In a case appealed from the tax court, the New Jersey Superior Court, Appellate Division recently affirmed that an out-of-state employer was subject to the New Jersey corporation business tax because it allowed one of its employees to telecommute from New Jersey.
The employer, Telebright, is a Delaware corporation with its principal place of business in Maryland.1 Telebright initially hired the employee in question to work for the corporation in Maryland.2 In 2004, the employee relocated to New Jersey, after her husband received a job in the state. In order to retain the employee’s services, Telebright agreed to allow her to telecommute.3 Hereafter, the employee worked full-time from her home in New Jersey writing software code.4 The software code she wrote was ultimately incorporated into a web application offered by Telebright to its clients.5 Telebright withheld New Jersey gross income tax from the employee’s wages, and remitted those with-holdings to the New Jersey Division of Taxation.6 Except for the one employee, Telebright had no other significant connections with New Jersey. It did not maintain an office or financial accounts in New Jersey, nor did it solicit sales in the state.7
In 2006, the division sent Telebright a ‘nexus survey’ inquiring about the corporation’s contacts with New Jersey.8 In its response, Telebright acknowledged that it employed one software developer who telecommuted from New Jersey, and that the corporation was withholding New Jersey income taxes from her wages.9 The division responded by notifying Telebright that it was obligated to file a New Jersey corporation business tax (CBT) return.10
Initially, the division asserted that Telebright was obligated to file a CBT return because it maintained "an office" in the state. Later, the division changed its reasoning, and took the position that Telebright was obligated to file a CBT return because it was "doing business" in New Jersey by allowing the employee to work from her home in the state.11
Telebright subsequently challenged the division’s determination that it was subject to the Corporate Business Tax Act (CBT), and argued that the application of the CBT to the company’s activities in New Jersey would violate both the due process and commerce clauses of the United States Constitution.12 The tax court of New Jersey rejected Telebright’s arguments, and affirmed the position of the division that Telebright was doing business in New Jersey and, therefore, subject to the CBT.13 Telebright then appealed to the New Jersey Superior Court, Appellate Division.14
The Superior Court began its analysis by noting that the CBT requires a foreign corporation to pay an annual franchise tax "for the privilege of doing business ... in this State."15 The court next noted that the reach of the CBT was to be "co-extensive with the State’s constitutional power to tax," and that the statute was to be "construed broadly in light of that purpose."16 The court had no difficulty concluding that Telebright was doing business in New Jersey and, therefore, under the statute was subject to the CBT.17 In reaching that conclusion, the court analogized the software writing performed by the Telebright employee to work performed by a manufacturing employee who fabricated parts in New Jersey for a product that was later assembled outside the state.18
The court next considered Telebright’s argument that applying the CBT to the company’s limited activities in New Jersey would violate the due process clause of the United States Constitution.19 The court noted that the due process clause primarily was concerned with the "fairness" of a state exercising authority over a business, i.e., whether, based on its activities within the state, a business should realize that it could be regulated by that state.20 The court noted that the employee in question produced software code for Telebright while in New Jersey, and was entitled "to all of the legal protections th[e] State provides to its residents."21 The court also noted that, if the employee violated the restrictive covenants in her employment agreement with Telebright, and provided that Telebright had filed a business activities report with the state, Telebright could file suit in New Jersey state courts to enforce those restrictive covenants.22 The court also noted that the United States Supreme Court had, in other cases, held that the presence of one employee within a state was sufficient to subject a company to that state’s business and occupation tax without violating the due process clause.23 The court, therefore, concluded that Telebright had sufficient minimum contacts with New Jersey to permit taxation without violating the due process clause.24
Lastly, the court considered Telebright’s argument that application of the CBT to the corporation would violate the commerce clause.25 The court noted that Telebright’s argument in that regard focused on whether the tax was "applied to an activity with a substantial nexus with the taxing State."26 Telebright argued that employing one person in the state was "de minimis," and did not constitute a sufficient link or connection to allow the imposition of the CBT.27 Telebright also argued that taxing businesses on the basis of telecommuting would impose unjustifiable local entanglements and an undue accounting burden upon businesses employing telecommuters.28
The court had little difficulty rejecting both of those arguments.29 The court found a sufficient nexus in that Telebright had a full-time employee working in the state who was producing a portion of the company’s web-based product.30 The court also rejected Telebright’s argument that filing a CBT return would be an undue accounting burden, noting that Telebright was already withholding New Jersey state income tax from the employee’s salary and was subject to New Jersey’s labor and anti-discrimination laws concerning the employee.31 The court, therefore, affirmed the decision of the tax court that Telebright was subject to the CBT.32
At first glance, it may be tempting to view the Telebright decision as relevant only to employers who do not have brick and mortar offices in New Jersey. In fact, Telebright is also relevant to employers who have traditional offices in New Jersey for several reasons.
First, the position taken by the New Jersey Division of Taxation in Telebright represents the position taken by the tax departments in the majority of states throughout the country.33 Consequently, New Jersey employers should consider that they may be required to pay business taxes imposed by states from which they allow employees to telecommute, even if they have no other significant contacts with those states.
Although taxation of businesses based on such limited contact with a state may seem unfair, it is unlikely that states imposing such taxes will voluntarily change their positions any time in the foreseeable future. It is also unlikely that federal legislation will be enacted that would restrict the ability of states to impose taxes in such situations. Federal legislation has been proposed that would prohibit a state from imposing gross income taxes on a telecommuting employee who is not physically located in that state.34 However, as of this date, even that less controversial legislation has failed to garner enough support to gain passage in Congress.
Second, Telebright also serves as a reminder that employers should consider the wider range of legal issues that may arise when employees telecommute, and they should plan accordingly. In addition to tax issues, significant legal concerns associated with telecommuting employees include compliance with laws covering wage and hour, workers compensation, occupational safety and health, discrimination and privacy. An employer can significantly reduce the risks associated with these issues by properly implementing a well-drafted telecommuting policy, and by requiring each telecommuting employee to execute an individual agreement. The individual agreement should confirm that the employee will abide by the telecommuting policy, and should also address matters that are particular to the employee.
Wage and Hour
Wage and hour laws typically require that non-exempt employees be paid for all hours spent working, and that employees be paid overtime for hours in excess of 40 in a week.35 Uninterrupted meal breaks may typically be excluded from hours worked.36 Employers are also required to maintain records of the actual hours worked by non-exempt employees.37 When employees are working from home, it is often difficult for the employer to monitor the actual hours worked. Likewise, it is difficult for an employer to know whether a telecommuting employee took an uninterrupted meal break. As a result, allowing non-exempt employees to telecommute can increase the likelihood of claims for unpaid wages and/or overtime.
In an effort to reduce the likelihood of wage claims, the telecommuting policy should expressly require employees to record their working hours, and their breaks, accurately and on a daily basis. If practical, the employer should consider specifying in writing the daily schedules (e.g., start and stop times) for telecommuting employees. Where the work of the employees is performed primarily on an employer’s computer system, the employer should periodically compare the employees’ reported hours with the records reflecting the employees’ use of the computer system (e.g., log-on and log-off times) to ensure that employees are not working outside of their assigned and/or reported hours. If employees fail to record their hours worked and breaks accurately, they should be subject to counseling and discipline as would be the case with any other infraction.
To a lesser extent, wage and hour concerns may also arise with exempt, salaried employees. The overtime exemptions for such employees may be dependent on their supervision of two or more employees or their exercise of discretion and independent judgment.38 Employers should be vigilant to ensure that exempt employees, even though outside a typical office setting, actually exercise the requisite supervision or discretion, lest they lose their exemptions.
The law applying workers compensation to telecommuting employees is still developing.39 However, there is growing recognition that, for a telecommuting employee "it can genuinely…be said that the home has become part of the employment premises."40 New Jersey is among the states that have recognized that an employee’s injury that arises out of and in the course of working for an employer at a home office is covered by workers compensation.41 However, an issue that is arising with increasing frequency in cases involving telecommuting employees involves whether the injury suffered by the employee actually arose from their employment. In one recent decision, a New Jersey court affirmed an award of workers compensation death benefits based on a finding that the death of a telecommuting employee from a pulmonary embolism arose from her extended sitting at her computer while working.42 The New Jersey Supreme Court has granted certiorari in that case.
In an effort to reduce the likelihood of workers compensation claims from telecommuting employees, the employer should have an individual agreement with each employee that specifies the activities the employee will provide for the employer, the precise location (i.e., room) within the employee’s home where those activities will be performed and, if practical, the precise hours during which those activities will be performed. The agreement should also state that the employee is not "on-call" during hours outside their regular shift.43 The agreement with the employee and the telecommuting policy should require the employee to report any injuries immediately, and should allow the employer to inspect the workplace as part of its investigation into any workplace illness or injury.
Occupational Safety and Health
Another related concern involves the application of occupational safety and health laws to telecommuting employees. The federal Occupational Safety and Health Administration "will not conduct inspections of employees’ home offices."44 Nor does the Occupational Safety and Health Act (OSHA) require employers to inspect the home offices of telecommuting employees. However, OSHA regulations do require employers to keep track of any work-related injuries.45 For that reason, as noted earlier regarding workers compensation, the telecommuting policy should require employees to report any injuries immediately. As part of the telecommuting agreement with the individual employee, the employer should also require the employee to confirm that the specified work area is safe (e.g., has a smoke detector, adequate ventilation, at least two means of exit, no unsafe wiring, and an ergonomically adequate chair and desk). The employer should also require the employee to agree that, with reasonable notice, the employer may inspect the area where the employee will be working.
Accommodation of Disabilities
Another important legal consideration regarding telecommuting involves employees who have disabilities. Under New Jersey law and federal law, employers are required to provide reasonable accommodations for qualified employees with disabilities.46 In general, a reasonable accommodation is a change in the work environment or the way the job is done that allows an employee with a disability to perform the essential functions of a job.47 The Equal Employment Opportunity Commission (EEOC) has issued guidelines advising that an employer should consider whether permitting an employee to work from home would be a reasonable accommodation under the Americans with Disabilities Act (ADA), even if the employer does not allow other employees to telecommute.48 Likewise, several courts have recognized that telecommuting may be a form of reasonable accommodation, provided that the essential functions of the employee’s position can be performed from home.49
The telecommuting policy should acknowledge that the essential functions of some positions cannot be properly performed by a telecommuting employee.50 Likewise, an employer should establish and maintain job descriptions that accurately identify the essential functions of its various positions. If the position cannot be effectively performed from home, the job description should reflect the need for the employee to be present in the employer’s facility. An employer is also permitted to refuse to allow a disabled employee to telecommute if it would pose an undue hardship and/or if the employer offers an alternate reasonable accommodation that would also be effective.51
A further consideration with respect to telecommuting is the possibility of discrimination claims from those persons whose requests to telecommute are rejected, as well as claims from those persons who are permitted to telecommute. In order to limit claims by persons whose request to telecommute are rejected, the telecommuting policy should set forth objective criteria concerning the jobs for which telecommuting will be permitted, and the employer should apply those criteria consistently. The objective criteria in the policy should be applied against the essential functions for the positions set forth in job descriptions. In order to limit claims by persons who are permitted to telecommute, the employer should offer the same training and promotion opportunities to telecommuting employees as it offers to those in similar positions working at its offices. This consideration can be of particular importance if a disproportionate percentage of those telecommuting are women, or in another protected category.52
Implementation of a telecommuting program also raises privacy concerns. With respect to the material the telecommuting employee is using remotely, the policy should require the employee to protect the privacy of any sensitive information of the employer and/or its clients (i.e., information security). Information security is particularly important if the information accessed by the employee is covered by state or federal laws protecting privacy (e.g., the Health Insurance Portability and Accountability Act (HIPAA)). The employer’s information technology department should also ensure that the employee has appropriate firewall and anti-virus protection.
With respect to the employee’s privacy rights, in the telecommuting agreement, the employee should expressly consent to the employer accessing all forms of communication used by the employee while performing the work (e.g., phone, e-mail and Internet). As noted earlier, the employee should also expressly consent to the employer inspecting the workplace itself. Documenting the employee’s consent to such monitoring and access is particularly important in New Jersey, where an employee’s right to privacy has been recognized as a possible source of a "clear mandate of public policy that would support a wrongful discharge claim."53
As noted above, many of an employer’s legal risks associated with telecommuting can be reduced through a comprehensive, well-drafted telecommuting policy. In addition to the policy, the employer should have a written agreement with each telecommuting employee, which acknowledges the employee’s understanding of the policy and commitment to comply with it, and also addresses items particular to the employee. Of course, although the items discussed above are among the most significant legal issues related to telecommuting, they are certainly not the only legal issues. The policy/agreement can also address practical guidelines, such as restrictions on dependent care while working and client/customer meetings at the telecommuting employee’s residence.
Third, briefly mentioned in the Telebright decision is a procedural defense that may be available to New Jersey employers who are called upon to defend claims brought in New Jersey courts by foreign employers. In the section of the Telebright decision discussing the benefits the state afforded to the employer of the telecommuting employee, the court noted that the employer would be able to bring suit in state court to enforce restrictive covenants against the telecommuting employee "provided" that the employer had filed a "business activities report" with the state.54
Under New Jersey law, foreign corporations "carrying on activity or owning or maintaining any property in th[e] State," must generally file such a business activities report.55 The failure to file such a report, if required, "shall prevent the use of the courts in this State" with respect to claims that arose or contracts that were executed during the period after the last such report was filed.56 Thus, if an employer is sued in a New Jersey court by a foreign corporation, it may wish to investigate whether the foreign corporation failed to file a required business activities report and, if so, it may consider pursuing a motion to dismiss on that basis.57
Telecommuting can be one way employers can promote work/life balance and diversity. It can be an attractive benefit in recruiting and retaining employees, while lowering overhead and commuting costs. However, the Telebright case exemplifies the many legal and practical issues employers need to consider before permitting telecommuting in the workplace.
1. Telebright Corp. v. Director, New Jersey Division of Taxation, 424 N.J. Super. 384, 388 (App. Div. 2012).
2. Id. at 389.
4. Id. at 388-89.
6. Id. at 389; Telebright Corp. v. Director Division of Taxation (Telebright Tax), 25 N.J. Tax 333, 341 (2010), aff’d, 424 N.J. Super. 384 (App. Div. 2012).
7. Telebright Tax, 25 N.J. Tax at 340.
8. Id. at 341.
10. Id. at 341-42.
11. Id. at 342.
13. Id. at 355.
14. Telebright, 424 N.J. Super. 384 (App. Div. 2012).
15. Id. at 389 (quoting N.J. Stat. Ann. §54:10A-2).
16. Id. at 390.
18. Id. at 391.
19. Id. The due process clause provides: "No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws." U.S. Constitution, Amendment XIV, Sec. 1.
21. Id. at 392.
23. Id. (citing Standard Pressed Steel Co. v. Department of Revenue, 419 U.S. 560, 562 (1975)).
24. Id. at 392-93.
25. Id. at 393. The commerce clause provides that "The Congress shall have Power ... [t]o regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes." U.S. Constitution, Art. 1, Sec. 8, Clause 3.
26. Id. The court noted that the commerce clause test includes four factors: whether the "tax (1) is applied to an activity with a substantial nexus with the taxing State, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services provided by the State." Id. (quoting Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977)). However, the court found that Telebright’s brief in support of its appeal did not effectively challenge the second, third or fourth prongs of the test. Id.
27. Id. at 393-94.
28. Id. at 394.
29. Id. at 394-95.
30. Id. at 395. The court also stated that the company benefited "from all the protections New Jersey law afford[ed] this employee." Id.
33. In a 2012 survey of state tax departments conducted by the Bureau of National Affairs, 35 states responded that an out of state employer which allowed an employee to telecommute from within their state would create a sufficient nexus to subject that employer to their state’s business taxes. 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). Only six states indicated that telecommuting would not generate a sufficient nexus for taxation purposes. Id.
34. See, e.g., Telecommuter Tax Fairness Act of 2012, H.R. 5615, 112th Cong. (2nd Sess. 2012); Telecommuter Tax Fairness Act of 2011, S.1811, 112th Cong. (1st Sess. 2011).
35. See, e.g., 29 U.S.C. § 207(a)(1) (generally requiring payment of one and one-half the employee’s regular rate for hours in excess of 40 in a work week); N.J. Stat. Ann. § 34:11-56a4 (same); N.J. Admin. Code § 12:56-5.1 ("Employees entitled to the benefits of the act shall be paid for all hours worked.").
36. See, e.g., 29 C.F.R. § 785.19 ("Bona fide meal periods are not worktime .... Ordinarily 30 minutes or more is long enough for a bona fide meal period."); N.J. Admin. Code § 12:56-5.2(a) (noting that an employer is not required "to pay an employee for hours the employee is not required to be at his or her place of work because of ... lunch hours ....").
37. 29 C.F.R. § 516.2(a)(7) (requiring employers to maintain records of "[h]ours worked each workday and total hours worked each workweek"); N.J. Admin. Code § 12:56-4.1 ("Every employer shall keep records which contain the name and address of each employee ... the total hours worked each day and each workweek ....").
38. 29 C.F.R. § 541.100(a)(3) (stating that executive exemption is dependent upon the employee "customarily and regularly direct[ing] the work of two or more other employees"); 29 C.F.R. § 541.200(a)(3) (stating that administrative exemption is dependent "upon the exercise of discretion and independent judgment with respect to matters of significance"); N.J. Admin. Code § 12:56-7.2 (generally adopting federal executive and administrative exemptions).
39. David B. Torrey, Telecommuter Injuries and Compensability Under Workers’ Compensation Acts, at 2 (2012) presented to the Workers Compensation Insurance Organizations Spring 2012 Meeting, available at http://www.iaiabc.org/files/%20WCandTelecommuters%202012.pdf.
40. Lex K. Lawson, Lawson’s Workers’ Compensation Law, §16.10 (2012).
41. See, e.g., Renner v. AT&T, 2011 N.J. Super. Unpub. LEXIS 1668 (N.J. Super. 2011) (awarding workers compensation benefits to telecommuting employee for death while at home), cert. granted, 209 N.J. 233 (Feb. 16, 2012); Verizon Pennsylvania, Inc. v. WCAB, 900 A.2d 440 (Pa. Commw. 2006) (awarding workers compensation benefits to telecommuting employee for injuries at home); AE Clevite, Inc.v. Labor Commission, 996 P.2d 1072 (Utah Ct. App. 2000) (same); see also Wait v. Travelers Indemnity Co. of Illinois, 240 S.W.3d 220 (Tenn. 2007) (recognizing that workers compensation applies to injuries of telecommuting employee arising from performance of duties, but denying benefits on particular facts).
42. Renner, 2011 N.J. Super. Unpub. LEXIS 1668.
43. If the telecommuting employee suffers an injury in a different state than the state in which the employer is located, the question may arise as to which state’s workers compensation law applies. The answer to that question typically requires an examination of the laws of both states involved.
44. OSHA Directive No. CPL-2-0.125 (Feb. 22, 2000).
45. 29 C.F.R § 1904.4(a)(1) (requiring employers to report any injury or illness that is "work-related"); 29 C.F.R. § 1904.5(b)(7) ("Injuries and illnesses that occur while an employee is working at home, including work in a home office, will be considered work-related if the injury or illness occurs while the employee is performing work for pay or compensation in the home, and the injury or illness is directly related to the performance of work rather than to the general home environment or setting.").
46. N.J. Admin. Code §13:13-2.5(b) ("An employer must make a reasonable accommodation to the limitations of an employee or applicant who is a person with a disability, unless the employer can demonstrate that the accommodation would impose an undue hardship on the operation of its business."); 29 C.F.R. § 1630.9(a) (regulations under the Americans with Disabilities Act applicable to employers with 15 or more employees) ("It is unlawful for a covered entity not to make reasonable accommodation to the known physical or mental limitations of an otherwise qualified applicant or employee with a disability, unless such covered entity can demonstrate that the accommodation would impose an undue hardship on the operation of its business.").
47. See, e.g., 29.C.F.R. §1630.2(o)(1)(ii); see also N.J. Admin. Code §13:13-2.5(b)(1) (setting forth examples of reasonable accommodations).
48. EEOC, Work at Home/Telework as a Reasonable Accommodation (EEOC Telework Guidance) (last modified Oct. 27, 2005) (Question No. 2; "May permitting an employee to work at home be a reasonable accommodation, even if the employer has no telework program? Yes. Changing the location where work is performed may fall under the ADA’s reasonable accommodation requirement of modifying workplace policies, even if the employer does not allow other employees to telework."), available at http://www.eeoc.gov/facts/telework.html.
49. See, e.g., Core v. Champaign County Bd. of County Commissioners, 2012 U.S. Dist. LEXIS 105956 (S.D. Ohio July 30, 2012); Bixby v. JPMorgan Chase Bank, 2012 U.S. Dist. LEXIS 32974 (N.D. Ill. March 8, 2012).
50. Positions that may be more suitable for telecommuting include those where the employee does not need either close supervision or direct contact with clients or coworkers.
51. See, e.g., Bixby, 2012 U.S. Dist. LEXIS 32974, at *20 (recognizing undue hardship defense); EEOC Telework Guidance (Answer No.5) (recognizing that employer "can select any effective accommodation, even if it is not the [telecommuting] one preferred by the employee").
52. See, e.g., Michelle A. Travis, Equality in the Virtual Workplace, 24 Berkley J. Emp. & Lab. L. 283, 303-11 (2003) (discussing situations where employers have implemented telecommuting programs that had a disparate impact on female employees).
53. Hennessey v. Coastal Eagle Point Oil Co., 129 N.J. 81, 98-99 (1992).
54. Telebright, 424 N.J. Super. at 392. The same defense would apply to actions in New Jersey federal courts that are based on diversity. See Horgan Bros., Inc. v. Monroe Property, LLC, 2010 U.S. Dist. LEXIS 65144, at *11 n.7 (D.N.J. June 30, 2010).
55. N.J. Stat. Ann. § 14A:13-15.
56. N.J. Stat. Ann. § 14A:13-20(b). An employer may cure its failure by filing the appropriate reports and paying all taxes, interest and penalties, or posting an appropriate bond. See First Family Mortgage Corp. v. Durham, 108 N.J. 277, 291-92 (1987); N.J. Stat. Ann. § 14A:20(c).
57. See, e.g., Horgan Bros., 2010 U.S. Dist. LEXIS 65144, at *13 (granting motion to dismiss based on plaintiff’s failure to file business activities reports).