Hybrid work strategy: Employment and tax compliance

WfA Blog 6: Employee Tax Compliance
 

By Michael Clarke, Reem Janho, and Kalpita Ainapure

Many organizations are now recognizing that remote and hybrid work is here to stay and must be a part of their talent strategy in order to attract and retain high-caliber talent. Almost 70% of executives recently surveyed by Deloitte¹ noted that they plan on implementing some kind of hybrid model or plan to remain fully virtual. Based on recent trends related to the “Great Reset” in the employment market, employees across all industries are expecting their employers to lean into a remote or hybrid work strategy.

As organizations adapt to this “new normal” of having on-site, hybrid, and remote workforces, it is critical that they understand the employment and tax compliance aspects of managing and retaining remote and hybrid workforces. In this article, we will discuss steps and considerations that organizations should understand as they look to develop sustainable remote and hybrid work strategies.

Set up a cross-functional governance structure

At many organizations, HR is the primary driver of remote and hybrid work strategy across the enterprise. While this is not uncommon, it is imperative that additional stakeholders, such as Legal, Tax, Compliance, HRIS, Payroll, and Finance, be included in the strategy development and implementation process to ensure that cross-functional considerations are being evaluated. When allowing employees to work in a remote or hybrid environment, there are specific employment regulatory and tax implications that organizations must understand to be able to compliantly administer and operationalize the program.

Define the “worker categories”

Next, it is important to define clear worker categories your organization will have when it comes to a remote work strategy. These worker categories should be developed by considering the following:

• Program eligibility: Determine which workforce types will be eligible for remote and hybrid work, including exempt and non-exempt employees, full-time and part-time employees, third-party contractors, etc. It is important to understand the various employment regulations that may apply with allowing each of these workforce types to work from a remote/hybrid environment (e.g., nonexempt employees in many states are allowed meal and rest breaks during the workday).
• Nature of work: Identify what types of roles and work can be completed off-site and does not require any specialized equipment. The criteria should be objective, based on legitimate business reasons, and applied consistently to avoid claims of illegal discrimination and/or retaliation.
• Plan for change: Organizations should establish room for flexibility early in the program so that changes in worker category, pay structure, or other adaptations to an employee's status can be addressed efficiently and consistently.

Identify your employee geographic footprint

During the pandemic, many organizations asked a majority of their workforce to work remotely without putting the appropriate guardrails in place to track or manage where the employees were located. This resulted in employees shifting cities, states, and even countries without informing or requesting permission from their employers.

Employee-initiated relocations without informing or prior approval from the employer poses a whole host of employment and tax issues for the organization. Regardless of where the employer is located, the employment regulations of the locations where they have remote employees are working from apply (e.g., wage and hours variations, workers’ compensation, remote work stipends, and leave of absence/time off differences). There are also tax compliance and operational implications to consider which include corporate tax obligations, payroll tax, and payroll registration and reporting requirements.

Given this, it is not only important to understand where employees are located as they work remotely, but employers must also maintain an ongoing knowledge of the governing rules and regulations of those locations. To avoid employment and tax risk exposure, employers can put the following strategies into place:

• Limit the locations from which employees can work (i.e., restrict states with heavy regulations if there is no existing or desire for employer presence, such as California or New York)
• Require employees to submit an employee-initiated relocation form which requests employer approval to shift locations
• Limit the length of time that employees can work outside of their declared work location

Develop a clear policy and tools for implementation

In order to develop a sustainable remote work program, organizations will need to set up appropriate program guardrails through a clear and comprehensive remote work policy that clarifies eligibility, geographic footprint limitations, approval requirements, and employee and manager expectations. The remote work policy will serve as the bedrock for the overall remote work program.

Organizations should also conduct a top-down review of interdependent policies and procedures to make certain that they adequately support the needs of their remote and hybrid employees. Many of these policies may have been developed pre-COVID and may be geared only toward an on-site workforce. The interdependent policies and procedures include:

• Expense Reimbursement
• Wage and Hours
• Hiring and Onboarding (e.g., Form I-9 verification)
• Performance and Talent Management
• Travel and Entertainment
• Workers’ Compensation
• Leaves of Absences
• Privacy and Data Security
• Payroll

These policies and procedures should be updated to include any guidance specific to the remote and hybrid workforce and should be referenced within the main remote work policy. In addition, to achieve this at scale it will also require technology that provides organizations with the ability to collect, process, and analyze a large amount of data and assess compliance risks real-time.

It is leading practices that organizations develop an agreement between the remote employee and the employer acknowledging that the remote/hybrid employee understands their expectations and confirms that they will abide by the remote work policy and the interdependent policies. The agreement should specify the employee’s remote work locations, work hours expectations, and on‑site work expectations. Organizations should also review and refresh job descriptions and employment contracts for current and new hire employees to clarify remote work expectations.

After developing a remote work policy and refreshing existing workforce policies, employers should communicate these policies to the workforce, and develop tools and training to support managers with program compliance. The training and tools for managers are critical in avoiding instances of employment discrimination as a result of unconscious bias.

Sources:

1. 2021 Return to Workplaces Survey (Deloitte), April 2021

Contributors:

1. Michael Clarke
2. Reem Janho
3. Kalpita Ainapure