Hiring your first out-of-state employee is a significant milestone, but it can also introduce a range of compliance obligations that many employers don't anticipate. While remote work has made it easier than ever to recruit talent beyond your local market, adding an employee in another state may trigger new tax, payroll, employment law, and onboarding requirements.
Here are some key considerations before hiring your first out-of-state employee.
KEY POINTS
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Understanding state and local employment laws
One of the biggest challenges for employers is that employment laws can vary depending on the state, county, or city. In many cases, the laws that apply are based on where the employee performs the work, not where your company is located.
For example, an employee working remotely in California may be subject to California's meal and rest break requirements, expense reimbursement rules, leave protections, and wage-and-hour laws, even if your business is based elsewhere. Some cities and counties have additional requirements, including higher minimum wages and local paid leave mandates.
In some situations, more than one law may apply, and employers may need to follow whichever requirement provides the greater benefit or protection to the employee. Because these rules can be complex, consult qualified legal and tax advisors before hiring an employee in a new state.
Additional compliance considerations
When hiring an employee in another state, employers should also review the jurisdiction-specific rules on:
- New hire reporting
- Paid sick leave, paid family leave, or other leave programs
- Pay frequency and wage payment
- Pay disclosure and pay transparency
- State- or city-facilitated retirement savings programs
- Employment notices and workplace posters
- Workers' compensation coverage
- Worker classification (employee versus independent contractor, and exempt versus nonexempt status for overtime purposes)
Complying with payroll tax obligations
Hiring an employee in another state can create payroll tax responsibilities that didn't previously exist. Employers may need to register with the state's tax agencies, withhold state income taxes, and obtain unemployment insurance accounts.
In some situations, having an employee working in a state may also establish a business presence, commonly known as "nexus," which can trigger additional tax obligations.
Employers may also need to register for state unemployment insurance and comply with state-specific payroll reporting requirements.
Before your employee begins work, make sure your payroll processes are set up to comply with all applicable state and local requirements, and consult a tax advisor as needed.
Drafting remote-work policies
A written remote work policy can help set expectations and reduce misunderstandings. The policy should include:
- Work hours and availability expectations
- Timekeeping procedures
- Overtime authorization requirements
- Data security and confidentiality rules
- Equipment and technology requirements
- Expense reimbursement procedures
- Communication expectations
Just as important, employers should make remote work decisions consistently and without discrimination. Consider whether the position is suitable for remote work and whether the employee can successfully perform the job with limited supervision.
Managing remote employees
Hiring an out-of-state employee isn't just a compliance challenge. It also requires thoughtful management practices to keep remote workers engaged, productive, and connected to your organization.
To help remote employees succeed:
- Set clear expectations. Define work hours, response-time expectations, performance goals, and project deadlines from the outset.
- Focus on results, rather than visibility. Evaluate employees based on performance and achievement of goals rather than when they are online.
- Schedule regular check-ins. Frequent one-on-one meetings can help managers provide feedback, answer questions, and identify concerns before they become larger issues.
- Encourage communication and collaboration. Use video conferencing, messaging platforms, and team meetings to help remote employees stay connected with coworkers and company initiatives.
- Include remote employees in company culture. Ensure remote workers have opportunities to participate in meetings, training programs, recognition initiatives, and team-building activities.
- Provide the right tools and resources. Equip employees with the technology, equipment, and support they need to perform their jobs effectively and securely.
- Maintain consistent policy enforcement. Apply workplace policies, performance standards, and disciplinary procedures consistently, regardless of where employees work.
Keeping accurate time records
Accurate timekeeping is essential, especially for nonexempt employees.
Employers must maintain complete records of hours worked, which may include certain non-productive time and overtime when required. Electronic timekeeping systems that employees can access through a computer or mobile device can make compliance easier.
Employers should also have policies that:
- Require employees to record all hours worked
- Prohibit off-the-clock work
- Require advance approval for overtime
Keep in mind that employees generally must be paid for overtime worked, even if not approved in advance. However, employers may still enforce disciplinary measures for violating overtime policies.
Also, if a remote nonexempt employee is required to travel to the company's office for meetings or training, some or all of that travel time may be compensable under federal and state law.
Providing meal and rest breaks
Many states require employers to provide meal periods, rest breaks, or both. These requirements often apply to remote employees just as they do to on-site workers.
Meal periods
Under federal law, there are rules pertaining to pay when meal periods are provided (whether voluntarily or as a result of a state requirement). For a meal period to be unpaid under the FLSA, the two following requirements must be met:
- The meal period must generally be at least 30 minutes without interruption; and
- The employee must be fully relieved of all duties for the purpose of eating a regular meal.
Remote work can make meal periods harder to monitor and easier to interrupt or leave unrecorded. Employees may also be more likely to work through lunch when they are at home and away from normal workplace cues.
If a nonexempt employee performs work during an otherwise unpaid meal period, that time is generally compensable. In addition, some states impose specific meal-period requirements, including timing, duration, or premium-pay obligations.
If a meal period is interrupted by work, employers should ensure the time is recorded and paid as required by applicable law. Depending on the circumstances and state law, the employee may need to be paid for the interrupted time and/or provided a compliant meal period.
Employers should make it clear that employees must promptly report missed, interrupted, or shortened meal periods and explain exactly how to do so.
Rest breaks
Under federal law, rest breaks of a short duration must generally be considered paid working time. The U.S. Department of Labor (DOL) defines a rest break as any period lasting 20 minutes or less that the employee is allowed to spend away from work.
Meal-period and rest-break requirements also vary by state, so employers should ensure their policies and pay practices align with applicable law.
Reimbursing employees for business expenses
Several states require employers to reimburse employees for necessary business expenses, which may include internet service, mobile phone use, office supplies, or equipment needed to perform the job.
Even when state law doesn't expressly require reimbursement, employers should be mindful that unreimbursed business expenses cannot reduce a nonexempt employee's earnings below minimum wage or cut into overtime compensation.
A clear reimbursement policy should identify eligible expenses, required documentation, and submission deadlines.
Addressing workers' compensation and safety
Remote employees are generally covered by workers' compensation laws just like employees who work on-site. If an employee suffers a work-related injury while performing job duties at home, they may be entitled to benefits.
Employers should:
- Define normal working hours
- Clearly document job duties
- Require prompt reporting of workplace injuries
- Promote safe work practices
Although federal safety regulators generally don’t inspect home offices used for typical office work, employers may still have recordkeeping responsibilities for work-related injuries and illnesses.
Onboarding new hires and completing Form I-9
Federal law requires employers to complete a Form I-9 for every new hire, including remote employees. Typically, employers must examine an employee's original documentation (not copies) in the employee's physical presence.
However, if an employer is unable to physically meet with the worker to review I-9 documents, federal law allows employers to use an authorized representative to fulfill this function on the employer's behalf. Under this method, the authorized representative will view the original documents in the employee's presence.
The authorized representative is commonly an attorney or notary public. Under federal rules, an authorized representative can technically be any person the employer designates to complete and sign the I-9 on its behalf.
However, state law may restrict who can complete the I-9 on the employer's behalf. For example, California limits such services to licensed attorneys, individuals authorized under federal law to provide immigration services, and individuals qualified and bonded as an immigration consultant under state law.
Keep in mind that the employer is ultimately responsible for any I-9 violations. Therefore, if you, as the employer, designate a representative, then you should ensure that they have experience in completing the I-9 and you should review the I-9 completed by the designated representative to confirm it is error-free.
For more information, review this area on the USCIS website.
Alternative procedure
As of August 1, 2023, employers may follow an alternative procedure to the in-person physical document examination method, provided they meet specific requirements. To qualify, employers must be enrolled in E-Verify and be considered in good standing.
For details on the alternative procedure, including steps, visit the USCIS website.
Because employers remain responsible for errors, it's important to have a consistent and compliant onboarding process in place.
Enforcing policies and providing accommodations
Remote employees are entitled to the same workplace protections as other employees. Anti-harassment, confidentiality, cybersecurity, and workplace conduct policies should apply equally to remote workers. Make sure remote employees receive and acknowledge your employee handbook and all applicable workplace policies before beginning work.
Additionally, employers must continue to comply with reasonable accommodation requirements under the Americans with Disabilities Act (ADA) and applicable state laws. In some cases, remote work itself may be considered a reasonable accommodation.
Conclusion
Hiring your first out-of-state employee can help your business access a broader talent pool and support future growth. However, remote employment often comes with additional obligations involving payroll taxes, wage-and-hour laws, paid leave requirements, expense reimbursement, workers' compensation, onboarding, and state-specific employment requirements. Before making that first out-of-state hire, review the laws where the employee will work, update your policies, and confirm that your payroll and compliance processes are ready.
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