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Remote Employees vs. Contractors: An Important Distinction
Common questions covered here
Can I hire contractors instead of remote employees?
Where is the line between contractors and employees?
Could I be fined for hiring contractors instead of employees?
Companies typically hire employees and engage a mix of freelancers or contractors. Until more recently in the U.S., this was simply a matter of cost and strategy—hiring contractors helped outsource some work, especially to accelerate a specific project or initiative.
cautionFor U.S. businesses, hiring contractors is financially appealing, as companies don’t need to handle payroll and tax withholding, or provide healthcare or other benefits. It might seem like an easy and less expensive way to expand your remote workforce. But there are federal laws about when someone can be considered a contractor vs. an employee, and getting this wrong can be very painful and expensive.
Behavioral control. “A worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised.”
Financial control. “Does the business have a right to direct or control the financial and business aspects of the worker’s job?”
Relationship. “The type of relationship depends upon how the worker and business perceive their interaction with one another.”
Here’s set of questions companies can use to help evaluate this relationship with someone they’re going to hire:
Do they have control over how their work is conducted? Are they subject to instruction over process or other work rules? Are they under direct supervision?
Can they set their own schedule?
Do you provide any benefits or holiday pay?
Are they paid only for the work they complete?
Can they freely work with other employers?
Violation of these laws can lead to a number of financially significant consequences:*
$50 per Form W-2 that was not filed.
Penalties of 1.5% of the wages, plus 40% of Social Security and Medicare taxes (FICA) that were not withheld from the employee, and 100% of matching FICA taxes that were not paid by the employer. Daily accrued interest may also be added.
Penalty under Section 6651 for failure-to-file Form 941 employment tax return, 5% of the tax amount per month, up to 25%.
If the IRS suspects intentional misconduct or fraud, there could be additional fines.
In 2015, home-cleaning startup Homejoy shut down after failing to raise enough additional money while grappling with four separate legal cases of employee misclassification based on Homejoy categorizing all of its cleaners as contractors. Around the same time, other startups like DoorDash, Caviar, GrubHub, and Instacart were all grappling with existing or imminent lawsuits from contractors arguing they should be classified as employees.*
newCalifornia recently passed a sweeping new law, AB5, that makes it significantly harder for companies to employ contractors by closing the gap between what constitutes a contractor and an employee. California makes it close to impossible for employers to engage gig workers (for example, drivers for ride-hailing services like Uber or Lyft) and many other types of service providers (such as freelance writers and editors) as independent contractors. If they don’t have their own independent business, are doing the core work of your company, and you exercise direction over what they do, they must be employees.
As of January 1, 2020, for someone to be classified as an independent contractor in California, they must meet all of these requirements:
The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
The worker performs work that is outside the usual course of the hiring entity’s business; and
The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
cautionViolation of contractor classification according to AB5 could result in fines between $5K and $25K per violation.
newThis is becoming more prevalent elsewhere: the New Jersey legislature is debating a law very similar to California’s, and New York is considering one as well.
Other states have similar, albeit less strict, laws and their own variation of an ABC test like California uses. Be sure to check with the state’s employment bureau or department when considering hiring in a new state.
importantThe remainder of this section applies to full-time employees only, not contractors or freelancers.
Once you hire a remote employee, it’s imperative that you pay attention to the federal, state, and municipal regulations for each new location in which a remote employee works. The laws you are accustomed to complying with where you are located, may be applied, interpreted, and enforced in different ways based on where the worker is. This applies even to federal laws.
importantIn general, California, Massachusetts, New York, Delaware, and New Jersey have the strictest rules. So whenever you’re considering state variations, those are the ones you definitely will want to pay attention to.
cautionYou’ll also want to have a company policy established for how you handle variations in things like parental leave or other benefits that may be mandated by state law—in these cases, some employees may have very different levels of coverage based on where they live. Many remote companies handle this by ensuring everyone is brought up to the best level of coverage across the entire workforce*—but regardless of what you do, ensure that all employees are aware of the policy.
By default, the controlling laws include federal, state, and local. The emphasis is on where the employee works, even if temporarily. This applies to most basic employment rights (such as minimum wage, overtime, and safety issues).* For example, Oracle Corporation learned the hard way that California’s overtime rules applied to its traveling instructors when they worked in California, even though they lived in Arizona and Colorado.*
But some state laws only apply to remote employees as long as they report to a worksite in that state (for example, see the Massachusetts Equal Pay Act).
Keeping Track of Remote U.S. Employee Requirements
Common questions covered here
Should I outsource hiring remote employees?
What is a Professional Employment Organization (PEO) and can it help me hire and manage remote employees?
What are the pros and cons of using a Professional Employment Organization (PEO)?
When it comes to keeping up with all the laws and regulations for remote U.S. workers, you have roughly three options:
Track everything yourself. This means that for every location that you have a remote employee, you manage payroll, benefits, and so on with your own internal HR employees or via external accountants, benefits administrators, lawyers, et cetera. This was what many businesses had to do before more recent SaaS-based HR-service providers came on the market.
Mix advisors with services. This typically is a mix of contract legal and financial help paired with some form of service provider that handles most of the payroll, benefits, and related overhead (like Gusto, Zenefits, Bamboo, et cetera—see our list of tools and services for a list of all these providers).
Outsource everything. Give all the tracking, implementation, and ongoing management to a Professional Employer Organization (PEO).
A Professional Employer Organization (or PEO) is an outsourced solution for HR, including payroll, benefits, workers’ comp, and compliance. A PEO is a co-employment model,* in which the PEO takes on the responsibility for a company’s HR, including any liability; and payroll is processed through the PEO’s tax ID, not the company’s.
importantIn general, what we’ve seen mostly for remote companies—especially startups or small organizations—is the second option above. With the advent of modern SaaS-based HR tools, the vast majority of payroll and benefits oversight is easily managed via these services. But they don’t necessarily handle everything (for example, registering new employees in their state), so you will want to be sure to ask what is and isn’t handled. (You can use the checklists below to help with this.)
When it comes to outsourcing via PEOs, there are multiple pros and cons.
The primary benefit of going with a PEO is that it dramatically reduces a company’s payroll and HR overhead. They handle all your HR needs while you focus on the business. A few other benefits include:
Monitoring laws and regulations.PEOs stay up to date on all the state and municipal rules and regulations, many of which can change often and quickly.
Liability assurance. The PEO takes responsibility for any issues related to staying compliant. Should an employee or local jurisdiction take issue with certain administrative issues, the PEO may be ultimately responsible for resolving the situation.
Compliance.PEOs handle all payroll and tax-related compliance needs, including:
W-2 and 1099 filings
Employment Practices Liability Insurance (EPLI)
Employee benefits.PEOs are also responsible for your employees’ benefits, like health insurance. Because PEOs serve a large client base, they have greater purchasing power and can negotiate better coverage.
Many of the potential downsides of PEOs are the flip side of the benefits coin:
Lack of control. Due to the co-employment model—which is a contractual agreement between the PEO and your company—and a PEO’s assumption of liability, companies give up a certain amount of control. This can amount to a company having to adopt the PEO’s policies and procedures, and potentially even their employee handbook terms. The PEO can also be involved in performance-related and firing decisions.
Cost. Someone else is doing all that work, and you have to pay them for it. PEO pricing typically falls into one of two categories:
Percentage of payroll is a PEO pricing model that charges a percentage—typically about 2–12%—of a company’s total payroll amount per pay period for its services. Many PEOs also include an administrative fee on top of this per pay period as well.
Per-employee (or PEPM or PEPY) is a PEO pricing model that charges a fixed dollar amount per employee either monthly or annually for their services. This is similar to many SaaS-based “per-seat” pricing models. Per-employee pricing varies quite a bit across PEOs.
Limited healthcare choices. While the rates PEOs negotiate may be better than what your company can, you have little say about which providers they choose. When it comes to remote employees, this can be a significant issue, as some companies may not have good options for out-of-state employees.
Outdated tooling and customer service. Startups and tech-savvy companies that are used to modern, SaaS-based tools may be frustrated with most PEOs. Internationally, this can be even more exaggerated, with some still operating largely via phone calls, and in some cases even via fax. (See Working with a GEO.)
contributeWe’re not aware of any startups or smaller companies that work with a PEO for U.S.-based remote workers. If you have experience with this we’d love to hear from you.
In the next section, we lay out the various aspects of employing remote U.S. team members you’ll either have to track, or ensure is handled by whichever third party or service you use. We include checklists of what to look out for for each section, and where possible, matrices of jurisdiction (federal, state, municipal) related to each of the areas.
Hiring and Firing
Common questions covered here
What do I need to know when it comes to hiring or firing a remote employee in the U.S.?
How do I keep track of employment laws for all the states where I have employees?
Do laws for hiring and firing employees vary by state?
In order to protect candidates from discrimination, U.S. federal law, as well as many state and local laws, prohibits companies from recruiting new employees in a discriminatory way,* making hiring decisions on a discriminatory basis or using hiring practices that have an especially negative effect on relevant groups,* and asking certain questions during interviews.*
Whether a candidate has a disability. If the candidate’s disability is obvious or disclosed, it is permitted to ask about providing assistance with the application process or changing the environment or way in which the work is done to accommodate the candidate;
About the candidate’s genetic information;
About the candidate’s race, religion, or ethnicity;
About the candidate’s age, unless that information is being used to verify that the candidate meets any age-related legal requirements; and
About the candidate’s pregnancy or plans to start a family.
cautionState and local laws add to these bans, meaning that your interviews of remote employees may operate under rules you’re not accustomed to. These prohibitions include “ban-the-box” laws that prohibit companies from asking candidates about their criminal history (prior to a conditional job offer), and restrictions on questions about candidates’ salary histories.**
newStates and localities differ in their treatment of non-compete agreements, so if a candidate has such an agreement in place, you’ll want to consult applicable laws to determine whether it will prevent them from working for your company. As of April 2019, the Center for American Progress reported that three states (California, North Dakota, and Oklahoma) have outright bans on non-compete agreements (except in limited circumstances), while another 26 will enforce some non-compete agreements, but not others.
The Hiring Process
For all employees in the United States, employers must verify employees’ identity and employment authorization.* This process includes physically examining, with the employee physically present, each document the employee has provided. Doing so can be more difficult for remote employees because reviewing documents via webcam is explicitly prohibited, but employers can designate an authorized representative to perform the examination and fill out the necessary forms. Authorized representatives can include personnel officers, foremen, agents, or notaries public.**
A few things you’ll need to pay attention to for remote hiring:
Contracting. It’s important to make sure that your contract or offer letter with the employee spells out the relationship between the company and the employee, and provides for any state or local legal requirements.* If your remote employee is in a different place than the bulk of your workforce, this may mean that your contract with the remote employee differs in some ways from your standard employment contract.
New hire reporting. Employers are required to report basic information on new and rehired employees to the state where the employee works shortly after the hire or rehire is made. Federal law requires that reporting be completed within 20 days,* but some states require faster reporting.*
For the federal government, the purpose of new-hire reporting is to help locate noncustodial parents to establish and enforce child support orders.* States also have an interest in determining which of its residents are currently employed to appropriately administer unemployment benefits, workers’ compensation, and other entitlement programs.*
Certain reasons for firing employees are always illegal in the United States. Federal law prohibits employers from terminating employees because of their age, race, color, religion, sex, ethnic/national origin, disability, or veteran status.* Employers are also prohibited from firing an employee for asserting their right to be free from discrimination.* The Equal Employment Opportunity Commission (EEOC) refers to asserting these rights as “protected activity,” which can include:
“filing or being a witness in an EEO charge, complaint, investigation, or lawsuit
communicating with a supervisor or manager about employment discrimination, including harassment
answering questions during an employer investigation of alleged harassment
refusing to follow orders that would result in discrimination
resisting sexual advances, or intervening to protect others
requesting accommodation of a disability or for a religious practice
asking managers or co-workers about salary information to uncover potentially discriminatory wages.”*
newStates and localities can also enact anti-discrimination laws that make further reasons for termination illegal, and/or expand the employers included in these restrictions. For example, while there are ongoing cases disputing whether discrimination on the basis of sexual orientation and gender identity is prohibited by federal law, twenty-one states and D.C. prohibit such discrimination.*
importantThe National Conference of State Legislatures compiled a chart outlining state-level discrimination laws across the country; this is a useful place to start, but it’s wise to always check for updated information in any state where you’re hiring.
Except for Montana,* all states in the U.S. recognize at-will employment, which allows employers to terminate employees at any time, as long as the reason they’re firing the employee is not illegal.* In the states that recognize at-will employment (all states other than Montana), there are two ways that the freedom of employers to terminate employees is restricted: The employment contract can include an implied higher bar for termination, and/or state and local law can provide greater restrictions.
Implied contract. Even if it isn’t written down, if an employer has given an employee reason to expect a particular term of employment or only to be fired for just cause, then the parties may have what is referred to as an “implied contract” and the employer may not be able to terminate the employee at will. Most states recognize an implied contract exception, but states treat the exception differently, and this is a developing area.*
Public policy. This means that an employee cannot be fired if their termination would “violate a public interest.”* States can define this narrowly and broadly, but generally if the employee engages in one of the following four categories of conduct, the public policy exception applies:
refusing to perform an act that’s legally prohibited
reporting a legal violation
engaging in acts that are in the public interest, such as performing jury duty
exercising a statutory right, such as filing a worker’s compensation claim.
Implied covenant of good faith and fair dealing. A relatively small number of states include this final exception. As the National Conference of State Legislatures explains, “judicial interpretations of this covenant have varied from requiring just cause for termination to prohibiting terminations made in bad faith or motivated by malice.”
The flip side of the at-will employment coin is that employees are also free to leave at any time for any or no reason. The state-by-state exceptions that limit employers’ ability to terminate employees don’t apply to employees leaving, though, so this element of the relationship with your employees shouldn’t differ between on-site and remote.
When it comes to the firing process, there is no federal requirement as to how much notice a company needs to provide before firing someone, and the same is true for at-will employment states. However, some states require that the employers provide specific documents to the employee when they are terminated. For example, Illinois requires employers to provide a pamphlet, and California requires employers to provide notice of termination and information about unemployment benefits.
importantAfter firing an employee, you will need to be sure to issue their final paycheck following the applicable rules and regulations. For more information, see Payroll and Taxes.
As with individual employees, employers are prohibited under federal, state, and local law from laying off groups of employees for discriminatory reasons.*Federal law, through the Worker Adjustment and Retaining Notification Act (WARN), also requires employers with 100 or more employees to provide at least 60 calendar days’ advance written notice when laying off 50 or more employees at a single site, 50 or more employees in any locations if they constitute at least a third of the company’s workforce, or more than 500 employees.*
importantFor the first type of layoff—of 50 or more employees at a single site—remote employees may be counted toward the site from which they receive assignments or to which they report. Unfortunately, however, courts in different jurisdictions disagree as to how remote employees should be counted.*
Some states also have laws that adjust the circumstances in which an employer must give notice. For example:
California expands WARN to apply to companies with at least 75 employees and requires notice whenever 50 or more employees are laid off, regardless of their location or percentage of the workforce.
Illinois expands WARN to apply to companies with at least 75 employees and requires notice whenever 25 or more employees are laid off if they are at a single site and constitute at least a third of the company’s workforce at that site, or if 250 or more employees at a single site are laid off.
Tennessee expands WARN to apply to companies with at least 50 employees and requires notice whenever 50 or more employees at a single site are laid off.
Thorough checklists for the steps you will need to take when recruiting and hiring include:
Learn what kinds of discrimination are illegal in the candidate’s state, and design policies to avoid these in hiring decisions.
Make sure your interview questions are in line with the laws in the state where the candidate lives, as well as federal law and your company’s state laws.
The Hiring Process
Determine whether the candidate has a non-compete agreement in effect, and if so, whether it is enforceable under state law.
Verify the employee’s identity and work authorization by physically examining the employee’s relevant documents with the employee present, or by designating an authorized representative to do so.
Make sure that your contract with the employee spells out the relationship between the company and the employee and provides for any state or local legal requirements.
Report the new hire to the state where the employee will be working by the deadline created by that state, 20 days or fewer from the date of the hire.
When considering terminating an employee, ensure that the reason for termination is allowable under federal and state law.
Research and comply with state laws that require employers to provide employees with certain documents when they are fired.
If the employee is being terminated as part of a layoff, review federal and applicable state rules that may require written notice 60 days before the employee will be terminated.
Issue the employee’s final paycheck on the timeline required by applicable law (see Payroll and Taxes).
If your company provides a group health plan, notify the plan that the employee has been terminated and, if your company administers the plan, notify the employee of their COBRA eligibility (see Benefits).
Common questions covered here
Do I have to keep track of minimum wage and overtime laws for every state where I employ someone?
How do you pay employees who live and work in a different state?
Do laws about compensation vary by state?
Compensation is a complicated topic in its own right, and crossing state lines impacts what kind of pay and associated benefits you offer employees in a number of ways. You’ll need to factor in state and local laws regarding minimum wage and overtime, among other things. And to do that, you’ll need to know which kind of employees you have.
Exempt vs. Non-exempt Employees
Although it might be tempting to think of minimum-wage and overtime rules as applicable to all workers, this isn’t the case. Instead, they apply to some workers (non-exempt employees) but not others (exempt employees and independent contractors) based on classifications that are initially set at the federal level.*
Exempt employees are excluded from minimum-wage and overtime regulations, along with other rights and protections afforded nonexempt workers. Employers must pay a salary rather than an hourly wage for a position for it to be exempt, and exempt employees are expected to complete their duties irrespective of the amount of time required to do so.
Non-exempt employees are generally subject to coverage by the Fair Labor Standards Act (FLSA), which establishes mandatory minimums for minimum-wage and overtime pay.
For most employees, whether they are exempt or nonexempt depends on:
how much they are paid
how they are paid
what kind of work they do.
With few exceptions, to be considered exempt, an employee must a) be paid at least $684 per week,* b) be paid on a salary basis, and c) also perform exempt job duties. Of the many categories of exempt employees, you are most likely to encounter the federal exemption for salaried employees in executive,* administrative,* professional,* computer,* and outside sales* roles. For computer workers specifically, the exemption applies even if they are paid on an hourly basis, as long as they are paid at least $27.63 per hour.*
importantStates and localities can set their own requirements for their minimum-wage and overtime laws, so it’s important to be familiar with the rules in all the states and localities where you have employees. For example, in California an exempt employee must be paid at least twice the state minimum wage.*
If a remote employee is non-exempt, they must be paid at least the amount of the highest minimum wage that applies to them based on their location.*
importantFederal law does not consider equity compensation to be a form of wage, so even if you’re offering employees primarily equity, you will still need to meet minimum-wage requirements,* or pay your employees enough that they qualify as exempt.* Also, state and local laws may treat equity compensation differently than federal law,* so it’s essential to consult a local expert.
Federal law requires overtime pay for non-exempt employees who work more than 40 hours in a week, but state and local laws can be more generous. For example, California also considers any work beyond eight hours in a day to be overtime, and an employee gets whichever overtime amount is greater between daily hours (beyond 8) and weekly hours (beyond 40).
Federal law generally does not require employers to reimburse employees for business expenses, but the FLSA does require reimbursement if the expenses reduce an employee’s pay below minimum wage.*
Additionally, some states, such as California and Illinois, require employers to reimburse “necessary expenditures.”
Compensation and Location
Once you’re above the required thresholds for exemption or satisfying minimum-wage and overtime requirements, there’s a further question of how you want to gauge the appropriate amount to pay your employees. This is less a legal question than a question of company philosophy and policy; but briefly, your options include:
Paying all employees a global salary as if they were based where your company is based (as Chef does).
Paying each employee a local salary based on the market rate where they are based (as GitLab does).
importantYou should not use compensation to discriminate between employees based on their race, color, religion, sex, national origin, age, or disability. A number of federal laws prohibit discrimination in compensation.*
Equal Pay Act. This law requires all employers to give men and women equal pay for equal work in the same establishment. Generally speaking, “establishment” is understood to mean worksite, so differences in remote employees’ pay according to their location may be acceptable under these terms. The Equal Employment Opportunity Commission advises that “workers at different worksites sometimes may be compared if the same managers oversee the operations of both locations and workers frequently transfer between the two locations.”
importantState and local governments may supplement federal protections on equal compensation. For example, Oregon’s Equal Pay Act requires all employers to provide comparable pay for comparable work to all Oregon-based employees regardless of race, color, religion, sex, sexual orientation, national origin, marital status, veteran status, disability, or age. This goes beyond federal requirements because it has no minimum employee count and extends rules about equal pay beyond the issue of sex.
A thorough checklist to use when determining compensation would include:
Determine whether an employee is exempt or non-exempt under federal and applicable state and local laws.
Ensure that non-exempt employees are paid at least minimum wage and are paid overtime as required by applicable laws.
Ensure that any business expenses incurred by non-exempt employees are reimbursed if deducting them from the employees’ pay would mean their compensation does not adhere to minimum wage and overtime requirements.
Ensure that your employees’ compensation is not discriminatory, including by complying with federal and state laws that require employees to be paid comparable pay for comparable work.
Common questions covered here
Do I have to keep track of benefits laws for every state where I employ someone?
Do I have to support FMLA laws for every state where I employ someone?
Do laws about benefits vary by state?
Benefits can vary significantly at state and local levels, so this is one area where it’s important to be aware of a host of differences (or ensure whatever third party or service you’re using is doing so adequately instead).
The United States does not guarantee paid family leave, a fact that makes it unique among industrialized countries.* Instead, federal law provides unpaid family leave for approximately 60% of the workforce through the Family Medical Leave Act (FMLA) (see more on this in the following section).*
newAs of August 2019, eight states and the District of Columbia offered paid parental leave, which would cover eligible employees working from those locations.*
newLate in 2019, Congress passed a measure that will provide twelve weeks of paid parental leave to federal employees who have held their job for at least a year.* While this does not apply to private-sector employees, it may signal a shift towards increased parental leave coverage at the federal level.
Medical and Other Leave
The Family Medical Leave Act is a federal law that “entitles eligible employees of covered employers to take unpaid, job-protected leave for specified family and medical reasons with continuation of group health insurance coverage under the same terms and conditions as if the employee had not taken leave.”*
The employee’s child being born, or a child being placed with the employee for adoption or foster care.
Caring for an immediate family member who has a serious health condition.
Having a serious health condition that “makes the employee unable to perform the essential functions of his or her job.”
Having a “qualifying exigency” related to the fact that an immediate family member is an active-duty military member. “Qualifying exigencies” include making arrangements for a child or parent of the military member, attending certain military ceremonies and briefings, spending time with the military member on R&R leave, and so on.*
Eligible employees may take up to 26 weeks of FMLA leave in a twelve-month period to care for an immediate family member who is a servicemember and incurred serious injury or illness while on active duty.
In order to be eligible for this leave, the FMLA specifies that an employee must be “employed at a worksite where 50 or more employees are employed by the employer within 75 miles of that worksite.”*
importantThis can lead to the mistaken impression that many remote employees aren’t covered. However, for FMLA purposes, an employee is included in a particular office’s headcount if they report to that site; or, if they don’t report to any particular site, their work is assigned from that site.*
Here’s a useful example:
Consider an employer who has an office in South Carolina with 40 employees, an office in Oklahoma with 20 employees, and has 15 employees who work from home and reside in New York, Mississippi, and California … If all 15 remote employees report to or have their work assigned from the South Carolina office, their worksite will be considered South Carolina under the FMLA. Therefore, all the employees in South Carolina and all the remote employees (despite how far away they are) would be eligible for FMLA leave.*
Many states also have their own medical-leave laws that expand on the FMLA. States can lower the eligibility requirements that:
For some state leave laws, an employee may only be eligible if they are not eligible for FMLA leave. For others, an eligible employee may be able to take both federal and state leave.*
Similarly, state laws differ in exactly who they cover. A remote employee who lives in a state will be covered by whatever leave laws that state has if they otherwise meet eligibility requirements. However, some leave laws may also cover remote employees who live outside the state if the employer has its primary office in the state.*
importantTo get an overview of laws in each state where you have or are considering hiring remote employees, you can check out aggregated resources like these:
Because there are so many laws to keep track of and they can change on different schedules, we always recommend consulting an attorney for current advice.
Federal law is the primary source of health insurance requirements for employees, so this is one area where you don’t have to worry about differences between on-site and remote workers within the United States.
While not required to provide health insurance, some smaller companies do qualify for a tax credit—the Small Business Health Care Tax Credit—if they provide health insurance. To qualify, a company must:
Have fewer than 25 full-time employees
Pay average wages below a certain amount*
Offer a qualified health-care plan to its employees
Pay at least 50% of the cost of the employee’s health-care coverage (but not family members or dependents)
Recently terminated employees may also qualify for health insurance for a certain period after they leave the company.
Federal law, through the Consolidated Omnibus Budget Reconciliation Act (COBRA), requires employers who have more than twenty employees and provide private-sector group health plans to give certain employees who would otherwise lose their coverage the option to temporarily extend. Employees who qualify for COBRA benefits include those who lost their job for reasons other than gross misconduct or had a reduction in hours.* COBRA has a few notable requirements:
If COBRA applies to your company and you fire an employee, you must notify the group health plan within 30 days.*
If your company is administering the health plan, then you are also responsible for notifying the employee of their eligibility.**
COBRA requires health plans to offer continuation coverage to terminated employees for 18 months or, if the employee became entitled to Medicare less than 18 months before they were fired, for 36 months.*
importantMost states offer state continuation coverage, sometimes referred to as “mini-COBRA,” that applies to employers with fewer employees and/or expands the coverage offered.
For example, Texas offers a mini-COBRA plan that offers continuation coverage to employees in companies with between two and fifty employees. If the employee does not qualify for federal COBRA, Texas offers nine months of continuation coverage; if the employee does qualify for federal COBRA, Texas offers an additional six months on top of the federal continuation coverage.*
In addition to offering different coverage, states that offer mini-COBRAs may have different ways of administering the program or different notice requirements,* so it’s important to be familiar with the rules in the states where your employees receive coverage.
importantThe states that currently do not offer COBRA continuation are Alabama, Alaska, Hawaii, Idaho, Indiana, Michigan, Montana, and Nevada.*
Certain locations require employers to provide employees with commuter benefits, which generally allow employees to pay for certain commuting costs using pre-tax money, but may also include further benefits like offering a subsidy for commuting or an actual transit service.
importantSome of these laws do apply to at least certain remote employees:
New York City. This law applies to all employees who worked an average of 30 hours or more per week in the most recent four weeks if any portion of that time was in New York City and their employer has 20 or more full-time employees.*
Washington D.C. This law requires companies with 20 or more full-time employees to offer commuter benefits, and applies to employees who perform the majority of their work in the district.*
Seattle. This law applies to remote employees who work an average of ten or more hours per week in Seattle.*
But other commuter laws do not apply to remote workers:
New Jersey only covers employees “who [report] to the employer’s work location.”*
San Francisco does not include “employees who always work remotely, and do not commute to a physical office or work on-site in the San Francisco Bay Area” among the “covered employees” or “full-time employees” for the purposes of the Bay Area Commuter Benefits Program.*
You’ll want to include the following on your benefits checklist:
If you have a remote employee in one of the eight states that offer paid parental leave, or Washington D.C., ensure you offer leave that complies with the relevant law(s).
If an employee needs to take another kind of leave that is covered by either FMLA or a state protected leave law, ensure that they are able to take the leave to which they are entitled and that their position is available upon their return.
If your company has at least 50 employees, provide health insurance that pays for at least 60% of covered services to at least 95% of your employees and their dependents.
If your company has fewer than 25 employees, consider whether you might qualify for Small Business Health Care Tax Credit if you provide your employees with health insurance.
If your company provides a group health plan, notify the plan that the employee has been terminated; and if your company administers the plan, notify the employee of their COBRA eligibility.
Determine whether the location(s) where your remote employees work requires your company to provide commuter benefits.
importantAlso be sure to establish and enforce a policy for how you will handle differences in benefits across states (and countries, if applicable) for different remote employees.
Policies and Miscellaneous HR
Common questions covered here
Do I have to pay for home office equipment for any remote employees who work from home?
Do I have to follow OSHA standards for all my remote employees?
Do laws about discrimination and sexual harassment vary by state?
This section covers a collection of concerns that would largely be covered in a company’s employee handbook. For state-based variations on these categories, pay attention to New York and California, which have the most unique laws about these kinds of issues.
Many states, notably California, require companies to reimburse employees for any equipment or other things they are required to purchase in order to do their job.* This can range from office equipment to even something like the cost of opening a bank account in order to receive direct deposits.
It’s good policy to ensure remote workers have equally as comfortable and well-equipped work spaces as they would have in a corporate office.
importantOSHA issued guidance in 2000 stating that it would not conduct inspections of remote employees’ home offices; but employers are still responsible for keeping records of work-related injuries and illnesses for these employees.*
Twenty-one states and Puerto Rico currently operate their own workplace safety and health programs that cover private-sector employees. OSHA monitors these plans and requires them to be at least as effective as OSHA in protecting workers.* For a full list of and links to the state plans, see OSHA’s State Plans site.
importantSome states—notably California, Michigan, Oregon, and Washington—have state plans that have significantly more stringent requirements than OSHA. If you have remote employees in any of the locations that have state plans, you should become familiar with those states’ rules, particularly regarding reporting, training, and inspections for remote employees.
Federal, state, and local laws provide that employees should be free from discrimination not only during the hiring process and potential termination, but also during the course of their employment. Among other things, the law states that employers should not discriminate on these bases when making decisions about which employees will be allowed to work remotely.*
The Equal Employment Opportunity Commission (EEOC) enforces federal anti-discrimination laws. For companies with at least twenty employees,* the EEOC specifies that “it is illegal for an employer to make decisions about job assignments and promotions based on an employee’s race, color, religion, sex (including gender identity, sexual orientation, and pregnancy), national origin, age (40 or older), disability or genetic information.”
newThere are currently cases before the Supreme Court questioning whether gender identity and sexual orientation are protected from discrimination under federal law, which would affect employers with fifteen or more employees.*
importantState and local laws can expand protections against discrimination for employees. For example, while there are ongoing cases disputing whether discrimination on the basis of sexual orientation and gender identity is prohibited by federal law, twenty-one states and D.C. prohibit such discrimination.*
Although sexual harassment is considered a form of discrimination, it is worth considering separately here because of the many specialized laws that address it. Harassment of remote employees is both feasible via a variety of channels provided by modern tools, and potentially less visible, as well.**
Federal, state, and local laws prohibit harassment against applicants and employees because of their sex. Under federal law, conduct must rise to a certain level to be considered sexual harassment; it must “explicitly or implicitly affect an individual’s employment, unreasonably interfere with an individual’s work performance, or create an intimidating, hostile, or offensive work environment.”*
importantState and local laws may expand sexual harassment protection beyond what federal law provides. For example, California has indicated that a “single incident of harassing conduct” would constitute sexual harassment, even if it did not affect the employee’s employment or unreasonably interfere with their performance.
cautionCritically, employers can be held liable for sexual harassment that occurs in their company if they do not take adequate steps to prevent and punish it.* Some states and localities require employers to provide sexual harassment training to their employees. For example, New York requires all employers who employ anyone in the state to provide annual training to their employees, even if the company has no other contact with New York.*
Under federal law—specifically, the Americans with Disabilities Act (ADA)—employers with fifteen or more employees must provide “reasonable accommodations” to individuals with disabilities.*
Allowing an employee to work remotely can itself be considered an accommodation under the ADA if a medical condition interferes with the employee’s ability to do their job in the workplace.*
The federal Fair Labor Standards Act (FLSA) does not require employers to reimburse employees for business expenses. However, many states do have laws enforcing this, notably California. The California Labor Code (section 2802) stipulates that employers must reimburse employees for “all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties.”* For remote employees, this can include things such as cell phones, laptops, and any home office equipment they may require to work remotely. California has some of the strictest labor codes in the country, so if you’re abiding by them for everyone, you should be well covered across the board.
Policies and Miscellaneous HR Checklist
An effective checklist for policies and miscellaneous HR issues will include:
Establish reporting and record-keeping policies to comply with federal workplace safety rules.
Check the workplace safety laws that apply in the states where you have remote employees; determine whether they apply to those employees; and ensure you comply with relevant regulations.
Put in place policies to ensure that decisions about promotions, assignments, raises, and so on are not made on discriminatory bases.
Put in place policies to prevent workplace sexual harassment, ensure that employees know how to report complaints, and provide effective remedies for harassment.
Determine whether the states or localities in which you have remote employees have any specific anti-sexual-harassment training requirements and provide such training as appropriate.
Provide reasonable accommodations to remote employees with disabilities so that they can enjoy employment opportunities equal to those of employees without disabilities.
Have a policy in place for expense reimbursement that reflects potential state-based variations.
Payroll and Taxes
Common questions covered here
Do remote employees in a different state have to pay local taxes?
What state do you pay taxes in if you are a remote worker who works from home?
Can remote workers be taxed on the same income in two states?
In general, most basic employment rights (including minimum wage, overtime, and more) are governed by the laws of the state where an employee works.* When it comes to payroll and taxes, this is very much the case. If your company is in California, but you have an employee in New York, they will need to pay local New York-based taxes, and you will be responsible for tracking and withholding those. You’ll also need to be aware of withholding requirements for things like workers comp and disability insurance. Below we list all the payroll and tax requirements you’ll need to track, noting whether they are merely federally mandated or whether they might vary down to the state, county, or municipal level.
The Fair Labor Standards Act (FLSA) sets a national standard for minimum wage for non-exempt employees.*
Minimum-wage laws can get quite complicated, with variations at the state, county, and city level; they can also vary by company size (for example, 20 or more employees) and age of employee.*
While many companies supporting remote work will be doing so largely for exempt, salaried employees, you will have to be aware of these laws in detail for any remote non-exempt, hourly employees.
While you do have to maintain records related to payroll, companies are not federally mandated to provide a pay stub,*and the vast majority of people get paid via direct deposit.*
importantPay-stub laws vary by state as regards to whether an employer is required to provide a pay stub, and may dictate what information must be included. Some states will also allow you to make direct deposit mandatory.*
The cadence of paydays at your company isn’t federally mandated, but federal laws do say you must keep a consistent pay frequency once you set it. At the state level, you are required to follow any laws regarding paying employees semi-monthly, monthly, weekly or biweekly.*
The federal government has no oversight regarding when you send a final paycheck, but states have varying rules about this.* The timeframe may also vary if the employee quits or is fired.
Income Tax Withholding
Income tax is one area of remote work that can be quite complicated. Along with standard federal income-tax requirements,* an employee’s income is taxed at the state level based on a “physical-presence rule,” meaning that employees have to pay taxes for the state in which they reside. Employers will generally also pay taxes on wages paid to these workers to the same state, even if the employer has no physical presence in that state.*
Two notable exceptions to this general rule exist:
Reciprocal agreements. In the rare event that someone lives in a state that has a reciprocal agreement with the state where their employer is located, they can file a Certificate of Non-residency, which exempts them from paying taxes in the employer’s state and instead pay taxes in their home state. These states include:
Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Montana, New Jersey, North Dakota, Ohio, Pennsylvania, Virginia, West Virginia, Wisconsin, and the District of Columbia
Convenience vs. necessity test. Five states—New York, Nebraska, Pennsylvania, Delaware, and New Jersey—may require that workers be taxed based on their employer’s location.* If you work remotely for a company in one of those states, and working from home is a matter of convenience for you rather than a necessity for your employer, you could end up getting taxed twice—for that state and the one you live in (if it has state income taxes).
contributeWe’re unaware of any cases where this has happened to a remote employee, so if you have any experience with this we’d love to hear from you!
FICA (Medicare and Social Security)
This is one area where you don’t have to worry about anything beyond federal regulations. Withholding rates for Medicare and Social Security are set at the federal level* and don’t have any variations at the state or local level. Withholding is split between the employer and employee, but the employer is responsible for processing the withholding on the employee’s behalf.
Workers’ Comp and Disability Insurance Withholding
Workers’ comp is required for any company with one or more employees, but is not a federal program. Benefits are usually paid by a private insurance company or state-run workers’ comp fund.
Disability laws may vary by state, and then by size of company and industry. Five states have laws about disability insurance: California, New Jersey, Rhode Island, Hawaii, and New York.* In New York, paid family leave is included as a rider to the disability benefit, and employers can charge employees for a portion of that coverage.
The Federal Unemployment Tax Act (FUTA) requires that each state’s taxable wage base must at least equal the FUTA wage base of $7K per employee, although most states’ wage bases exceed the required amount. FUTA is 100% employer-paid.*
State unemployment taxes (SUTA) varies by state. Some states use various formulas to determine the taxable wage base; others use a percentage of the state’s average annual wage; and many simply follow the FUTA wage base. You can download a table of the state rates from the American Payroll Association.
importantEmployers can claim up to 5.4% credit for FUTA, as long as all of the SUTA taxes were paid on time. This deduction reduces the net rate for FUTA to 0.6%.
Tax Deductible Contribution Limits
The IRS dictates the maximum amount that employees can contribute to retirement plans like IRAs and 401Ks. These limits are only mandated at the federal level,* and don’t vary by state.
Federal law contains requirements for how overtime is calculated. If state laws are different from federal, the employer must follow the law that is most beneficial for the employee.**
Paid and Unpaid Breaks
Certain federal laws govern the number and duration of breaks and whether they constitute compensated time or not;* however, implementation of these laws is largely state-specific.* In general, these laws apply to non-exempt or hourly workers. This means that if, say, you hire a customer-service company in California and your company is in Idaho, failure to be aware of and adhere to these laws would expose you to penalties. But for any exempt workers you hire, you don’t have to worry about these laws as they won’t apply.
Taxation of Bonuses
The federal government stipulates that businesses pay a 22% flat tax rate for bonuses,* including signing bonuses, vacation pay, and most other forms of payment that fall outside an employee’s regular paycheck. There also are state-specific variations that apply to employers, including whether or not state income tax needs to be withheld as well.
Registering Your Business
Companies must register as a business with the appropriate federal authorities and with the state tax agency for any state in which it has employees.
Businesses have five types of reporting requirements they must follow:
New hire. Report to the appropriate state or federal Department of Health and Human Services within 20 days of the hiring date. Some states may require faster reporting of new hires.
Form 941. Federal income tax, Medicare, Social Security, and tipped wages must be reported quarterly.
Form 940 (FUTA). File annually by January 31.
Wage detail reports. State income taxes, unemployment, and other requirements must be filed quarterly.
Year-end W-2s. These must be sent to employees and filed with the Social Security Administration by January 31.
Table: Federal, State, and Local Laws Governing Payroll and Taxes
Do I need additional security or compliance measures for remote workers who work from home?
How do you provide security when employees work from home?
What are potential security risks of having remote employees work from home?
When everyone worked in the same office, maintaining good data privacy, security, and compliance practices was fairly straightforward (and the requirements were much simpler!). Everything was stored on central servers; no one lugged their desktop computer home to work for a few more hours; and few people even knew what a “hacker” was. The largely good news for remote workers is that in the intervening few decades, the explosion in smartphones, laptops, and cloud-based services means that most organizations had to rapidly adapt to an increasingly mobile workforce and rapidly changing regulations regarding protecting consumer data.
Given that this guide is largely for startups and high-growth companies, it’s outside our scope to delve beyond the basics of data security and privacy.
What’s important to know is that generally speaking, privacy and security laws apply more to where your customers are, not where your employees are. If you have solid policies and practices for everyone in your company, remote or otherwise, then you should largely be in good shape.
importantThere’s one noteworthy exception, which doesn’t fit squarely within data protection or privacy per se, but does govern invention assignment agreements.
An invention assignment agreement is a contract that grants an employer certain rights to inventions created or conceptualized by an employee while they were working for that employer. The two most common forms of invention assignment agreements are patentable inventions and copyrightable works.
At least nine states have statutes governing employee invention assignment agreements. Seven of those states—California, Delaware, Illinois, Kansas, Minnesota, North Carolina, and Washington—all have nearly the same set of requirements. If your agreements are in line with any of those, you should be similarly covered in any other states with comparable laws. Foley & Gardner provide a good summary of what may vary in these cases.
Notable Privacy and Security Legislation
Adhering to a general set of guidelines—which we lay out below—will get most organizations where they need to be. That said, in the U.S., as of 2020 there’s one new development that companies of a certain size will be required to pay attention to, regardless of where their employees are, and it’s worth mentioning because it’s likely to set the stage for other state-based regulations.
collect more than half of their revenue from the sale of personal data.
Companies don’t have to be based in California or have a physical presence there to fall under the law. They don’t even have to be based in the United States. In many ways, this is much closer to the General Data Protection Regulation (GDPR) laws that rolled out in 2018, which also affect any company with over 250 employees that does business with residents of the European Union over the internet.* (GDPR does stipulate requirements for businesses with fewer employees—even sole proprietorships or other small entities—they just have less strict reporting requirements.*)
A couple other states have their own noteworthy data protection and security laws, including Massachusetts** and New York.* The burden of these data privacy and security breach disclosure requirements is generally alleviated to some extent for a “small business,” which in the New York statute is defined as a “person or businesses with fewer than 50 employees, less than $3M in gross annual revenue, or less than $5M in year-end total assets.”
Data Privacy and Security Guidelines for Remote Companies
This is a set of practices that any company should follow, but with remote and more mobile employees, it’s especially important to have these in place:
Device security. It’s critical to be clear what your company’s device policies are. Can people use their own phones and laptops (aka “bring your own device” or BYOD)? If they are, it’s even more important that any data or tools they’re using have appropriate information management (see below) to ensure that access could be shut down in the event that their device is lost or stolen. Many companies side-step this by offering their own laptops and cell phones for employees to use.
Passwords. Make sure everyone is using a password manager, and never share passwords in writing or locations where guests or non-authorized people might have access (like Slack).
Two-factor authentication (2FA).2FA requires people to use a code sent to their phone or some other kind of authentication device, or another type of authentication service, in order to log in to any tools, portals, or services for their work.
Wifi/VPNs. It seems like common knowledge that employees should refrain from using unsecured wifi networks, but that’s painfully tone-deaf advice for remote or mobile employees. Providing guidance around not accessing certain information or systems when on unsecured wifi is far more helpful for most growing companies. Companies can also consider providing VPN solutions to help when wifi network security isn’t guaranteed.
Information management (or access control). Information management aims to make sure people are who they say they are, and that they have the appropriate access. A simple example is: who is invited to specific channels within Slack, or who has access to company data and/or tools? Access control can become significantly more complex for larger, enterprise companies, but for growing remote organizations, what matters most is to make sure people only have access to tools and data that they explicitly need to do their job.
Cloud-based storage. Employees shouldn’t be storing sensitive information on their own devices. Thanks to the widespread availability of cloud services, this is much easier than it used to be. Using tools like Google Suite, Docusign, Dropbox, and similar services—with appropriate information management and access controls—allows remote workers to access documentation and data they may need without storing it locally.
Write it down. Document what your data privacy and security measures are, making sure it’s included in your onboarding material and company handbook, and revisiting these policies with everyone at a cadence that makes sense for the growth of your company.
HIPAA, ITAR, PCI-DSS, GLBA, SOX, ISO 9000, et cetera.
Why these can be important (for example, to get certain customers you might need documentation or certification)
Physical security (perimeter, MFA, biometric, et cetera.)
Further Reading on Data Privacy, Security, and Compliance
Accessing pools of talent outside your home country is one of the more appealing aspects of remote work for companies, especially when considering the U.S., where competition for talent is fierce. Being remote-friendly enables companies to cast the widest possible net to find the people they need. This can allow you to hire people at comparable wages outside the competition pools with large companies in expensive urban centers, which can help change people’s lives for the better and bring more mobility and opportunity to underserved communities. Additionally, if your company is aiming to expand into new markets, hiring locally means bringing in people who live and work in the region, who are more likely to know their market incredibly well.
This sounds great on paper, but the reality is far more complex. Hiring internationally means weighing nearly the entire list of considerations from the previous section on U.S. employees, and having to solve for all that in every new country.
importantWhile U.S. companies can hire from any state without needing a physical presence there, it’s not so straightforward internationally. If you aren’t incorporated in a given country, then you can’t hire someone as a full-time employee.
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