This is the last post I am writing on telecommuting! Scouts honor–unless, of course, later on, some new development occurs that I cannot imagine us not getting to know better! So, imagine this scenario: You are the CEO of a company that primarily does business in Maryland. You hire Patty Programmer to work out of your Maryland headquarters to write software code. Patty later relocates to New Jersey. Patty is so good at what she does you and your company don’t want to lose her. So you let Patty telecommute and does the same work for you out of her home in New Jersey. One day the New Jersey Division of Taxation, informs you that you must pay New Jersey corporation business taxes. Can that really happen? It can and it did. Find out more after the jump…
The actual case is Telebright Corporation Inc. v. Director of Taxation DOCKET NO. A-5096-09T2 (March 2, 2012). The Superior Court Appellate Division agreed with the New Jersey Division of Taxation that having even one full-time employee in New Jersey, whether s/he is in a brick-and-mortar office or s/he telecommutes, creates sufficient contract with the State to subject Telebright to New Jersey Corporate Business Taxes. For those who want more details, you can find the court’s opinion here.
Do you need to be concerned about one New Jersey case if your company does not do business in New Jersey? The truth is, New Jersey is not the only state that takes this position. In a 2012 survey of state tax departments, conducted by the Bureau of National Affairs, 35 states answered that an out-of-state employer allowing an employee to telecommute from within their state, creates sufficient nexus to subject that employer to their state’s business taxes (H/t Christopher J. Moran of Pepper & Hamilton Tips for Commuting After Telebright, available here; See Also Bloomberg BNA 2012 Survey of State Tax Departments, at S-64 to S-66 (Tax Management, Inc. 2012) (Nexus Creating Activities: Employee Activities — Non-Sales Related). So, chances are, if you are allowing someone to telecommute from another state, you will be subject to that state’s business taxes.
You know that if you open an actual office in another state, you are “doing business” in that state, and you will be subject to that state’s laws, right? The 35 states that will subject you to taxes based on your telecommuters are really saying that the operative question is not whether you have a brick and mortar office or make multi-million dollar deals in the state. One way or another, the reasoning goes, you derive benefit from having contact within that state. The court in Telebright gave one good example: suppose the employee in that case had breached a restrictive covenant. Telebright would have had the option of suing the employee for that breach in the New Jersey courts. Should Telebright be allowed that benefit, based on having an employee telecommuting out of New Jersey and not had to contribute to New Jersey’s tax base? While I am sure at least one person out there could come up with a counterargument, my point is to illustrate why most states will subject employers to its business taxes based on the presence of telecommuters in their state.
You may have guessed that even though Telebright addressed the issue of taxes, it really is about much more. Remember, if you have employees in several states, your company will be subject to the employment laws of those states (and localities) in which you are employing people. So, for example, using New Jersey again, if you employ people in NJ, not only will federal Equal Employment Opportunity laws, and FMLA and ADA and the like apply, you in all likelihood will also be subject to the New Jersey Law Against Discrimination, as well as New Jersey’s family leave laws—and any other employment laws. This will be the case whether you maintain an office in New Jersey or you are allowing employees to telecommute from New Jersey — or another state. In other words, if you employ people in more than one state you will need to ensure that you are complying with those states laws. This should not be news to any of you!
OK, one more twist before we wrap up this topic: How does telecommuting impact your non-compete (assuming you have one)? Within what geographic area is your employee prohibited from starting or joining a competing business? Is it a mile-radius from your main office? The office where s/he worked? The territory out of which s/he actually did business? Which state’s laws will govern the agreement, and in which state will disputes be decided? (This is why you need to reach out to your friendly, competent employment counsel!)
This is a great segue into next week’s topic, which briefly re-visits non-competes, and some of the recent buzz. Don’t miss it!
Sorry I don’t have any amusing telecommuting video clips this week, but I’ll see what I can come up with next week. Until then, fare thee well!
Disclaimer: This post’s contents are for informational purposes only, are not legal advice and do not create an attorney-client relationship. Always consult with competent local employment counsel on any issues discussed here.
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