to a variety of taxes specific to the state, county, and in some cases, even a city. A recent KPMG presentation cited that there are approximately 10,000 taxing jurisdictions in the U.S. Some payroll software systems or other vendors may offer employers support in navigating tax rates and withholding procedures among the different jurisdictions from which they operate.
Income tax withholding
State law generally requires employers to withhold state income tax based primarily on where an employee performs services, and secondarily where the employee resides.
In 43 states and Washington, D.C., a remote employee typically receives a tax credit or deduction from their home state and will file a second return as a “nonresident” in their work state. Employers may offer a reminder to their remote employees to adjust withholding in the event one state maintains a higher income tax rate over the other.
In some cases, states who border one another may establish a reciprocal agreement to address incurring tax liability. For example, the Commonwealth of Virginia maintains respective reciprocal agreements (specific parameters apply) with a few neighboring states to simplify income tax for employees. These agreements allow the employee to pay the income tax of the state in which they live, and not the state where they work.
Nonresident and temporary work arrangements
Additionally, the majority of U.S. states have established thresholds as to how long a nonresident may work in a state before an employer is required to withhold state income taxes. Stipulations around these rules will vary. For example, Arizona maintains a 60-day rule before an employer is obligated to withhold income tax. Some state rules may be as short as 14-days, or stipulate an income threshold. This is an important data point for employees who move or travel at increased intervals and localities with additional income sourcing rules.
Convenience and income sourcing rules
Five states, Connecticut, Delaware, Nebraska, New York, and Pennsylvania tax employees where their office is located, even if that office is outside of the employer’s state. This is often referred to as a “convenience” or income sourcing rule. In many of these states, the employee may be denied a tax credit or deduction from taxes paid to another state, potentially resulting in double taxation. Generally, if the employee may only carry out their work in that specific state location, they may be exempt from this rule. Specific conditions by state and the employee’s situation will apply. The following are recent notable and unique developments:
- Arkansas’ Governor signed a bill in April 2021 amending its convenience rule.
- Connecticut’s Governor has signed a bill amending its convenience rule for the 2020 year only.
- The Commonwealth of Massachusetts instituted a new income sourcing rule in March 2020 requiring employees of Massachusetts based employers to pay income tax to the Commonwealth if they were a remote (non-resident) employee during the pandemic. In October 2020, New Hampshire filed a petition with the U.S. Supreme Court, asserting that the emergency regulation violates the Commerce and Due Process constitutional provision by imposing tax on New Hampshire residents even though they did not enter Massachusetts to work. New Jersey, Connecticut, Hawaii, and Iowa filed an amicus brief supporting New Hampshire. Similar suits in other states have escalated in the past, however the U.S. Supreme Court has historically held to the determination that states hold broad latitude to tax in-state activity, including nonresidents on in-state earnings.
As an employer, it’s important to be aware of these rules as they may carry implications for remote employees working in new locations because of the pandemic, working in localities on a short-term basis, or in the long term, have an adverse effect on competitiveness to recruit in a particular state. As an employee, it’s critical to inform your employer of your location to ensure it withholds tax from the correct state.
Action steps to take at the institution
Registration and taxation aside, the expansion of a multi-state workforce introduces a set of complex compliance requirements which require close, coordinated, and detailed communication with a multitude of cross-campus constituents.
This team may include the hiring division or department, business operations, general counsel, human resources, payroll, IT, and finance professionals. The following are few considerations to begin:
- Re-create your institutional compliance team to align campus stakeholders in the institution’s strategy, procedures, policies, and risks addressing remote work and multistate operations.
- Institutional contacts in HR and Payroll are critical resources when considering potential remote positions. Payroll services may support compliance functionality for tax purposes, however verification of laws and compliance at the local level should always be encouraged.
- Well-defined policies are critical:
- Determine factors and parameters to define which campus positions may be remote.
- Location is everything. Acknowledge that where employees want to be, and where it is realistic for them to be, may not always align. Consider the institution’s level of risk and investment in investigating specific states and potential issues. Institute language which requires the remote employee to notify the institution if they move or if a current on-premises employee desires to transition into a remote capacity.
- If fully remote, articulate expectations for in-person engagement, travel, and related expenses.
- If temporarily remote, define an end date for the work agreement and include parameters for reconsideration or extension.
- Communicate and document determinations regarding state laws, employee classifications, and agreements meticulously.
- Schedule an audit: Review the respective state laws, reassess the goal(s) of operating in a multi-state capacity, and revisit the cost-benefit analysis of remote work.
- Engage and ensure the institution’s government relations contacts are aware of the interest and investments in the institution’s multi-state workforce. Help them stay connected to local laws and congressional interest in efforts to simplify nonresident tax laws such as the Mobile Workforce State Income Tax Simplification Act or the Multi-state Worker Fairness Act.
Student and organizational culture considerations are critical
It can be tempting to allow the burdensome process of managing state-by-state compliance to determine where remote work may occur. However, it’s important to weigh the investment of resources against the strategic direction of the respective department, division, or institution as a whole. I encourage institutions to review the numerous stories shared in the Chronicle of Higher Education over the last several months addressing campus and student culture considerations. Some key conversations to consider in addition to aspect of compliance:
- How dependent is the program or campus culture on in-person engagement? How does that factor into student support? How has virtual student support been received?
- What is the goal of remote work? How does it factor into individual roles? Are roles hybrid or fully remote? Are there implications for employee retention?
- What does the out-of-state(s) expansion achieve? Does it support access to a broader or specific talent pool?
Share your questions, progress, and challenges with WCET & SAN
The information provided in this piece is sourced broadly and intended to provide an overview of some considerations relative to managing a multi-state workforce. I encourage you to evaluate any determinations alongside specific details of the institution, employment situation, and locality with general counsel. There is a myriad of additional state-by-state provisions pertaining to the American’s with Disabilities Act (ADA) or Family Medical Leave Act (FMLA), protected class, WARN laws, reimbursement rules, employee privacy, hiring practices, unions, etc. not included in this piece.
Your experiences and reflections navigating these issues are helpful to inform additional research, tools, and conversations with the WCET State Authorization Network (SAN) going forward. Myself and my colleagues would love to hear from you. Please reach out: email@example.com or 303-541-0289. If you have questions or want to discuss the considerations presented here, engage the WCET membership through our DISCUSS or SAN Network member communities.