How Remote Work Complicates Compliance and Payroll

As remote and hybrid work becomes the norm, employers must navigate labor laws, tax rules and data security obligations that vary by location. Your team may be located across the U.S. or include international contractors; either way, it is critical to stay legally compliant.

Compliance challenges across states and borders

If employees live and work in the company's state, tax treatment is straightforward. But if an employee resides in a different state, the company may need to register the business and comply with payroll tax laws — such as withholding income tax, paying unemployment taxes and filing quarterly returns — in the state where the employee lives or works, even if the company has only one physical office. That also means tracking each state's rules on paid leave, wage and hour laws, and termination requirements.

International hiring has its own challenges. If you hire someone from another country, you'll need to comply with a completely different set of labor laws, tax obligations and benefits rules.

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It may be tempting to consider any remote worker an independent contractor, hoping to avoid the complexity of navigating out-of-state or extra-country laws and rules. However, if the workers are legally considered employees, you can face steep penalties. For example, the U.S. Fair Labor Standards Act guarantees certain rights for employees, including overtime and benefits. Other countries impose similar standards and may enforce them more aggressively when foreign employers are involved.

Don't overlook data security and privacy rules

Remote work can also weaken data protection, especially if employees store sensitive information on their personal devices. Without office-based IT infrastructure, workers may rely on outdated routers, default passwords or unencrypted networks. The company should offer systems and training that make it easy to store and transmit data securely.

If you hire overseas workers, you also need to comply with foreign data privacy laws. For example, the European Union's General Data Protection Regulation applies if an EU-based employee works remotely for a U.S. company. That means any personal data you access such as names, emails, financial details, and IP addresses, falls under GDPR protections. Your company will need to create clear and GDPR-compliant policies for how data is collected, stored and used; it will also need to train workers to follow the policies.

Fraud and oversight gaps in remote environments

One emerging risk concerns remote workers who secretly outsource their jobs to third parties; sometimes entire work positions are handled by lower paid contractors overseas. This can raise major concerns about security, confidentiality and performance.

Companies can try to combat the outsourcing and reduce their risk by using time-tracking software, IP logging or activity audits. Without in-person supervision, it's easy to miss problems or assume productivity based on surface-level digital communication. Another approach is to require use of approved collaboration apps that are maintained and updated by IT support.

Get legal guidance before problems arise

Some companies address patchwork requirements, such as state-run retirement plan mandates, by offering comprehensive 401(k) plans that qualify for exemptions. This can simplify compliance across jurisdictions. Other legal solutions can help resolve conflicts in employment definitions, enforcement practices and data transfer rules when your workforce spans multiple regions. Attorneys and payroll experts understand how laws differ across states and countries and can recommend the right strategies and products to keep your company compliant.

Interested in learning more? Chat with a Connectify HR expert today.