As we enter the post-pandemic (fingers crossed) world, employee travel is restarting while many employees keep working remotely. Remote work has its benefits, but there are still landmines that employers need to avoid in managing an increasingly remote and mobile employee workforce.
Handling income tax withholdings continues to be a tricky (and potentially very expensive) issue. Knowing when to withhold unemployment and state income taxes in the state where the employee is located versus withholding unemployment and state income taxes in the state where the employer’s home office is located is key. There are even situations when remote employees may be subject to double income tax in both the state in which they work and the state in which their employer operates.
There are three main approaches for withholding state and local income taxes: (a) “Physical presence” rule; (b) Reciprocity; and (c) Convenience rule. See our previous article for more in-depth discussion. As a reminder, Arkansas follows the “physical presence” rule, meaning that employers are required to withhold state income taxes in Arkansas for work performed in Arkansas. Arkansas Department of Finance and Administration (DFA) Individual Income Tax Regulation 1.26-52-202(c) has been on the books for decades and is basically in line with this approach. But, in 2015 and early 2020, the DFA issued opinions following the convenience rule approach in ruling that nonresident employees for Arkansas employers were subject to Arkansas income tax though they worked out-of-state. The reason for this was that the individuals’ work was carrying out the mission and purpose of its employer in Arkansas.
With this uncertainty, and in the midst of a pandemic causing droves of employees to work remotely, the 93rd Arkansas General Assembly amended Arkansas law to clear up the ambiguity. The law now clearly requires allocation based on where work is performed:
A nonresident individual who is paid a salary, lump sum payment, or any other form of payment that encompasses work performed both inside and outside of Arkansas shall pay Arkansas income tax only on the portion of the individual’s income that reasonably can be allocated to work performed in Arkansas.
See Ark. Code Ann. § 26-51-202(c)(1)(2). A nonresident individual performs work in Arkansas when he or she is physically located in Arkansas while performing the work. Thus, whenever an employee is working in Arkansas, an income tax obligation is created. The 2021 law also clarified withholding obligations on out-of-state businesses employing workers in Arkansas.
A perfect example of the risks of getting withholding wrong comes in a ruling handed down by the DFA earlier this month. See Administrative Decision 22-207 (May 5, 2022). The decision upheld an assessment of withholding tax against an out-of-state employer – perhaps in the construction industry – finding that the employer only withheld Arkansas income tax on its Arkansas-based employees and not its out-of-state employees who worked in Arkansas. The employer had based its income tax withholdings on the out-of-state employees on the locations where the employees were based, not where each employee worked day-to-day. Compiling the problem, the employer then failed to keep clear records of wages earned by each employee within Arkansas. The result appears to have been a significant liability to the employer.
In view of such risks, consider reviewing your current payroll tax policies and practices. Make sure to correct any issues and refine your recordkeeping practices to ensure they are adequate if an audit occurs. Finally, if exposures are identified, consider whether to pursue a voluntary disclosure or simply accept the risk.
General Employment/Confidentiality Implications
On that same note, there are several employment and confidentiality matters that employers should have top of mind. That starts with considering who should be allowed to work remotely. It requires an analysis of what work can be done remotely and what criteria should be applied when selecting which employees can work remotely. The criteria should be as objective as possible, based on legitimate business reasons, and applied consistently to avoid claims of illegal discrimination or retaliation. And be prepared to engage in the interactive process under the Americans with Disabilities Act (ADA) to determine whether remote work is a reasonable accommodation for employees who may request remote work as an accommodation.
Protecting company confidential information and trade secrets is also paramount. Honing protection and avoiding accidental disclosure and misappropriation takes effort and planning to identify trade secrets, limit access to those secrets, and enact further measures to guard them. See our previous article for more in-depth discussion. Some best practices to keep in mind include:
- Educating employees on trade secrets, and data security and storage policies;
- Ensuring up-to-date and secure systems are in place;
- Limiting access to sensitive and proprietary information on a need-to-know basis;
- Developing a plan to promptly collect devices and terminate access to company data once an employee is furloughed, laid off or terminated;
- Developing a cybersecurity framework and risk management plan with help from legal counsel and IT professionals;
- Updating any restrictive covenants the business uses to address remote work situations and incorporate any changes in the law in the applicable forum; and
- Having employees sign confidentiality or nondisclosure agreements to prohibit disclosure of trade secrets and other confidential and proprietary information.
If not avoided, common remote work-related wage and hour issues can become extremely expensive as well. First, confirm that all exempt remote workers are in fact properly classified as exempt – their salaries must meet the minimum salary threshold ($684/week) and their primary duties must match the exemption under which the worker is classified. The Department of Labor provides good fact sheets for each exemption. Also remember these salaried employees are generally entitled to a full week’s salary for any week in which they perform any remote work.
Most importantly, make sure that non-exempt remote workers are accurately recording all hours worked as they are generally entitled to pay only for hours actually worked, including work that was not requested but allowed and performed at home. Communicate (in writing) off-the clock work prohibitions and overtime expectations. For instance, emailing with employees after hours without recording that time is considered off-the-clock work which could turn into unpaid minimum wage or overtime. And educate and train managers on monitoring wage and hour issues.
With employees out of the office, employers have to be even more diligent in making sure remote employees are still abiding by anti-harassment and discrimination policies. At times, virtual/remote harassment can go undetected. Examples include: cyberbullying via email, text or private group chat; verbal bullying (e.g., raised voice, humiliation, snarky comments, and so on) in virtual meetings; and inappropriate comments or conduct during virtual meetings. Managers and supervisors should be trained on how to watch for the signs of harassment and instructed to involve the Human Resources Department over any concerns. It is critical to treat all reports of harassment seriously.
Another topic that may get lost in the shuffle is handling remote worker injuries. Under most workers’ compensation laws, employers may be liable for injuries that employees suffer while working from home. For instance, Arkansas’ workers’ compensation laws generally apply to all legitimately injured workers who suffer an injury or disease arising out of and in the course of their employment. According to the Occupational Safety and Health Administration (OSHA), an injury is considered work-related if it occurs at home while performing paid work directly related to the performance of the work, rather than to the general home environment. The typical injuries will be easy to identify and deal with, such as trip-and-falls, lower-back strains and carpal tunnel syndrome. What will be difficult to deal with are injuries that blur the lines of what arises out of and in the course of their employment. For things like this, timely reporting is paramount. It is likely that there will be no other witnesses. Having employees report any injuries immediately will hopefully help ensure that the most accurate version of events is documented. Employees should be encouraged to define their home office space and provided information and training about setting up safe workstations. Safety checklists are also helpful. Sticking with the best practices for avoiding wage and hour issues, require all remote workers to record and maintain detailed time records, including detailed records of meal breaks and other personal breaks.
Keeping Policies Up-to-Date
As always, make sure to update existing written policies (both tax and remote work) or create new written policies if needed. Also ensure recordkeeping necessary to implement such policies. Be sure to stay abreast of any possible legal and cultural implications. Additionally, make sure to stay vigilant on any new state and federal laws and regulations and local ordinances