Pandemic Work-From-Home Arrangements Have Tax and Employment Law Consequences

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TAKEAWAYS

  • Prolonged work-from-home status for employees who live in a different jurisdiction than their assigned office can generate new tax and employment law compliance obligations for employers.
  • Employers with employees who maintain home offices in other jurisdictions generally must register to do business in those jurisdictions and comply with employment laws in those jurisdictions.
  • State law tests for worker coverage vary significantly, so there is no substitute for consulting each jurisdiction’s specific guidelines.

Since the COVID-19 pandemic in the U.S. first led to stay-at-home orders in March 2020, many employees have converted to full-time remote worker status. Some have remained in that status for more than nine months and anticipate continued remote work for at least several months longer. In some cases, teleworking employees’ homes are in different jurisdictions than their assigned offices (as is common for many employees who work in the District of Columbia but live in Maryland or Virginia, or work in New York City but live in New Jersey or Connecticut). In others, employees have temporarily relocated for the duration of the pandemic, either for locales they consider more desirable now that commuting is not an issue or to share housing with other family members. But whenever temporary remote working stints become longer term arrangements, there can be tax consequences.

Resolving jurisdictional questions for tax purposes can be complicated: as explained in this recent article by Pillsbury partner Michael Kosnitzky, rules vary on which state has the right to tax the income of employees working from home for employers in a different state. Most state employment laws are clear that out-of-state employers must comply with the state legal obligations in the jurisdictions in which their remote employees are physically located.

In addition, employers with employees working in other states may assume requirements to register as a foreign corporation. In Illinois, for example, employers are required to register with the Illinois Department of Revenue (IDOR) and withhold Illinois state taxes if the employer has an employee performing work duties from Illinois for more than 30 days. The Director of IDOR announced that the Department will waive penalties and interest against out-of-state employers if the “sole reason” for the withholding requirement is that the employee was working from home due to the COVID-19 pandemic, but the requirement itself still applies. As we near the end of the 2020 tax year, employers aware of employees who have temporarily moved to other jurisdictions during the pandemic should review whether they are in compliance with the laws of the jurisdictions in which their employees are riding out the pandemic.

Using District of Columbia and New York City employers as examples, this client alert describes the kinds of legal and tax compliance issues employers must address due to these continuing remote work arrangements with respect to employees who are working from home from the neighboring jurisdictions of Virginia, Maryland, New Jersey, or Connecticut.

DC Employers with Employees in Virginia and Maryland

Income Tax implications for Employers and Employees

DC employers’ withholding requirements should not be affected by employees who are residents of Virginia and Maryland shifting to telework status due to DC’s reciprocal agreements with Maryland and Virginia, which require employees to pay state income tax in the state in which they are domiciled, not where they work. For example, a DC employee who resides in Maryland would pay Maryland state income tax, not DC income tax, regardless of whether the employee worked remotely or in the office. In response to an increase in remote work due to COVID-19, the Office of the Comptroller of Maryland issued guidance addressing withholding questions. The guidance explains that Maryland state income tax and state income tax withholding applies to employees domiciled in Maryland and non-resident employees receiving Maryland-source income, absent a reciprocal agreement Maryland has with residents of DC, Virginia, and West Virginia.

If employees of DC businesses have temporarily relocated to work remotely from jurisdictions other than DC, Virginia, or Maryland however, the employer should consult the applicable jurisdiction’s state tax law residency definitions. Whether the employee has become a resident of another jurisdiction for state income tax purposes may depend on how long the employee has been living in the state, whether the employee maintains a home elsewhere, whether the employee intends to return to their home in another state, and other factors. State law residency tests vary significantly, so there is no substitute for consulting each jurisdiction’s specific guidelines.

Business Registration Requirements

DC employers should be aware of business registration requirements in Virginia and Maryland, both of which suggest that DC employers with remote employees in Virginia and Maryland should register as an employer in these states.

Under Virginia law, a DC employer should register as an employer if it has an employee working remotely in Virginia. Virginia law imposes an income tax on “Virginia taxable income for each taxable year of ... every foreign corporation having income from Virginia sources.” The Virginia Tax Commissioner takes the position that “[g]enerally, a corporation will have income from Virginia sources if there is a sufficient business activity within Virginia to make one or more of the applicable apportionment factors positive.” Under this Virginia Revenue Ruling, a foreign corporation is subject to state income tax withholding requirements by virtue of having one employee in Virginia that performs services from her home, as the activities of the corporation’s one employee in Virginia are enough to create nexus for Virginia corporate income tax purposes. The guidance does not provide a clear test for when an employee is considered to be providing services from home if the employee also has an office on the employer’s premises (even if unused).

While Maryland law is less clear cut, DC employers with workers working remotely from Maryland should consider registering as a Maryland business. If a business has a sufficient presence in Maryland, it must register with the Maryland Comptroller’s Office. Maryland’s Interstate Commerce Tax Act (P.L. 86-272) provides examples of in-state activities which create a nexus, which include “[m]aintaining a business location in Maryland, including any kind of office” and “[e]mployees soliciting and accepting orders in Maryland.” However, the examples provided under the statute are not exhaustive, and the Comptroller’s Office has not provided any additional guidance indicating whether a foreign employer employing Maryland workers remotely would need to register as a Maryland employee.

Employers would generally be prudent to register as a foreign corporation in any state in which an employee is working from a home office, if the employee qualifies as a resident of that state.

New York Employers with New Jersey and Connecticut Remote Employees

Income Tax Implications

Unlike DC, New York follows the “convenience of the employer” test, which provides that an employee with income from New York sources owes New York State taxes even if they are a non-resident, except for work days in which the employee is required by the employer to work out of state (e.g., not merely as a convenience for the employer or the employee).

In its most recent guidance, the New York’s Department of Taxation and Finance has taken an aggressive position, stating that a non-resident whose primary office is in New York State is considered to be working in New York State on days the employee telecommutes from outside the state during the pandemic, unless the employer has established a “bona fide employer office” at the telecommuting location. While the “bona fide employer office” test relies on a number of factors, the New York State guidance explains that unless an employer has specifically acted to establish a bona fide employer office at an employee’s telecommuting location, New York State income tax will continue to be imposed.

Business Registration Requirements

While the New Jersey Division of Taxation typically requires that an out-of-state corporation that permits or requires employees to work from their homes in New Jersey register as a New Jersey business and pay New Jersey corporation business tax, the Division announced this spring that it would not treat the presence of employees working from their homes in New Jersey as creating a sufficient nexus for out-of-state corporations if those employees are working from home solely as a result of closures due to COVID-19 and the employer’s social distancing policy.

Additionally, in New Jersey a remote seller that makes a retail sale of tangible personal property, specified digital products or services delivered into New Jersey must register, collect, and remit New Jersey sales tax. However, during the pandemic, the New Jersey Division of Taxation has temporarily waived the “Sales Tax nexus standard,” which is generally met if an out-of-state seller has an employee working within the state. According to the Division, “as long as the out-of-State seller did not maintain any physical presence other than employees working from home in New Jersey and is below the established economic thresholds (i.e., gross revenue from sales delivered in New Jersey during the current or prior calendar year is $100,000 or less or the business has conducted 200 or fewer separate transactions in New Jersey during the current or prior calendar year) the Division will not consider the out-of-state seller to have nexus for Sales Tax purposes.”

Under Connecticut law, a company has sufficient business nexus to the state—and is required to register for Connecticut corporation business tax—if it engages in activities including “maintaining an office or compensating its employee for the use of his home if such employee works from home” and “performing or soliciting orders for services” within the state.

Workers’ Compensation Insurance

Because an employee injury or illness is compensable under workers’ compensation if it arises out of and in the course of employment, remote workers are covered under workers’ compensation insurance. DC and New York employers should therefore ensure that their workers’ compensation insurance covers the jurisdictions where remote employees are working.

In addition, because employers are also responsible for providing the same safe work environment for those who work remotely, employers should create a remote work policy that outlines expectations for remote work, including guidelines for keeping a safe designated work area to reduce the chances of injury.

Unemployment Insurance

Because eligibility for unemployment insurance benefits is generally determined by the employee’s physical presence, having an employee regularly working in another state generally requires that the employer register for and pay the unemployment insurance premiums in that state. Accordingly, DC and New York employers should maintain a record of all locations in which remote workers reside and ensure that unemployment insurance premiums are being paid in these states.

State Employment Laws

Many states and localities have enacted employment laws applicable to any employee working in that jurisdiction. These laws may include wage-and-hours laws, affecting minimum wage or minimum salary for exemption from overtime, and rest and meal breaks; paid or unpaid leave laws; other mandatory benefits (e.g., temporary disability insurance); or recall rights after a furlough. Some of these laws also require employers to give employees in the jurisdiction notice of their rights.

Accordingly, employers must ensure that they learn about and comply with the employment laws in any jurisdiction in which an employee is working remotely. California courts, for example, have held that California’s overtime laws apply to non-resident employees of a California corporation who work in California for “full days and weeks” at a time, as explained in this July 7, 2011, Client Alert. Employers would be well-advised to consult with employment counsel about each state in which the employer has remote workers, to ascertain that state’s laws regarding when an individual is a state resident or otherwise subject to the state’s employment laws and what employment laws in the state apply to the employer. Employers questioning whether they should be making tax payments in other states should also consult with tax counsel on those issues and may wish to file a protective claim for a refund after making the payment.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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