Understanding Multistate Employment Law: Navigating Complexities

The COVID-19 pandemic has led to a significant shift in the way we work, with many employees now working remotely and in different locations. This has left employers wondering about their legal obligations when it comes to remote employees working out of state. The law that applies to an employee's work will most likely be the law of the jurisdiction where the employee is based. This means that employers with a workforce in multiple states must ensure compliance with the specific requirements of each state and locality where they employ staff. This includes compliance with employment laws, workers' compensation insurance, and unemployment insurance obligations.

Compliance with state income tax laws

Withholding Income Tax:

The default rule is to withhold income tax for the state in which the employee performs services (the work state). Almost all states require this, even for non-residents. However, it's important to note that nine states—Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming—do not have a state income tax.

Nexus:

An employer may be required to withhold income tax from an employee's wages for their state of residence, even if they don't work there, if the employer has a business presence or nexus in that state. This could be in the form of a physical office, store, or factory. Even an employee working remotely from their state of residence on an occasional basis might create a nexus.

Reciprocity:

Some states have reciprocal agreements that simplify tax withholding by allowing employers to withhold income tax only for the state of residence, even if the employee works in another state. This avoids double taxation, which is not prohibited by the U.S. Constitution.

State Nonresident Taxation Thresholds:

Some states have thresholds for withholding income tax, such as a minimum number of days worked or an amount of wages earned, before requiring income tax withholding. These thresholds vary from state to state, and retroactive withholding can be complicated, so some employers choose to start withholding from the commencement of services in a state.

Mobile Workforce Issues:

When employees travel for business and work in multiple states, withholding requirements become even more complex. Employees who work in multiple states may be subject to state income tax in every state they travel to, even if they only work there for a day. This has led to proposals for federal legislation to establish a uniform threshold, such as a 30-day threshold, for state taxation of nonresident income.

Compliance Strategies:

To navigate the complexities of state income tax laws, multistate employers should adopt comprehensive compliance strategies. This includes regularly training payroll staff, conducting periodic compliance audits, staying updated on legislative changes, and consulting with tax professionals and advisors.

Leveraging Technology:

Utilizing advanced payroll software that is regularly updated can be invaluable for multistate employers. It can automate tax calculations, withholdings, and filings, ensuring compliance with varying state requirements and reducing the risk of errors.

In conclusion, compliance with state income tax laws for multistate employers requires a deep understanding of each state's regulations, careful monitoring of legislative changes, and the implementation of robust compliance strategies.

Compliance with employment laws

Understanding the Applicable Laws

Each state has its own set of employment laws and regulations that govern areas such as wage and hour laws, required leave laws, minimum wage, overtime pay, and tax withholding. Multistate employers must familiarise themselves with the laws in each state where they operate and ensure compliance with the most employee-friendly rules. This includes understanding the nuances and differences between federal laws, such as the Fair Labor Standards Act (FLSA), and state laws, as states may have more or less stringent requirements.

Wage and Hour Compliance

Compliance with wage and hour laws is essential. While federal law mandates time-and-a-half payment for nonexempt workers beyond 40 hours in a workweek, some states have more stringent daily overtime requirements. For example, California requires double time after 12 hours of work in a day, while Alaska, California, and Nevada mandate overtime premiums for hours beyond eight in a day. Industry-specific daily overtime rules also exist, such as in Oregon for manufacturing workers.

Leave Laws

Federal and state laws provide various statutory leave rights, both paid and unpaid, depending on employer size and employee work location. The Family Medical Leave Act (FMLA) is a well-known example, but state laws may mirror or expand upon these rights. For instance, California provides broader FMLA coverage for smaller employers. Additionally, many states and localities have enacted paid sick leave laws that multistate employers must navigate, as different accrual rates, leave uses, and carryover allowances apply.

Tax Compliance

Income tax laws for nonresident workers vary widely across states. Some states, like New York, carefully monitor out-of-state workers, while others are less vigilant. The rules for income tax withholding and personal income tax returns differ, with some states having a "first day" rule, and others having varying periods before nonresident income tax applies, ranging from 10 to 60 days. Additionally, some states assess income tax based on income earned rather than time worked, with a floor amount. Multistate employers must understand and comply with the tax laws in each state to avoid penalties.

Employee Classification

Misclassification of employees as independent contractors is a common issue. Most workers are legally presumed to be employees, and strict criteria must be met for a worker to be classified as an independent contractor. Some states, like California, have highly restrictive misclassification laws, while others, like Virginia, have statutes with statutory remedies for misclassified employees. Proper employee classification is crucial to avoid legal and financial consequences.

Compliance with Reporting Requirements

Multistate employers have specific reporting obligations. They must report new hires to the designated agency in each state, which is typically the state's Department of Labor or a similar entity. Additionally, employers must report new hires to the federal government, usually the Department of Health and Human Services (HHS), within the specified timeframe, which is typically within 20 days. Non-compliance can result in penalties and fines.

In summary, compliance with employment laws for multistate employers requires a thorough understanding of the laws and regulations in each state where they operate. Multistate employers must be diligent in their compliance efforts, ensuring that their policies, procedures, and practices adhere to the specific requirements of each state to avoid legal and financial repercussions.

Compliance with health insurance coverage

National Group Health Insurance Plans

National group health insurance plans offer a streamlined approach by providing coverage through a single insurance provider across multiple states. This option ensures consistency in benefits and simplifies administration for the business. It also enhances negotiating power with insurance providers, potentially resulting in better rates and coverage options. However, it is crucial to ensure that the chosen plan complies with the legal standards and regulations of each state. The downside of this option is the limited availability and higher costs associated with national plans.

State Health Insurance Plans

Another approach is to offer separate state health insurance plans tailored to each state's regulations and market conditions. This method allows for greater customization of benefits to meet the diverse needs of employees in various locations. However, managing multiple policies can be administratively challenging and time-consuming, especially for small businesses. It is important to consider the availability of insurance providers and the specific healthcare providers included in each state's plan network.

Health Reimbursement Arrangements (HRAs)

Health Reimbursement Arrangements (HRAs) are a flexible and cost-controlled option for multi-state employers. HRAs enable employers to reimburse employees for their healthcare expenses, including individual health insurance premiums and out-of-pocket medical costs. This approach empowers employees to choose their own plans and select providers that best meet their needs. HRAs also offer tax advantages, as reimbursements are often tax-free for employees. Additionally, they satisfy federal government mandates, such as the Affordable Care Act's employer mandate.

Professional Employer Organizations (PEOs)

Professional Employer Organizations (PEOs) offer comprehensive HR solutions, particularly for small and mid-sized businesses. PEOs allow companies to outsource various human resource functions, including employee benefits management. By contracting with a PEO, employers can access cost-effective and high-quality health insurance options, as well as other benefits like dental, vision, and retirement plans. PEOs provide support in navigating the complexities of multi-state employee benefits and help businesses focus on their core competencies.

Health Insurance Stipends

Offering health insurance stipends involves providing employees with a fixed amount of money to purchase their own health insurance or cover medical expenses. This option offers flexibility to employees and simplifies the benefits administration process for employers. However, it requires employees to independently manage their health insurance, and the stipend is usually taxed.

When deciding on the most suitable option, multi-state employers should consider factors such as the size and geographical distribution of their workforce, budget constraints, and the specific needs and preferences of their employees. Consulting with knowledgeable benefits consultants or brokers can help navigate the complexities and ensure compliance with health insurance coverage requirements across multiple states.

Compliance with wage and hour laws

Varying State Laws

Firstly, it's important to understand that state wage and hour laws can differ significantly. For example, in California, employees are entitled to overtime pay if they work more than eight hours a day, and double time for work exceeding 12 hours. In contrast, federal law, as outlined in the Fair Labor Standards Act (FLSA), mandates overtime pay for any work beyond 40 hours in a standard workweek. This discrepancy underlines the importance of multistate employers being diligent in understanding the specific wage and hour laws in each state they operate in.

Minimum Wage

The federal minimum wage is set at $7.25 per hour by the FLSA. However, states have the authority to enforce higher minimum wages, and many do. For instance, California's minimum wage is set to increase to $16.50 per hour for all employers on January 1, 2025. Employers must always abide by the higher minimum wage, be it federal or state-mandated.

Overtime Exemptions

The FLSA also outlines exemptions from overtime pay for certain employees. These include executive, administrative, and professional employees, who must meet specific job duty requirements and earn a minimum salary. As of 2024, this minimum salary is $684 per week, or $35,568 per year. However, this amount may vary depending on state laws, and some states have more restrictive rules. For instance, California employers must pay a higher minimum salary to certain employees to qualify for exempt status under state wage and hour law.

Remote Work Considerations

The rise of remote work has further complicated wage and hour laws for multistate employers. Employees working remotely are generally subject to the laws of the state in which they work, regardless of the employer's location. This means that an employee working remotely in a different state may suddenly become subject to a different set of wage and hour laws, including minimum wage, overtime, and paid leave requirements.

Compliance Strategies

To ensure compliance with wage and hour laws, multistate employers should implement several strategies. Firstly, they should establish a policy requiring employees to notify the company of any work location changes. This proactive approach will help employers stay informed about their employees' work locations and applicable laws. Additionally, employers should adopt an assessment and approval process involving the Tax Department, Legal, and HR teams. This process should include researching and identifying all relevant laws that may apply in the states where employees are working.

In summary, compliance with wage and hour laws for multistate employers is a complex and dynamic challenge. Employers must stay informed about the specific regulations in each state, be mindful of remote work arrangements, and implement robust policies and processes to ensure compliance with the applicable laws. By doing so, they can avoid legal issues and provide their employees with fair and equitable wages.

Compliance with leave laws

Multistate employers face a complex web of compliance issues, with leaves of absence presenting the most challenging multi-jurisdictional compliance issues. Compliance with leave laws is a critical aspect of human resources management for multistate employers. The applicable laws will depend on the specific jurisdiction where the employee is working and the nature of their employment.

In general, the governing state for employment laws, including leave laws, is the state in which the work is physically performed. This means that multistate employers must navigate different leave laws and requirements across multiple states. These laws can include paid sick leave mandates, the Family and Medical Leave Act (FMLA), and other state leave laws. For example, some states may have more restrictive misclassification laws, making it difficult to treat individuals as independent contractors.

To ensure compliance, multistate employers should be aware of the specific leave laws in each state where they have employees. This includes understanding the different accrual rates, leave uses, and carryover allowances for paid leave laws. Additionally, multistate employers should be mindful of federal laws, such as the requirement for employers with 50 or more employees to have an FMLA policy, including military caregiver leave.

To further complicate matters, the nature of an employee's work arrangement may impact their leave entitlements. For instance, some states may not consider short, temporary stays by employees to be covered work, while others do. This can create challenges for employees who work remotely from different locations or split their time between multiple states.

To navigate these complexities, multistate employers can seek expert help or utilise technology solutions that provide legal updates and automatically generate state-specific employment documents.

Frequently asked questions