What Employers Need to Know About Out-of-State Hiring

Remote working and remote hiring have been gaining popularity over the last several years, but this trend accelerated heavily in response to COVID-19 restrictions and associated retention and hiring challenges.

Considering Out-of-state employees is a great way to expand the available talent pool and can even help bring representation of your business into new areas. However, for each new state you hire from, there are different laws and regulations that need to be followed. When you hire an out-of-state employee, you must be sure to comply with that state’s specific requirements governing the hiring process, payroll, taxes, human resources, workers’ compensation, and so much more. Below is a detailed guide on what employers need to know about out-of-state hiring.

Before Hiring Out-of-State Employees

When considering hiring employees outside of the state you primarily do business in, you must first register to do business in the new state. This includes filing to perform business operations as a “Foreign Qualification” with that state’s Secretary of State, registering for a State Unemployment Tax Act (SUTA) account in that state, and securing a State Employer Identification Number (EIN) for that state. You may also want to consider hiring a registered agent in that state, as many state agencies will only send documents to physical addresses within the state.

Each state sets their own tax rates and requirements, and before you hire your first out-of-state employee it’s crucial to ensure that your company will be correctly distributing taxes on their behalf. Typically, you’re only required to withhold state income tax in the state in which the employee is working, although regulations vary depending on the state. Be sure to research the state tax requirements for the states you are hiring in, and check to see whether or not any reciprocal tax agreements apply.

In addition to Federal unemployment taxes, each state has their own separate unemployment tax program with their own varying rates, requirements, and registration processes. Similar to unemployment taxes, every state (except Texas) has their own mandatory workers’ compensation tax system. There may also be other tax-related requirements to consider including State Disability tax, or taxes related to Paid Family and Medical Leave.

There also may be additional licenses, permits, or certifications required in the state or on a city, county, or municipal level, depending on the scope of work being performed. It’s important to research all of the requirements down to the most local level to ensure your remote work relationship is in compliance.

Next Steps for Hiring Out-of-State Employees

Once your business is registered in all of the necessary ways, you can begin hiring employees in that state. Every part of the hiring process, from the job listing and offer of employment to the orientation and training must be compliant with the new state’s laws and regulations.

While your hiring process likely already adheres to federal Equal Employment Opportunity Commission (EEOC) regulations, there may state-specific nondiscrimination laws to follow as well. For example, asking about a candidate’s criminal history before extending a conditional job offer is against the law in several states as well as in Washington D.C. Each state also has their own various laws regarding checking references and doing background or credit checks and drug testing.

When onboarding your out-of-state employee, it’s important to ensure that documentation and recordkeeping requirements for the new state are being met. Some states require specific forms to be submitted for each new hire which often need to be completed within a certain time frame and stored in a specific way. There may also be training requirements that need to be completed within a certain amount of time from onboarding as well.

Wages for Out-of-State Employees

Many different states and municipalities have their own wage and hour laws, as well. These laws govern minimum wages, how often you must pay your employees, how often your employees must be provided with rest breaks and meal breaks, how many days employees can work consecutively, and even what information you must include on the employee’s pay stub.

Laws regarding different types of leave also vary widely depending on the state. While all employers in the US have to at least adhere to the federally mandated Family and Medical Leave Act (FMLA), some states have more generous leave requirements. In addition to family and medical leave, employees in other states may also be entitled to paid or unpaid leave for a variety of situations including sickness, voting, jury duty, bereavement, and more.

Benefits for Out-of-State Employees

For standard benefits, which include health, dental, and vision insurance, your broker only needs to be licensed in the state you are headquartered in. However, if you’re offering additional voluntary benefits to out-of-state employees, your benefits broker must be licensed in whichever states you have employees enrolling in those additional benefits. This includes Workers’ Comp insurance, which is mandatory every state except Texas – and in some states the coverage must be purchased directly from the state in which the employee is located.

Managing an Out-of-State Remote Employee

Different states also have different laws regarding employee communications, policies, handbooks, and notification requirements. Any mail or virtual communications must be in compliance with those laws, and requirements such as posters, handbooks, and informational sheets must be made available virtually and easily accessible.

If it’s your first time hiring a fully remote employee, there are also a number of considerations to make regarding equipment, remote work agreements, data security and more. You can read more about this topic in another blog post here.

Labor laws are constantly changing, and though most new laws go into effect at the beginning of the calendar year, they can sometimes go into effect mid-year, or immediately upon being signed into law. It’s crucial to stay up to date on legislative news for any state you have employees working in.

Conclusion

Hiring an out-of-state employee isn’t something to be done hastily. It takes a lot of preparation and ongoing commitment, but if done properly, can help your business thrive even during uncertain times. If you’re looking into hiring out-of-state employees, partnering with a PEO like Emplicity, who has a team of experts in every area of employment, can help make the process smooth and simple.