As we continue to examine the effects of the COVID-19 pandemic on work life, let’s take a closer look at compensation issues related to managing a remote workforce. If your business allowed employees to work from home during the pandemic, are you now planning to make the arrangement more permanent? How will that impact employee salary—will it be based on the cost of living at your business location or where each employee lives? How will skill, position, and merit factor into compensation decisions? In this article, we’ll take a look at compensation trends as well as payroll tax implications when supporting a remote workforce.

Now that we’re almost a year into this pandemic-forced work-from-home experiment, there is something to celebrate for both employers and employees. When working remotely, employee performance and productivity continued to hum along and in some cases even improved. As a result, surveys find that a majority of office workers would like to continue working from home at least one a day week once the pandemic ends and many employers support the idea. 

Several big technology companies including Microsoft and Facebook have announced their plans to implement a work-from-anywhere policy that gives employees the option to work from home at least part of the week. Excited by the prospect of permanent work from home options, some employees are relocating from expensive regions like the San Francisco Bay Area and New York City to more affordable suburbs and even rural areas. While this is happening, employers are looking more closely at remote worker compensation policies based on location.

Should compensation be affected by location?

The old adage “it’s all about location, location, location” is alive and well. Facebook announced in May 2020 that employees who work remotely but elect to move will be paid based on their new location. To employers, the step seems logical since they typically pay the local rate for labor costs. In one example, a company said it would lower pay by as much as 18% if an employee moved from Palo Alto, California to Denver, Colorado. 

Other tech companies have followed a similar strategy. For example, Microsoft is planning for its future “hybrid workplace” where employees can work from home as long as it doesn’t exceed half their work week or can work fully remotely if they receive approval from their manager. However, there are conditions for choosing the fully remote option: the company will pay home office expenses but will not provide compensation for any relocation costs. 

In general, employees aren’t thrilled about salary reductions due to location-based pay. In a recent survey, almost half of employees thought they shouldn’t have to take a pay cut if they move somewhere cheaper. 

Cost of labor considerations

If employers choose to pursue the cost of labor model for remote workforce compensation, there are other important things to consider in order to maintain a happy and productive workforce. Forward-thinking businesses will have to overcome the following challenges:

• Pay equity. As workers relocate, employers may be faced with inequities where some employees are getting paid much more for the same responsibilities simply based on location. Employers need to find a way to be fair and consistent with salary adjustments. Consider freezing pay rather than making a cut, “telling employees they are no longer eligible for raises because they are at the top of their pay range for their location.”

• Employee communication. If your business decides to reduce salaries, it’s important to be transparent—and it may be easier for employees to accept if it’s based on financial concerns as opposed to a desire to find cheaper talent. However, some employees are simply not going to accept a pay cut and employers will have to be prepared to deal with potential departures.

• Skill and performance evaluations. Some skills may be hard to find or always in demand. Employers may need to adopt a different compensation strategy in order to bring on or retain top talent with ultra-competitive skill sets. Regardless of the employee’s office location, employers will want to incentivize leadership, innovation, and productivity with performance pay. So, employers will need to find new ways to evaluate performance in light of the shift to remote work. Consider how the quality of unsupervised work can be measured objectively in a way that is consistent for employees at the same level.

Payroll tax implications for a multi-state, remote workforce

Along with your compensation strategy, employers also need to be mindful of state tax implications for their remote workforce. There are more than 11,000 tax codes in the US. In order to maintain compliance, every employer must know where employees live and work, maintain a library of resources for each taxing authority affecting your workforce, understand where to file, and be able to follow an accurate payment schedule. 

As many employees changed the location of where they work during the COVID-19 pandemic, payroll tax nexus has become a critical issue. More than half of states have passed some legislation to address it in the short term. The National Law Review also points out that as employers consider extending work-from-home policies, businesses need to understand “how nexus determinations will evolve over the coming months and years…[and] be mindful of nexus guidance published by states in which they have employees working remotely.” 

What is payroll tax nexus?

For remote employees, the location of the home office determines the place of work. When an employee works in one state but your business is in another, employers must collect applicable taxes for that employee where the employee resides. Each state has their own definition of a resident and it’s important to understand your obligations before quarter- or year-end. Some states have reciprocal agreements so every business should check, double check,
and ask for help from a CPA or other tax expert to ensure compliance and avoid costly penalties.

Learn more about multi-state payroll challenges

There’s no question that multi-state payroll issues are challenging. Learn more from Asure’s tax experts when you watch the webinar, “Multistate Payroll Tax: Compliance with a Remote Workforce.” You’ll get tips to navigate multi-state payroll tax complications with your remote workforce and learn how to set up accurate taxation for payroll and year-end reporting.