I had two people reach out to me for Advice on what to do about employees that moved during the pandemic. Because everyone was working remotely, some employees took it upon themselves to relocate to a place where they were more comfortable hunkering down. And, employees did this without requesting or gaining permission in advance. Should they terminate those employees for not following the company’s policies? Should they convert everyone who is not in the same state as the parent company into independent contractors? Does their type of work require them to work out of a licensed location? For both of these clients I told them that they should not rely solely on my advice because I do not give legal advice. They really need an employment attorney to weigh in on the rules in every state where employees have moved.
It matters where employees are located because states want companies to pay state payroll taxes on all employees that work from that state. Companies have to set up that paperwork and payroll and make certain that they comply with the labor laws in that state. Hiring a company located within that state to lease the employee to the company is a route that is often taken. That makes the former employee an independent contractor to their former employer. Both require a bit of extra work for the Payroll Team so they just want the company to terminate the employees that move out of state. However, most companies do not anticipate an employee moving so most companies (including the two represented here) do not have a written policy about this potential occurrence. Thus, termination was not an option (at least not for moving out of state).
Most good People Team leaders know and understand the delicate and, for some reason, pliable rules around who is and is not an independent contractor. They know that there are expensive mistakes that have been famously made by employers of every size and industry. And the risk is rarely worth the potential benefits. Managers will eventually make a mistake and be directive to the point where they enable the independent contractor to claim that they were an employee all along and deserved the associated benefits. There are plenty of lawyers who want to help angry people who feel they have been wronged – and those lawyers love someone who is looking for a fight about ‘principles.’
But the scariest moves that employees made at both organizations were moves to California. California is the most employee-friendly state in the Union. Their labor laws are created and enforced by six different regulatory agencies. Employers from outside of California believe that it is impossible to fire employees – even if they do bad things. There are also rumors that if even one person from the company works inside the state boundaries, the entire company must pay CA income taxes. The actual law that people were hearing about is that every company that is headquartered in California must pay CA taxes on every employee that works for that company – even if they are located outside of California. While that was not settled prior to the pandemic, employees cannot be double-taxed on income – even though CA does not have reciprocal rules with any other state. California employers must withhold for the state where the employee now resides and only withhold more than that state’s requirements if California’s taxes are higher because CA gets the difference. It is best to create a nexus for each state where an employee resides to make sure all taxes and labor laws are known and followed. It is true that in addition to the payroll taxes, employers will have to pay Unemployment Insurance (UI), Employment Training Tax (ETT), and State Disability Insurance (SDI).
The key to success in California is not different than any other state. Just hire the right people. Don’t get in a rush and hire the first semi-qualified individual that will accept an offer. Don’t let a poor performer hang on, especially if they are moving to California. Take the time to analyze what is required to make sure someone can execute all of the tasks that lead to successfully meeting or exceeding the role’s objectives. Take the time to build an effective selection process and validate the tools that will be used to measure the required traits. And, once hired, set people up for success and treat them right so that they will feel successful and won’t leave.
I have faced the same issues as these two People Team leaders in the past. I had folks that we wanted to hire or who needed to relocate to California. These were really good people that we did not want to lose. So I shared with both leaders some of the things that give California its special reputation.
The minimum wage in 2021 is $14/hour for non-exempt (aka hourly) employees and $58,240/year for exempt (aka salaried) employees. California has a unique definition of exempt. First, employers must ensure the employee spends more than 50% of his or her time performing “exempt” duties - which must include a significant amount of independent judgment. Second, they must use a salary test to ensure the employee earns at least two times the minimum wage as noted above. Software employees in 2021 must earn at least $47.48 per hour, or $8,242.32 per month, or $98,907.70 per year, to be exempt from California’s overtime laws. The minimum wage in some cities in CA is higher than the state minimum, so know which city limits your employees are in.
You must reimburse all employees for all expenses related to work and you cannot deduct things that employees need (e.g. uniform), use (e.g. laptop), or break (e.g. dishes). And all tasks must be compensated. (That is actually not a rule in every state.)
Whereas most employers do not pay for meals or breaks that last less than 20 minutes, you must pay for all breaks (but not meals) in California. Current and former employees can lay claim to unpaid breaks for up to four years. Employers must also provide sick leave. Some cities require paid sick leave.
On your first day at work, employees must receive a form showing the employee’s name and job title, pay rate, pay dates, employer name and address, paid sick leave program, etc. (The Labor Commission has a form that can be used to comply.) Every pay stub must show those details and all accruals to avoid a $100 - $4,000 per employee penalty. And you must keep records of all paychecks for three years and give current and former employees access to their records.
Pay employees exactly on time every time. Every late paycheck will cost the employer $200 + 25% of the total late paycheck. If the employee goes to the Labor Commissioner and files a claim, add 30 days of pay to that penalty.
If you terminate someone (or if they give at least 72 hours notice that they are quitting), on their last day you must pay them all unused accrued vacation time and all pay earned through the end of their last day. (Vacation is considered “wages” in CA.) If they walk out you have to pay them within 72 hours. California has a stricter version of the WARN Act if an employer has layoffs.
If employees want, and the company allows, workdays to exceed 8 hours (e.g. working 10 hours per day for four days), then two-thirds of the employees must agree to it through a secret ballot. There are all kinds of rules around how this should be done so be careful. Lots of employees may not want an unusual workday or workweek because California requires overtime of 1.5 times pay for work that exceeds 8 hours in a day and 2 times pay for work that exceeds 12 hours in a day. Employers must also pay overtime for weeks where an employee works over 40 hours or is scheduled for 7 or more consecutive days.
California has 20 reasons that employees can take a leave of absence. (Most states have two or three.) The reasons include paid time off for voting, time off to deal with school discipline issues, and unexpected child care issues. In addition to FMLA and California Pregnancy Disability, in 2021 the California Family Rights Act s grants eligible employees 12 weeks of protected time off to care for themselves, a family member, or bond with a child.
Companies can enforce non-disclosure agreements and the like to protect competitive secrets and intellectual property, but they cannot require a non-compete clause for any employee. And when you are hiring someone you cannot ask them for their salary history (though you might get away with asking what salary they want), nor should you ask about their social media activity or criminal history. If applicants ask about the salary range, you must provide it. And once hired, to play it safe, make sure everyone takes 2 hours of harassment training every 2 years. (If you use temps make sure the temp agency facilitated the required training.) By the way, anyone who manages people can be personally fined and jailed for not stopping reported harassment or safety concerns.
And circling back to the feared independent contractor rules… California has an ABC test to determine if someone is an independent contractor or an employee. The person is an independent contractor if the individual: A. Is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and B. Performs work that is outside the usual course of the hiring entity’s business; and C. Is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. Most contractors can make the claim that they are employees simply because the person at your organization is very directive about their work and evaluating their performance.
Both of the People Team leaders decided to hire attorneys in California and pay for the “I have an employee in California” package that included the easily customizable policies and procedures manual, all required forms and paperwork, signs for the employees to place in their home offices, and about an hour of professional expertise (Q&A). In both instances, the companies valued the employees that had moved and were expecting to continue to allow remote work for the roles that both employees were in. (One had to be in the office at least once per quarter for specific in-person meetings.) The employees were extremely happy that the companies went to such lengths to let them stay onboard and they are showing that appreciation with their discretionary effort and online praise. And… both companies now have policies and procedures to guide anyone that is contemplating moving out of state.