Remote and Hybrid Employees: Navigating the Legal Challenges for Nonprofits

It’s been six years since a global pandemic transformed the employment landscape for nonprofit organizations by cementing remote and hybrid work arrangements as an industry norm. While remote work presents many benefits relative to reduced real estate footprints, more manageable overhead costs, recruitment and retention advantages, and the promise of a better work-life balance, it also grafts expansive compliance obligations onto employers, which must comply with dozens (even hundreds) of employment laws in the various jurisdictions in which their employees reside and work.

This article addresses legal, compliance, and practical issues and challenges facing a multi-jurisdictional nonprofit workforce. Note that this article is limited to domestic and not international jurisdictions; employing workers in internal jurisdictions poses a series of significant additional compliance obligations.

State Laws

In most instances, the laws in the jurisdiction from where a remote employee principally works will govern the employment relationship. Employment laws vary from state-to-state and municipality-to-municipality.

1. Business Registration: All states require “foreign” (not incorporated in the state) corporations to register to do business in the state. Each state has different guidelines about when “physical presence” triggers state registration requirements, but, generally, having a remote employee in a state will trigger such a registration obligation. Businesses that do not establish a physical presence in a specific jurisdiction still may need to register as an employer in that jurisdiction in order to satisfy state payroll taxation requirements.
2. Taxation: Businesses that employ remote workers may need to pay (and withhold and remit) taxes to foreign states. Certainly, payroll deductions will be specific to the location from which each employee resides and principally performs their work. Employers also may need to fund a state’s unemployment insurance, disability insurance, and/or workers’ compensation programs, or, in some instances, contribute to a state’s paid-time-off-programs, as is the case in Maine, which levies a payroll tax on both employers and employees to fund its paid family and medical leave bank.
3. Employee/Independent Contractor Classification: While all nonprofit employers are subject to the U.S. Department of Labor’s worker classification guidance under the federal Fair Labor Standards Act (“FLSA”)[1] and IRS worker classification guidance, employers also must abide by the worker classification laws in each state where remote workers reside. Some states have adopted the Department of Labor’s Economic Realities Test; others have adopted the IRS Common Law Test, the ABC Test, or variations of these tests. For example, Minnesota evaluates worker classification based on behavioral control, financial control, and the relationship of the parties, as evaluated against roughly 20 factors. Employers must take care to comply with both federal and state laws when classifying employees and independent contractors. Improper classifications can result in statutory fines, back taxes and benefits, and other penalties.
4. Minimum Wage and Overtime: As with worker classification laws, all employers must comply with FLSA regulations on minimum wage and overtime pay. In addition to complying with the federal regulations, employers also must adhere to state minimum wage and overtime laws, which tend to be more employee-friendly than federal law. Each state sets its own minimum wage and rules on overtime pay. Vermont, for example, sets the minimum wage at $14.42/hour, nearly double the federal minimum wage of $7.25/hour. Employers must pay employees at or above the minimum wage set in the employee’s principal locality, all the while being mindful that certain municipalities set the minimum wage even higher than the state. California, for instance, requires non-exempt employees to be paid overtime at time-and-a-half for all hours worked over eight hours in a day, whereas most states and federal law require the payment of overtime pay for hours worked over 40 in a week. In addition, employers should be mindful of how minimum wage differences between and among the states may impact the optics and fairness in an organization’s otherwise neutral salary administration policy. Finally, hybrid employers that require non-exempt employees to travel to and from headquarters should evaluate state laws carefully to discern whether non-exempt employees may be eligible to be paid wages (and overtime pay, if applicable) for travel time between their remote work location and headquarters.
5. Expense Reimbursement: Some states such as California have enacted laws that require employers to reimburse remote employees for certain expenses related to remote work, such as reimbursement for a portion of cell phone and internet plans. Again, in addition to regulatory compliance, an employer should consider how differential treatment with respect to expense reimbursement may impact staff morale, even if a legitimate business reason (e.g., compliance with the law) supports the differential treatment.
6. Leave Accrual: Several states regulate sick leave and PTO accrual, setting minimum thresholds for accrual, rollover, and payout upon termination. While it is fairly easy to set accrual levels at the most generous rate without financially burdening the employer, internal policies must be styled carefully in remote and hybrid work contexts. Most notably, some states such as Colorado prohibit “use-it-or-lose-it” policies. In these states, while employers can cap accrual, they cannot cap rollover or payout upon termination, and any policies to the contrary will not be enforceable. Employers must be able to square their leave policy with all applicable state laws where their employees reside and work.
7. Paid and Unpaid Leave: All states have different laws with respect to paid and unpaid leave. Colorado, for example, entitles employees to jury duty leave, election leave, National Guard leave, Civil Air Patrol leave, and emergency responder and natural disaster leave, among other things. The District of Columbia entitles employees to bereavement leave, paid sick leave, jury duty leave, and family and medical leave, among other things. Other common leave includes organ and blood donation leave, school activities’ leave, election officer leave, and crime victim or domestic violence leave. Some states require paid leave in certain circumstances, such as Alabama, which requires employers to pay full-time employees their normal wages while responding to a jury summons or serving jury duty. Other states, such as Mississippi, do not, though both federal law and Mississippi state law require employers to provide unpaid leave in certain circumstances. The myriad of state laws governing paid and unpaid leave is among the most complex aspects of establishing and maintaining a legally sound remote work compliance program, especially considering that this sampling does not take into account additional laws specific to various municipalities, such as Montgomery County, Maryland, which affords even greater leave benefits to employees.
8. Discrimination and Harassment: While federal law prohibits discrimination and harassment based on certain protected classifications, some states have expanded protected classifications. For example, 27 states have enacted “Crown Laws,” prohibiting discrimination or harassment based on hair texture and hair styles. Other states prohibit discrimination based on homeless status or status as a victim of domestic violence. The District of Columbia prohibits discrimination on the basis of matriculation status. Several states require employers to furnish various notices to employees related to discrimination and harassment, as is the case in Illinois, which requires employers to furnish a notice about how to file a discrimination claim under the Illinois Human Rights Act.
9. Workplace Training: Some states mandate certain workplace training. For example, California requires employers with five or more employees to provide bi-annual sexual harassment prevention training, with different requirements for supervisory and non-supervisory employees.
10. Miscellaneous Law: States also regulate criminal background checks, workers’ compensation, restrictive covenants (e.g., noncompete and non-solicitation provisions), inquiries as to salary history, personnel file access, record retention, matters related to severance agreements, and more. A sound compliance program must take into account all relevant state (as well as local and federal) laws.

While, in most instances, the state and local laws of a remote worker’s primary work location govern the employment relationship, that is not true in all instances. As one example, if a small employer (2-19 employees) is headquartered in the District of Columbia, D.C.’s mini-COBRA law will apply to remote employees who reside outside of the District.

Whether state laws apply to hybrid work arrangements will depend on the time allocated to remote work relative to the time allocated to work at an employer’s physical headquarters, as well as any nuances in state law. Generally, employees who spend the majority of their time working from a remote location will be subject to the laws of their home jurisdiction.

Practical Advice

While remote work offers great benefits, employers must pursue such engagements with great thought and care, devoting attention both to legal compliance and practical challenges that may arise in remote and hybrid work contexts. In so doing, employers should consider the following practical advice:

1. Audit employee and independent contractor work locations. Audit the primary work location and residence of all employees. Maintain a comprehensive list of states and municipalities where your organization employs workers and/or engages independent contractors.
2. Audit and evaluate worker classifications under relevant state laws. Presumably, nonprofit employers have classified independent contactors and employees consistent with the U.S. Department of Labor’s Economic Realities Test and the IRS Common Law Rule. As an extra and necessary precaution, evaluate each worker against the relevant state law too, and document determinations.
3. Evaluate employee handbooks against state laws. Once you obtain a comprehensive list of remote work jurisdictions, engage counsel to review the organization’s employee handbook for legal form and sufficiency.  Counsel can work with you to style policies that satisfy requirements of multiple jurisdictions, or where that is not possible or advisable, to include riders specific to certain jurisdictions.
4. Establish compliance infrastructure. Make sure you have the infrastructure in place to manage multi-jurisdictional compliance. Checks and balances should be implemented to ensure that “foreign” business registrations do not lapse. Revised job descriptions should be audited on a periodic basis to ensure compliance with worker classification laws. Human Resources must furnish required notices on an annual basis, or on whatever timeline is established by state or municipal law. Your payroll provider must supply appropriate tax forms to new hires and properly deduct state and local taxes. This is merely a sampling, but an effective compliance program must be supported with an appropriate infrastructure. 
5. Establish residency requirements: Require employees and independent contractors to obtain prior approval before relocating to a new statutory jurisdiction. This will enable the employer to evaluate whether it is equipped to comply with the laws of the “foreign” jurisdiction, and with that information, make an informed decision about whether it wants to approve or deny the request. Note that it is generally permissible for employers to prohibit its employees from working remotely from certain jurisdictions, so long as such prohibitions are imposed on an objective, consistent, and non-discriminatory basis. Further, limit the duration in which an employee can remotely work from a different jurisdiction. Consider, for example, an employee who requests to work from an international location for two months. Here, you must take care to ensure that a casual decision does unwittingly subject the organization to the business registration and taxation laws of the foreign jurisdiction, which, in some instances, may trigger in a matter of weeks.  
6. Consider non-legal implications of remote work. In addition to legal compliance, employers should think carefully about core work hours (especially where remote workers reside in different time zones), data security, remote work expectations (e.g., dress code, distraction-free environment, video camera expectations), concurrent childcare and eldercare responsibilities, and effective management and engagement strategies for remote workers. Consider adopting and enforcing a remote work policy that addresses these matters.
7. Review insurance coverage. Contact your insurance broker to confirm that the organization has appropriate insurance coverage for claims specific to remote and hybrid work (e.g., state employment law claims, cybersecurity attacks in remote jurisdictions, etc.).

While remote and hybrid work arrangements present many desirable benefits, employers must be careful to structure such relationships in a legally sound manner while accounting for some of the practical complexities that may arise in remote and hybrid work environments. A thoughtful, reasoned approach can nurture a healthy and productive culture, satisfy compliance obligations, and prevent problems in the future.

By: Holly Peterson, Tenenbaum Legal