Multistate Compliance for Insurance Companies With Out-of-State Remote Employees

Remote work is part of today’s post-pandemic workplace zeitgeist. 

As the world begins to get a handle on COVID-19, companies make plans to bring employees back into the office. But generally, employees like working from home. Roughly 30 percent of employees say they’ll switch jobs if asked to return to the office full-time. 

So, whereas pre-pandemic remote work was a bit of a rarity, post-pandemic, that certainly won’t be the case – a good thing for employee satisfaction but a major challenge for employers. 

Aside from the often-cited downsides of remote work, such as social isolation and less clear boundaries between work and home, employers also have to consider the legal implications. Considerations, including employment laws and taxes, may all change depending on the physical location of an employee. This is true for all companies but particularly pertinent to insurance agencies that also need to manage producer compliance for employees who work remotely with the freedom to live and work in any state.

Yes, employers typically know the state in which their employees work. But do they know each and every requirement that now falls onto them and their producers to maintain those state licenses? The truth is, it’s hard to keep up with state-by-state compliance in a remote work landscape that allows for a transient lifestyle.

What’s with this transient lifestyle, anyway?

Remote work gives employees the freedom to do their job from just about anywhere. And while employees may have any number of reasons for leaving their primary state of residence, the volume of people taking advantage of this flexibility is remarkable.

The hot button term “digital nomad” refers to location-agnostic employees who work from wherever the internet allows. Between 2019 and 2020, the number of American digital nomads increased from 7.3 million to 10.9 million. That’s roughly a 49 percent increase in a one-year span.

It’s true that COVID-19 had unique implications for the workplace. Still, companies who build the infrastructure to allow for remote work now can avoid costly transition periods in the instance of future crises or changing workplace trends. Most companies realize this and have taken steps to support employees as they explore the potential advantages of remote work. 

Globally, 55 percent of companies support remote work in some capacity. 

But remote work comes with a laundry list of implications for companies, particularly those with employees who work out of state. So, if your company works with out-of-state employees – or is thinking about offering remote work to out-of-state employees – make sure you’ve considered the following legal and compliance implications.

Adhere to local employment laws

Employment laws govern many aspects of employment, including wages and hours, paid sick leave, employment conditions, and job posting requirements, among others. 

Every state has its own set of laws governing employment obligations, and remote employees are subject to the laws of the city or state in which they physically reside. But be careful, for employees who are only temporarily located in a given state, there may be exceptions to which laws they’re subject to. 

Consider this: It’s 2021. You’re a Colorado company and, as of 2021, Colorado has a minimum wage requirement of $12.32 per hour. But you hire someone who lives and works in California. In California, the minimum wage is $13.00 per hour for employers with 25 employees or less or $14.00 per hour for employers with 26 employees or more. You’ll need to make sure you pay your California employee the appropriate minimum wage according to the specifications outlined in their local employment laws. 

The exact details of employment laws may change depending on company-specific factors. For instance, how many employees work in a given state, are they exempt or non-exempt, are they paid equitably for equal work?

If you’re unsure of any local employment laws, check out your state’s labor office website or reach out to a state commissioner. Remember, not knowing about local employment laws won’t save you from facing hefty regulatory action for non-compliance. 

Insurance (our favorite subject)

Companies typically hold several insurance policies to protect against liability. The policies held may change depending on where employees are based. 

Unseen gaps in insurance coverage can annihilate an otherwise thriving company. It’s always a good idea to obtain official legal guidance on the ins and outs of insurance coverage, particularly when it comes to business liabilities. Below, we’ll briefly touch on some of the insurance considerations companies with out-of-state employees should be aware of, but this is not legal advice and should not be taken as such. 

Workers compensation 

If an employee gets injured on the job, worker’s compensation provides benefits to the injured worker. Often, employers are required to have worker’s compensation coverage in the state where the employee is located. If they don’t, they could face both civil and criminal penalties.

When employees move between states, it can be tricky to determine which state an employer should have worker’s compensation coverage in. States have different thresholds for how this is determined. For instance, in which state does the employee perform the majority of their work? Do they need to move between multiple states to do their job? Can they temporarily be covered under a reciprocity agreement? 

Unemployment insurance

When employees lose their jobs, they may be eligible for state-paid unemployment insurance. Payroll taxes paid by employers fund this system. 

To consolidate which state employers pay payroll tax, the United States Department of Labor set up the Localization of Work Provisions to help determine where “wages should be reported when work is performed entirely in one state or in a number of different states.” 

Ultimately, the goal of the Localization of Work Provisions is to simplify wage reporting, direct employee wage credits toward the state in which they’re most likely to be unemployed and collect unemployment payments, and avoid splitting payroll tax across multiple states. 

If it sounds complicated, don’t worry: it is. 

The Localization of Work Provisions operates through a four-factor waterfall test to determine employee localization. The test considers: 

1. Localization: Where the employee performs their job. 
2. Base of operations: The location where the employee’s work begins and ends.
3. Place of direction and control: Where the business directions come from (possibly company or department HQ).
4. Residence of the employee: The state where the employee physically resides.

As you run through this list, the first question you can answer with a single state is the one in which employers should pay payroll taxes. 

Spill the “t”: what’s the scoop with all these taxes? 

No one ever accused taxes of being straightforward! And the out-of-state payroll tax is no exception. Plus, taxes don’t begin and end there. 

Nonresident employers doing business in a state may be subject to corporate income taxes, franchise taxes, sales and use taxes, and so many more. If your company works with out-of-state employees – or is considering offering work to out-of-state employees – be sure to consult a tax professional to clarify tax obligations. 

Beyond taxes employers are responsible for, employees may need to pay taxes in multiple states if they work in one and live in another. Employers should be sure to communicate this to employees, so there aren’t any unnecessary tax season surprises.

Producer compliance

Agencies, carriers, and MGAs/MGUs need to be aware of all of the above in addition to paying close attention to insurance-specific producer compliance. Many states have distinct license requirements for resident and nonresident producers, so the physical residence of a producer matters.

As a result, remote work causes a bit of a headache for compliance managers. Employees want to be in different parts of the country, if not in a different country altogether. This has serious compliance consequences when not managed properly. 

The bottom line is that insurance producers should not be soliciting insurance policies from outside the United States and territories. When you solicit insurance and send out documents, you send out U.S.-based contracts. Producers cannot do that internationally – their licenses are invalid when outside of their licensed-state(s), so a producer’s transient lifestyle must be limited to the U.S. and its territories.

Within the U.S., a good rule of thumb is if a producer goes to a state and establishes residence personally – by changing their driver’s license, for instance – then they should do the same with their insurance residency within the statutory range as set by the state. However, if a producer continues to live in their primary residence for more than 50 percent of the time, then they don’t need to change their residence license, even if they move between other states for the rest of the time. To be safe, though, an insurance producer should get their nonresident license in any state in which they may solicit insurance. 

We’ve also found that remote work has opened up onboarding concerns for insurance agencies and brokers. Typically these agencies would have a few select states that they’re familiar with and frequently sell within. But remote work opens up the ability to hire agents and producers from states they have less familiarity with onboarding in. As a result, agencies sometimes struggle to track and manage state-specific licensing processes.

That’s where having a tool like AgentSync can play a vital role.  We know the licensing and renewal requirements for every U.S. state and territory and we track state-by-state changes so you don’t have to. 

Remote work and the future of insurance

As with many industries, the insurance industry pulled together to accommodate remote work and accompanying safety measures at the outset of the coronavirus pandemic. As a result, we’ve seen how versatile the industry can be when opening up job opportunities to diverse talent across the nation. 

Working with out-of-state employees allows companies to dip into a greater pool of talent. And that’s a really good thing for the industry. But as companies continue – or begin – to hire out-of-state employees, they should always keep in mind the legal and compliance implications that come with those hiring decisions at the risk of getting caught in growth-stifling regulatory actions. 

To help your team stay connected, compliant, and tight, even in a remote-work situation, check out what AgentSync Manage can do to support any hybrid workforce.