In March 2020, work trends changed dramatically. As a result of the global COVID-19 pandemic, millions of Americans were forced to work from home. While employers believed a remote workforce would result in a decrease in productivity, studies showed the opposite occurred—productivity increased with the rise in remote work. Recognizing the productivity increases, companies sought to cut their biggest overhead cost—office space—by allowing employees to continue to work from home in the post-pandemic era. It is clear remote work is here to stay, and employers must be conscious of how a remote workforce will affect their compliance with state and federal law. Remote work implicates tax laws, wage laws and intellectual property laws, to name just a few. It is incumbent on employers to understand the legal implications of remote work and implement appropriate safeguards to ensure compliance with state and federal law. 

With respect to tax laws, employers are required to withhold and report income tax at both the federal and state levels. Remote work can create unique tax withholding and reporting issues, especially when employees work remotely in a state that is different from the location of the employer’s headquarters. 

In a traditional workplace, all employees congregate in one central work location, and the likelihood is that employees all reside in proximity to the workplace, within the same state. In this scenario, an employer withholds state law income tax according to the rules of the single state where the employer has its headquarters, which is also the state where its employees reside.

The tax rules are more complicated, however, when employees reside in a state that is different from the location of the employer’s headquarters. The complications stem from the fact that each state law is different with respect to withholding and reporting state income taxes. Generally, state law income tax rules do not correlate to the place of the employer’s principal headquarters. Instead, states require withholding and reporting of state income taxes if:
(i) an employee is performing services in the state for more than a nominal amount of time or
(ii) an employee is a resident of the state. Further complicating matters, each state has its own unique rules about when withholding and reporting are required.

For example, six states have adopted a “convenience of the employee” rule. Under this rule, if an employee works within a state for their own convenience (as opposed to the employer’s convenience), then the employer has an income tax withholding obligation, even in the absence of any other business activity within the state. Some of these states require a prolonged or continuous period of time that the employee must perform services in the state, whereas other states (e.g., New York) require withholding and reporting if an employee performs services in the state for a single day. Other states ignore services altogether and focus solely on whether an employee is a resident of the state. Residency requirements vary by state and depend on length of time spent in the state within the year, whether the employee maintains a home within the state, intent to remain within the state and how many previous years the employee spent in the state.

In short, the various tax rules invoked by employees working remotely across state lines requires careful analysis of relevant state laws, in order to determine an employer’s withholding and reporting requirements. Employers that find themselves in this situation should engage employment and tax counsel to ensure proper compliance with these rules.

With respect to wage laws, the Fair Labor Standards Act (FLSA) requires an employer to pay its employees for all hours employees are “suffered or permitted” to work. This means employees are entitled to compensation not just for their scheduled hours but also for time spent working outside their scheduled working hours if the employer has reason to know that the employee is working extra time. Furthermore, the FLSA requires employers to maintain accurate time records, and, if an employer fails to do so, presume the employee’s time records are accurate. Put simply, if an employer does not have accurate time records and/or established policies for reporting off-the-clock work, the employer risks violating the FLSA.

The remote workforce further complicates the issue, as most employers have difficulty tracking hours worked from home. In recognition of this, the Department of Labor recently issued guidance encouraging employers to implement at-home, time-tracking measures; exercise diligence in continuously tracking at-home hours; and incorporate procedures for reporting time that has not been properly tracked. In short, employers that allow employees to work from home must start taking steps to accurately track at-home time to avoid violations of the FLSA.

Finally, with respect to proprietary business information and trade secrets, working from home may result in the loss of trade secret protections for those employers who don’t take steps to protect their confidential business information. Intellectual property is, by law, protected property, such as trade secrets, confidential or proprietary information, copyrightable or creative works, ideas, patents or inventions.

For example, the federal Defend Trade Secrets Act (DTSA) provides a private right of action against employees who misappropriate trade secrets. The DTSA defines “trade secret” as all “financial, business, scientific, technical, economic or engineering information” that (1) has an independent economic value from not being known and (2) the employer has taken reasonable measures to protect. In the work-from-home era, the crux of that inquiry is what steps employers are taking to protect that information.

Does the employer allow employees to possess confidential information without a confidentiality agreement covering at-home use? Does the employer allow employees to use their personal computers to create and/or modify proprietary data? Does the employer allow employees to use their personal email to disseminate proprietary data? Does the employer allow proprietary business to be discussed on an open Zoom call? If the answer to any of these questions is yes, the employer may lose trade secret protections.

In a recent trade secret case, a Delaware Court of Chancery ruled that in a trade secret claim, plaintiff did not take reasonable steps to protect its trade secrets when it failed to incorporate Zoom privacy and security features and disclosed its confidential and proprietary business strategies on an open Zoom call. The court emphasized the importance of the fact that any trade secrets the defendant allegedly misappropriated were disclosed during open Zoom calls that were not protected by Zoom’s privacy and safety features. This case emphasizes the need for employers to update their policies and procedures to ensure their pricing, customer lists, financial data, etc., are protected.

Again, these are just a few of the many examples of the potential legal pitfalls of having a remote workforce. Employers that desire to maintain a remote workforce should consult employment and tax counsel and audit their policies and procedures to ensure they are compliant with state and federal law.