8920 / What state tax issues should employers consider when evaluating whether to permit ongoing remote work arrangements?

Editor’s Note: While the state tax issues discussed below are important, employers should also consider their obligations under the FLSA. The DOL has released guidance outlining its stance on whether remote workers must be paid for short breaks taken throughout the course of the day. Pursuant to the DOL guidance, any break that is less than 20 minutes is compensable time if the employee is a non-exempt employee. That’s true regardless of the purpose of the break. The guidance is based on the principle that employees commonly take short breaks throughout the day regardless of whether they are located on site or remote–and that these breaks reduce fatigue and allow the employee to be more productive throughout the workday. The DOL differentiates these short breaks from longer meal breaks, or longer breaks to handle household issues, such as making dinner or caring for children. Note that this guidance only applies to employees who are not exempt from FLSA overtime requirements. While the guidance does not have the force of law, it can be relied upon by courts in determining whether employers have complied with FLSA rules.¹

Countless employers permitted remote work arrangements for the first time in response to the COVID-19 pandemic in 2020. Due to the ongoing nature of the pandemic (and the realization that many workers are equally productive and even prefer to work at home), some employers and employees wish to continue some of these arrangements even as many workspaces begin to reopen in a post-pandemic environment. However, before employers allow employees to continue working at home, there are many state-level tax issues that must be considered. Employers should have plans and policies in place to prevent adverse tax consequences, both for the employer and employee.

Application of state and local taxes is determined based on “nexus” concepts. Typically, there must be a substantial connection between a taxpayer and the state or locality that is attempting to tax an out-of-state taxpayer (assuming the taxpayer does not reside in the state). When all employees report to duty in a central location, this is rarely an issue—the location of the worksite controls which state and local taxes apply.

However, many remote workers live and work in neighboring states. Others have relocated to different states in reliance on pandemic telework arrangements. Remote workers can create the required substantial nexus by their physical presence while working remotely within a taxing jurisdiction even if the employer does not have a substantial connection to that jurisdiction.