7 Considerations When Paying Your Remote Workers
A 2021 survey by FlexJobs found that 58% of workers favor full-time remote work after the pandemic, and the same percentage would look for new jobs if their employer mandated a return to the office. Alternatively, 39% would prefer a remote/office-based hybrid approach to scheduling.
Remote work is so desirable that 24% of employees would take a pay cut and lose vacation days in exchange for remote privileges.
This phenomenon is global. The International Workplace Group (IWG) found that half of all workers globally spend at least half the work week outside of their main office. This figure comes from a 2019 survey before the COVID-19 pandemic made remote work even more common.
The prevalence of remote work has forced both large companies and small businesses to figure out how to handle payroll for remote workers. In addition to security and privacy concerns, remote work payments need to fit with the cost of living in each employee’s location and meet all local tax, reporting, and licensing laws.
If your business is switching to a remote work lifestyle permanently, it’s important to keep these key factors in mind as you pay and hire new employees.
1. Worker Classification
When switching to remote work, it’s important to find the right worker classification for your employees. Freelancers and independent contractors are paid and taxed differently than employees. If you accidentally miscategorize a remote employee as a contractor, you could face legal implications.
The Fair Labor Standards Act (FLSA) requires that employees receive minimum wage, overtime pay, and other employment rights and benefits. The US Department of Labor has a Wage and Hour Division unit that ensures that companies do not misclassify employees as contractors.
Meanwhile, the IRS can fine companies that avoid paying employment taxes by miscategorizing employees as contractors.
An employee typically works for one company and gets paid an hourly or yearly wage. They use the company’s equipment, including software, and must meet its standards and follow its directives during work.
On the other hand, an independent contractor gets paid after completion of a job or after reaching specific benchmarks. They use their own equipment and often work with multiple clients at the same time. Contractors handle their own payroll, record-keeping, and taxes.
In some positions, the difference between an employee and a contractor can be a lot more nuanced. The growing industry of travel nursing provides a good example of this. A travel nurse may work as an independent contractor for a medical facility, but they are usually employees of a staffing agency, which in turn, contracts with a medical facility.
2. Location-Based Pay
Remote workers in different parts of the country or the world may have different cost of living requirements. Companies need to decide if they should pay all remote employees the same rate or if they should base their payment on standards in each worker’s location.
This question is especially pertinent if you are paying foreign employees or workers who have relocated to countries with a higher or lower cost of living. However, paying different rates could lead to poor morale and lack of effort among remote employees who happen to be in places with a lower cost of living.
The other option would be to pay remote workers based on the amount of value they add to the company regardless of their location. This approach could allow you to find the best talent regardless of location and make it more difficult for other companies to lure your top employees away.
3. Payroll Requirements
Remote work can complicate payroll requirements. If the employee is in a different state, you will have to adhere to different taxes and rules for paying into unemployment and workers’ compensation funds. Also, if you offer benefits such as healthcare or retirement, the setup and costs could be different from place to place.
Because of these complexities, you could run into the issue of not being able to pay your employees on time. Solutions to this problem could include borrowing or finding a factoring service to advance money to cover payroll.
For example, if you run a medical staffing agency, you may need your clients to pay invoices before you can cover payroll costs. If they fail to do so, you can rely on accounts receivable factoring. During this process, a factoring company takes over your outstanding invoices and provides payment for them, minus a percentage fee. You can use this money to cover payroll.
If a business has workers in different places, it may need to meet local or state tax requirements. In addition to covering any mandated contributions to government programs, such as unemployment, a business may need to set up payroll tax accounting for each out-of-state place where their remote employees work.
You may also have to deal with a tax nexus. A tax nexus is a connection between your business and its operations in a different location. A remote employee in a state or city is typically sufficient for the local tax authorities to prove such a nexus. Depending on the nature of your business, you could get taxed on income earned through these other states.
5. Licenses and Permits
In some industries, remote workers need certifications or licenses to perform their jobs in a different location. For example, travel nurses from a staffing agency need to have a license for the state in which they travel for work. Luckily, staffing shortages have led many states to join an alliance that recognizes licensure for other states in the group.
In addition to employee licensing, the concept of foreign qualification could come into play if you have remote workers in other states. Foreign qualification involves registering your business in each state where you have remote employees. You typically file paperwork with each place’s Secretary of State. This allows you to operate and handle tax and permitting issues without having to create and register a new company in each state.
6. Privacy and Security
One of the biggest challenges in establishing remote work for your employees is counteracting the data privacy and security issues that arise. With remote work, you do not have direct control over the security of workers’ devices, internet connections, and anti-hacking practices. In addition, most businesses in remote work situations rely on cloud-based applications and systems to connect with workers.
All these moving parts could potentially make it easier for hackers to breach the system and steal data. In addition to business information, hackers could potentially steal client or customer data. Your company could be held liable for the damages caused by such theft.
You also have to deal with security issues when it comes to paying workers. You may need to rely on third-party apps, such as PayPal. If these services are not available to workers in foreign countries, you may need to utilize other services even if they typically have higher fees or lax security systems.
In addition to only offering payment options that meet your security standards, you could consider using a staffing agency or making payments through a local partner, who can handle currency changes and security issues on your behalf.
Promotions are a key factor in retaining workers and getting the most out of training and career development efforts for current employees. Research has shown that, in many cases, remote workers receive far fewer promotions than their peers who come into the office every day.
One way to avoid this issue is to have standardized promotion policies and regular worker reviews that measure output and performance. These steps can make promotions based on merit instead of facetime with decision-makers in the office.