Work-from-home arrangements, originally implemented as temporary solutions necessitated by the COVID-19 pandemic, have morphed into work-from-anywhere arrangements as some employees have chosen to relocate away from the states where their employers' offices are located to more affordable parts of the country. 

Some employers have necessarily embraced these remote arrangements and are considering turning a temporary solution into a permanent one as they pivot to a post-pandemic world.

However, work-from-anywhere arrangements can create significant legal compliance obligations for employers faced for the first time with a multistate workforce. For example, if employees of a New York company left the city during the pandemic and relocated to Montana or North Carolina, may the employer, if it chooses to allow remote work, legally adjust the employees' compensation downward? 

If the employees continue to work remotely in Montana or North Carolina, are they entitled to paid leave and other benefits under the more generous New York City employment laws? If an employment-related litigation were to arise between the employer and remote employees, would the employer be required to defend the lawsuit in Montana or North Carolina? 

Navigating the varying laws could be a nightmare for employers attracted to the potential cost savings resulting from work-from-anywhere arrangements. It is important to remember that the general rule is that the employment laws of the state where the employee resides and works typically govern the employment relationship, but not always.

Employers with remote workers in multiple jurisdictions must ensure compliance with federal law, and with the laws of each of the states in which their employees have chosen to reside. Compliance can be daunting.

Federal and state employment laws are not always aligned, and the states often take different approaches to employment relationships. Employers must analyze compliance on a case-by-case basis for each remote work arrangement in order to avoid the costly litigation that is sure to pop up around these issues. 

1. Compensation Structure and Wage Payment

Typically, payroll accounts for anywhere from 15% to 50% of an employer's annual costs. For employers in expensive, high-wage locations, adopting a localized compensation model — i.e., adjusting employee compensation packages, which include base salary, wages, incentives, commissions and voluntary benefits — according to employee locations, can result in significant savings.

Employee compensation is usually based on a competitive market rate for individuals performing similar work in similar industries in the same geographic location. The market rate is based, in large part, on the cost of living in the location. A reduction in the cost of living should result in a reduction to compensation. 

For example, if an employee moves from New York City to Asheville, North Carolina, the employee's salary should be reviewed against the Asheville market and adjusted downward because the cost of living is significantly lower in Asheville. 

Unless proscribed by employment contracts or collective bargaining agreements, employers may reduce employee compensation subject to compliance with federal and state law, and provided that the process is fair, nondiscriminatory and consistent. Prospective reductions in salary are generally permissible under the federal Fair Labor Standards Act and state wage payment laws.

Nonexempt hourly employees must receive at least the applicable federal or state minimum wage, whichever rate is higher, for all hours worked and, if they work overtime, they must receive their regular rate of pay plus overtime pay at a rate not less than one-and-a-half times the regular rate of pay for all overtime hours worked. Prospective reductions in the hourly rate are permissible provided the new hourly rate does not fall below the applicable minimum wage.

Salaried employees who perform certain prescribed duties and are paid above a threshold salary are exempt from minimum wage and overtime pay under the FLSA. Salary reductions are permissible without loss of the exemption provided the employee's duties remain in the exempt categories and provided the salary does not fall below the federal minimum threshold.

However, not all states recognize the same exempt duties criteria as the FLSA, and some states may have a higher salary threshold. Employers need to understand the type of work that can be considered exempt and the minimum salary requirements in all states where they have remote employees. 

Employers must also be mindful of business-related expenses that are incurred by their remote workers to ensure they are reimbursed in accordance with federal and state law. Under the FLSA, hourly employees are entitled to reimbursement of business-related expenses if the expenses drop the employee's compensation below the applicable minimum wage.

Several states also have enacted employee expense reimbursement laws that may exceed the requirements of the FLSA. Employers with remote workers in multiple states need to ensure their remote work reimbursement policies comply with both federal and any applicable state law.

Knowledge of the various state wage payment laws is also necessary as they dictate pay statement content, permissible deductions, the timing of final paychecks, and whether accrued paid vacation time may be forfeited. Although there is no federal or state law that requires employers to provide paid or unpaid vacation time to employees, if employers choose to do so they must comply with the limitations imposed by applicable state law.

For example, some states consider paid vacation time as earned wages and prohibit use-it-or-lose-it policies, while other states do not address when employers can require employees to forfeit accrued paid vacation time that is not used by a specified date.

2. State Unemployment Programs and Workers' Compensation

Employers with multistate work arrangements also must ensure that they are properly participating in applicable state unemployment and workers' compensation programs. Most states have adopted the interstate reciprocal coverage arrangement plan.

This plan allows employers with employees in multiple states to centralize unemployment compensation payments in one jurisdiction, so long as the employer provides the appropriate notice of election to the required state agencies. Workers' compensation laws can vary significantly among states, as can claim practices and insurance coverage requirements.

Generally, employers are required to have workers' compensation coverage in the state where the employee's work is performed. For remote employees this likely means the state in which they work remotely. Identifying the state workers' compensation laws applicable to a remote workforce and ensuring those jurisdictions are listed in the employer's workers' compensation policy is a critical compliance issue.

3. Leave

In addition to compensation and wage and hour compliance issues, state and local law may require more generous job-protected leave rights than employers face under the laws of their base state and federal law. However, for employers based in places like New York, with highly protective employment laws and more generous employee leave obligations, this may function in the reverse. 

In this scenario, a remote employee working in a less-protective state/locality would have access only to the laws of their less-protective location and not to those more protective laws of the employers' base state.

Like traditional employees, remote employees may be eligible for job-protected paid or unpaid leave for any number of reasons addressed by state and local law, including family and medical leave, disability leave, and time off to vote, serve on a jury, seek protection related to domestic violence, fulfill military duties, and more recently, to get COVID-19 vaccinations.

Some state laws can prohibit employers from requiring employees to use accrued paid time off during a job-protected leave where federal law generally allows such a requirement. Additionally, state disability discrimination laws similar to the federal Americans with Disabilities Act can require leaves in addition to federal and state family and medical leave laws when doing so would be a reasonable accommodation.

Being able to effectively administer the leave requirements of work-from-anywhere employees requires familiarity with the laws of your employees' locations, the various reasons for job-protected leave, eligibility requirements — i.e., length of employment and other criteria — and the limitations on leave administration. 

In many instances, even where a state does not have mandatory leave laws, an employer's employee handbook will govern what type of leave is available and whether it will be paid or not. Employers considering permanent work-from-anywhere arrangements may want to look to and update their employee handbooks to avoid the confusion, which can lead to litigation. 

4. Discrimination

The disparities between the anti-discrimination requirements of more-protective states as compared to those of less-protective states — which in many cases only impose federal anti-discrimination laws such as Title VII of the Civil Rights Act, the Age Discrimination in Employment Act, and the Americans with Disabilities Act — can be stark.

Whereas federal statutes apply to employers with at least 15 or 20 employees, depending on the statute, corresponding statutes in protective states can apply to employers with as few as one employee. Likewise, federal statutes protect employees from discrimination based on classifications such as race, color, sex, national origin, age, disability and genetic information.

Similar statutes in more-protective states can include marital status, hair styles, gender identity, status as a victim of domestic violence, and many others. Another point of divergence is training; while federal law does not mandate training, many anti-discrimination laws in more-protective states do require annual training.

Moreover, federal and state discrimination laws impose notice and posting requirements upon employers to advise employees of their rights under various federal, state and local employment laws. Remote work environments do not relieve employers of the various notice and posting obligations, though electronic dissemination and posting may be permitted in certain circumstances.

Understanding the specific requirements of the discrimination laws of each individual remote employee's location is imperative for employers to ensure their discrimination policies and practices are in compliance.

Employers with work-from-anywhere arrangements also need to be aware that remote employees working out of state may be able to assert employment claims under the state or local discrimination laws of the employers' home-based state. If the employer is subject to the jurisdiction of the courts in the state where the out-of-state remote employee works, companies may end up defending employment-related litigations in states where they have little or no other connections. 

Best Practices

Remote work arrangements have been beneficial to employers and employees during the pandemic because they enabled work to get done anywhere. This flexibility comes with benefits, disadvantages and uncertainties for employers.

Employers may benefit from downward adjustments to compensation structures for employees and more relaxed employment laws, but may subject themselves to the various and often conflicting employment laws of other states and localities. Employers are well advised to conduct a case-by-case, state-specific analysis of prolonged remote work-from-anywhere arrangements to determine whether the financial benefits outweigh the legal compliance obligations.

Originally published by Law360

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.