Remote work has increasingly become the norm — in fact, it is at an all-time high. Between 2019 and 2021, the number of people primarily working from home tripled from 9 million to 27.6 million. For many, it was unexpected just how strongly the pandemic would impact the commuting landscape in the United States.
Regardless of work-related circumstances, it is integral to employment law compliance that an employee is governed by the correct state’s laws. An influx of employees switching to remote and a confluence of other complex factors muddies the waters. This shift alone poses unprecedented challenges for absence management professionals.
Consider an employee named Sarah who works remotely from her home in Wisconsin for a tech company. Sarah’s supervisor, Barbara, works from her home in California. The company operates as a remote-only organization and has no physical headquarters. What, then, is Sarah’s work state? Wisconsin? California, where Sarah’s supervisor directs her services from? Or none of the above? The answer is complicated.
Why work state matters
Each state has different laws and requirements around unemployment, payroll taxes, workers’ unemployment and other employment law issues. Each worker must comply with their applicable state laws.
In 2004, the U.S. Department of Labor’s employment and training administration advisory system updated localization of work provisions, or principles for determining where wages should be reported when work is performed entirely in one state or in a number of different states. “Localization of work” provisions are additional provisions of states’ unemployment insurance (UI) laws.
This was the first update since guidance for interpreting state provisions on “localization of work” was issued in 1952 — spurred by seismic employment shifts including the advent of the internet, and the September 11, 2001 terrorist attack that required temporary mass-relocation to New Jersey.
Determining an employee’s work state
In general, under state unemployment laws, workers’ wages are reported to the state where the work is performed, and the laws of that state govern. For Sarah, that would mean Wisconsin. But much of the time it is not that simple.
Though states utilize various approaches in making this determination, many use the unemployment of localization of work (ULOW) test, in which an employer answers questions about whether an employee’s service is “localized” in a specific state.
A service is “localized” within a state if it is either performed entirely within a state, or performed both within and outside the state, but services outside of the state are temporary, transitory in nature or consists of isolated transactions. If true, the employee’s service is localized in that state, and that is their governing work state. However, if the above is not applicable, a work state determination must still be made. The following questions then must be applied in this order:
- Is any part of the service performed in the state in which the company’s base of operations is sited?
If not,
- Is any part of the service performed in the state from which the service is directed or controlled?
If not,
- Is any part of the service performed in the state in which the employee lives?
Let us utilize this test considering the opening scenario: Tech firm employee Sarah, a Wisconsin resident, and receives all her work assignments and products via internet communication from her boss, Barbara, in California.
No,
- the company is fully remote and has no base of operations.
No,
- no part of Sarah’s services are performed in California, the state from which the service is directed or controlled.
Yes,
- Sarah is performing all employment duties in Wisconsin, the state she lives in. Despite her supervisor being based in California, Sarah’s work state is Wisconsin, and her employment is subject to Wisconsin law. All wages from the date she began telecommuting from Wisconsin should be reported to Wisconsin.
Important considerations
Determining an employee’s work state may not work the same way if a request for leave under the Family and Medical Leave Act (FMLA) is involved. The law has specific guidance for evaluating whether an employee’s residence officially constitutes a work site.
Under FMLA, in the case of an employee who reports to, or receives assignments from, a different location, their personal residence is not a work site. Instead, it would be the state in which his/her assignments come from. In tech employee Sarah’s case, her work state would be that in which her boss is located — California.
It is the employer’s responsibility to thoroughly review their processes around determining an employee’s work state and ensure its accuracy to avoid residual effects for both parties down the line. Employers should carry out a comprehensive review, particularly if none have occurred since the pandemic shifted the workplace landscape.
This content was originally published by the Disability Management Employer Coalition (DMEC) as part of the Absence Matters column.
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