Each year, more employers are allowing their employees to telecommute. Many of them, however, do not take into consideration the legal or tax issues raised by telecommuting before allowing employees to work from home or another remote location. In addition, they do not consider whether telecommuting is appropriate for the particular position and employee. Federal and state laws still apply, and telecommuting raises a number of important issues under those laws.
Some key considerations are:
Wage and Hour Compliance — All state and federal wage-and-hour laws, including those governing minimum wage and overtime, apply to telecommuting employees. For those employees working from home, the law presents unique challenges for employers. For example, under the federal Fair Labor Standards Act, an employee will be considered to be in an “on call” situation—and must be compensated for that time—when the conditions placed on the employee’s activities are so restrictive that the employee cannot use the time effectively for his or her own non-work purposes.
Other wage-and-hour considerations include compliance with laws regarding meal and rest breaks, such as ensuring that the employee does not engage in behavior that might turn an otherwise unpaid break into compensable time, as well as accurate monitoring and reporting of the employee’s hours of work. For all of these reasons, employers should take care to clearly document and outline their expectations of employees in telecommuting arrangements regarding compensable time, hours of work and reporting hours of work.
The Americans with Disabilities Act (ADA) and the Family and Medical Leave Act (FMLA) — Telecommuting raises a host of issues for employers under the ADA and the FMLA, such as:
- Should an employer provide telecommuting to an employee as a reasonable accommodation under the ADA?
- Is telecommuting an appropriate and lawful substitute for FMLA leave?
- Alternatively, is telecommuting an appropriate and lawful means to accommodate and otherwise facilitate intermittent FMLA leave?
Although the answers to the questions above require a case-by-case analysis, it is known that an employer may be required to consider telecommuting to accommodate a disability under the ADA, and that while it is appropriate for employers to offer telecommuting in conjunction with a reduced leave schedule, employers may not require telecommuting in place of FMLA leave.
Employment Discrimination — Any telecommuting policy and arrangement must be administered in a non-discriminatory manner (i.e., without regard to an employee’s race, sex, marital status, or any other protected characteristic). In the telecommuting context, issues of discrimination typically arise when employers unknowingly implement telecommuting requirements that are neutral on their face, but disproportionately exclude a protected class. This is what is known as the “disparate impact” theory of discrimination.
For example, an employer may require that telecommuting employees must dedicate an entire room in their home as workspace before approving the telecommuting arrangement. At first, this requirement sounds harmless, but what if the result is that only more affluent employees—who are mostly white men—can afford to dedicate an entire room in their home? Such a facially-neutral requirement could give rise to a discrimination claim.
Tax and Payroll Issues — Employers should consider state and local tax laws prior to entering into telecommuting arrangements with employees. Not only are state and local tax laws often inconsistent, they can also place employers and their telecommuting employees at a disadvantage from a tax perspective.
An employer that allows its employees to telecommute from a state that the employer does not already have a nexus with—that is, does not have a sufficient connection with that state to allow the state to assert tax jurisdiction under the U.S. Constitution—could find itself subject to tax obligations in the state from which the employee telecommutes. Last year, the New Jersey Superior Court, Appellate Division, affirmed a tax court decision, which had held that an out-of-state employer with no business operations in New Jersey was subject to the New Jersey corporation business tax because it allowed one of its employees to telecommute from New Jersey. For more details, please see: Telebright Corp. v. Director, N.J. Div. of Taxation, 38 A.3d 604, 424 N.J.Super. 384 (N.J. Super. 2012).
In addition, telecommuting can have significant state income tax obligations for the employee. Individuals are generally subject to tax on all of their income by their state of residence, regardless of where that income is earned. Under what is known as the “convenience of the employer” rules, however, some states like New York tax all income sourced in their state by nonresidents, except where necessity requires nonresidents to perform work from their out-of-state location.
In New York, the test for proving employer necessity includes three sets of factors (explained in detail in Technical Memo TSB-M-06(5)I from the New York State Department of Taxation and Finance), most of which are not present in telecommuting arrangements. The result for some telecommuting employees is double taxation, or application of a higher tax rate even when the state of residence provides a tax credit for taxes paid to the nonresident state.
Telecommuting can also complicate the employer’s withholding obligations. Not only must an employer determine its withholding obligations for a telecommuter from a myriad of state withholding rules, but an employer, subject to a withholding requirement, must then register with the appropriate state tax agency. The registration may result in nexus questionnaires for other types of taxes, exposing an employer that does not have business operations in the state to Telebright-like results.
Privacy and Right of Access — Privacy is one of those issues where proactive policies and practices are a necessity, particularly because a privacy right only exists where an employee has a reasonable expectation of privacy. Therefore, in any telecommuting policy and agreement, employers will want to ensure that the expectation is unreasonable when it comes to items like right of access to the employee’s home worksite, the employer’s files and network data, and the employer’s and the employee’s electronic devices, by expressly securing employee consent to access, monitoring and, if necessary, data wiping.
Protecting Confidential and Proprietary Information — Employers will need to take extra precautions to ensure data security at home worksites. Employers should consider consent to and installation of security software; consent to computer and systems monitoring; and the use of dedicated equipment.
Zoning Laws — Many cities have zoning laws that limit or restrict the operation of home businesses, and in most cases, require a permit or license for a home business to operate. Employers should know what these laws are before entering into a telecommuting arrangement with an employee. Consideration should be given toward whether the employer or the telecommuting employee will be responsible for obtaining and paying for the required home office permit or license, as well as requiring inspection of those documents.
Workplace Safety — The federal Occupational Safety and Health Act (OSHA) does not require inspections of a telecommuter’s home, but it does subject work-related injuries occurring in a telecommuter’s home to OSHA recordkeeping requirements. If an employee performs “non-office type” work, employers remain responsible for any hazards caused by their equipment and processes. Even though OSHA does not require inspections, employers should conduct home worksite inspections, not only at the inception of the telecommuting arrangement and after an injury occurs (to determine if the injury is work-related), but on an ongoing, regular basis as well.
Workers’ Compensation — Usually an injury must be sustained in the course of the employee’s job duties to be compensable as workers’ compensation. Not all workers’ compensation insurance policies, however, will cover injuries of a telecommuter who is working out of state. As a preliminary matter, employers should review their policy to confirm that it will cover injuries that may arise during a particular telecommuting arrangement.
Tort Liability — Generally speaking, employers have primary responsibility for injuries to third-parties and damage to property caused by employee negligence. Although this is true with regard to damage occurring on the employer’s property, it is not clear whether this is true for damage or injury occurring at the home of a telecommuter. To protect themselves in the event of such claims, employers should ensure their liability insurance covers an employee’s home if it is being used for the employer’s business.
In addition to being mindful of the legal and tax issues arising under federal and state laws, employers need to be aware that not all positions or employees are suitable for telecommuting. The best cases for telecommuting are those where the individual employee, the position, and the employee’s supervisor are well-suited for the arrangement. It is important for the success of a telecommuting arrangement that a supervisor has the appropriate resources and support, not to mention management skills, to effectively manage an employee in such an arrangement.
Finally, employers must remember that since telecommuting is an arrangement established first and foremost to facilitate the accomplishment of work, a telecommuting policy and a telecommuting agreement are two must-haves for any business offering telecommuting to its staff.
The policy should contain a clear definition of telecommuting and a clear definition of eligibility requirements, as well as identify telecommuting-eligible positions and the procedures an employee needs to follow to apply for a telecommuting arrangement.
The agreement, on the other hand, sets forth the expectations for each employee’s specific telecommuting arrangement. It also acts as a written record of the arrangement that may be essential in resolving future disputes over attendance, overtime, holidays, and use of paid leave. Ultimately, the agreement is going to dictate how the arrangement will work, and for this reason, employers will want to be as specific as possible in crafting those agreements.
This article originally appeared in the September 2013 issue of the TaxStringer. It is reprinted with permission from the New York State Society of Certified Public Accountants.