Employers are recruiting and employing talent from anywhere. Employees are working remotely from home or in hybrid settings across different teams. Employers operating across many jurisdictions should take extra precautions to avoid compliance risk.
Why Multi-State Compliance is So Complex
Multi-state compliance is so complex because of the layered regulatory structure: federal, state, and local laws working simultaneously. Additionally, state autonomy creates inconsistencies that employers must actively manage. Employers are commonly caught off guard around these friction points:
- Wage standards
- Leave entitlements
- Payroll and tax rules
The risk of assuming one-state policies (such as the state where the employer operates in) scales nationally and creates a lot of problems down the line.
The Highest-Risk Compliance Areas for Multi-State Employers
Worker Classification Across Jurisdictions
Generally, you must withhold and deposit income taxes, Social Security taxes, and Medicare taxes from the wages paid to an employee. There are two tests for classifying employees. The ABC test and the economic realities test.
The ABC test assumes that a worker is an employee unless all the following below are true:
- Is the worker free from the control of the company by a contract or agreement and in practice?
- Is the service performed outside the usual business for the worker?
- Is the worker engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed?
The economic realities test is used to determine whether a worker is economically depending on the employer or is in business for him or herself and is an independent contractor.
According to the IRS, misclassifying an employee as an independent contractor could hold you liable for employment taxes for that worker.
Wage & Hour Variations That Trip Up Employers
Minimum wage varies between federal, state, and even local levels. The federal minimum hourly wage is $7.50 and has not increased since 2009. Be mindful that, depending on where an employee is, the minimum wage may be higher.
About overtime rules, some states have differing laws. The federal law governing overtime is the Fair Labor Standards Act (FLSA). It entitles nonexempt employees to overtime wages when they work more than 40 hours in a workweek. Some states have their own employment and overtime laws, while others follow the FLSA.
Regarding the length of a meal and rest breaks, it varies by state. Search the U.S. Department of Labor website to understand the minimum length of meal periods required under state law.
Hiring and Onboarding Requirements for Remote Employees
When hiring and onboarding remote employees, there may be state-specific background check and drug testing regulations you may have to be in compliance with. For example, several states restrict consumer reporting agencies from reporting convictions in more than seven years.
State laws vary when it comes to conducting drug and alcohol testing in the workplace or as pre-employment screening. Do not assume that where your company is headquartered determines the law as it relates to drug testing.
The I-9 form verifies a new hire’s identity and work authorization for employment in the U.S. All employers are required to complete an I-9 form for each individual they hire, including citizens and noncitizens. For remote hires, expect the following challenges:
- Verifying documents virtually. The traditional I-9 process requires employers to examine employee documents within three business days of hire physically
- Increased risk of errors
- Navigating state and federal regulations
Federal law requires employers to report basic information on new and rehired employees within 20 days of hire to the state where the new employees work. Some states may require it sooner.
Leave, Benefits, and PTO Administration
The Federal Family and Medical Leave Act (FMLA) entitles eligible employees to take unpaid, job-protected leave. Where an employee lives can determine whether they qualify for paid family and medical leave programs from their state.
Where paid sick leave is concerned, there is no federal mandate that requires employers to give all employees paid sick leave. As usual, requirements vary by state and local jurisdiction.
Upon an employee’s departure, some states make it mandatory for employers to pay their employees the value of their unused time off as wages. In other states, companies are not required to do so.
Payroll and Taxes
For each state in which your business has a work location, you will be required to withhold state income tax. For each extra state in which your employees are working, you will need to state if you want to withhold state income taxes for that state.
Local tax considerations such as double taxation risks, sudden rate increases, expansion pitfalls, and penalties and interest, are common pitfalls that are overlooked.
Building a Compliance-First Multi-State Workforce
Centralize Strategy, Localize Execution
Avoid falling out of compliance by creating standardized policies with state-specific addenda. Establish ownership and accountability for compliance oversight. When managers and employees are on the same page, you can stay ahead of any compliance fall-outs.
Use Technology to Reduce Human Error
Technology can be an employer’s biggest asset in reducing errors. Use multi-state payroll and human resource information systems to take the stress out of managing employees. Setting up automated compliance alerts and reporting can keep you ahead of changes in labor laws and keep you from falling out of compliance. Securing document management keeps you organized and ready for any potential audits.
Equip Managers and Employees with Clear Guidelines
When your teams are in the know, they are better suited to keep the business running. Train managers on state-level employment differences to make sure they stay in compliance while on the job. Additionally, providing remote employees with clear compliance rules sets reasonable expectations. Review policies with employees and provide updates to ensure that you are communicating your commitment to compliance.
Partner with Workforce and Compliance Experts
While it may seem beneficial to keep many of these compliance roles in-house, partnering with experts can reduce risk. Employment Enterprises navigates multi-state regulations, reduces administrative burden, and scales compliance workforce solutions efficiently.
Managing Risk in a Borderless Workforce
Multi-state compliance is complex – but manageable with the right approach. Employers who invest in systems, expertise, and proactive planning can stay ahead. Think of compliance as a strategic advantage instead of a legal obligation. Don’t be reactive – assess your multi-state compliance readiness before something goes wrong.