From late 2019 to early 2020, the prospect of working from home was seen as a growing trend, promoted by some employers as a benefit. Now, it has become one of several tools in responding to the global health crisis.

As the COVID-19 pandemic spread across the United States, estimates of the number of remote workers varied. In June, Stanford University economics professor Nicholas Bloom said in an interview that up to 42% of the U.S. workforce was working from home full-time, effectively creating a "work-from-home economy." Subsequently, a September Gallup survey showed that 33% of U.S. workers were "always" working from home during the pandemic, and 25% "sometimes" did so.

Compared with the U.S. Bureau of Labor Statistics' annual average for 2019, when about 26 million employed people worked from home, accounting for about 16% of total U.S. employment, the change is significant.

In some cases, as employers embraced remote work, employees have moved from densely populated areas like California to less populated regions such as western Nevada, according to The Wall Street Journal. Nancy McCormick, senior vice president of the Economic Development Authority of Western Nevada, said that besides being able to move to quieter areas with less traffic, the region may be particularly attractive to employees from neighboring states like California because many people often come there for skiing and other recreational activities, and some may have second homes there.

However, remote employees moving to "greener pastures" may also face costs beyond moving expenses, including salary adjustments. In a recent Willis Towers Watson survey, about half of employers said that the growth of remote work may require changes in how employees are compensated in the future, including paying based on where employees work. More than a quarter of respondents said that for all positions within the organization, compensation would be based on the remote employee's location.

Employers take different stances on "pay localization"

Some prominent employers have signaled they will continue with the so-called "pay localization" approach. In a video to employees in May, Facebook CEO Mark Zuckerberg said that salaries might be reduced if employees live in certain areas, because the company pays market wages by location. He said: "This means that if you live in a place where the cost of living or labor costs are significantly lower, then salaries there tend to be correspondingly lower."

Other companies have similar strategies, but companies interviewed by HR Dive said that relocating remote employees may not see salary decreases. Twitter—which announced earlier this year that it would allow employees in certain roles and situations to work remotely "forever"—told HR Dive that it takes a "competitive approach to pay localization," considering factors including the employee's role, team, and geographic location. Twitter said this process does not necessarily result in pay cuts. The company said that even before the pandemic, it had prioritized policies and programs encouraging flexibility in where and how employees work. Over the past year, requests for permanent remote work increased more than fourfold, and Twitter has a "highly customized process" to determine whether employees are eligible for remote work or relocation, involving input from multiple teams.

A spokesperson for the job site Indeed said the company sets salary ranges by location. The Austin-based company announced in October that it would allow certain categories of employees to work remotely permanently after local stay-at-home orders were lifted. The Indeed spokesperson said: "In the coming year, we will keep remote salary ranges unchanged, but they may change over time."

"If someone can do the job, it doesn't matter where they live"

When discussing pay localization, a fundamental question employers need to answer is how such actions will affect talent management and recruitment strategies. Mercer consulting partner Tauseef Rahman asked: "Are they driven by where the talent is, or by where the company is currently located?" Regardless of which approach is chosen, supply and demand for specific roles may have the greatest impact on compensation considerations. Rahman said: "The reality is, if someone can do the job, it doesn't matter where they live... You pay what it takes."

Willis Towers Watson Director of Talent and Rewards Josephine Gartrell said that if employees move to places with lower living costs, the employer's "gut reaction" might be to reduce pay, but "we don't view it that simply." Because for roles without a national talent market, labor costs (not living costs) are the main driver of compensation. Otherwise, employers might not consider labor costs in a location at all. In many cases, employees moving to lower-cost areas have not resulted in pay changes, but Gartrell noted that this could change over time.

Additionally, Rahman said there is no guarantee that companies that have been lenient about employees moving across state lines during the pandemic will maintain that attitude; "it remains to be seen, and we may not know for several years."

In this regard, Google CEO Sundar Pichai announced earlier this month that the company would reopen offices in September 2021 using a "hybrid workforce model," allowing some employees to work from home part of the week, according to CNBC. But the model does not allow a fully remote option and requires employees to live within commuting distance of a designated office.

Even so, some executives have criticized the idea that employees who move to cheaper areas should receive lower pay. Blair Reeves, director of product management at Salesforce, wrote in a Medium post that "the business rationale for employees needing to be in major metropolitan areas is crumbling," adding that companies should not penalize employees for living outside major metros.

Employees need to be aware of tax and registration obligations when relocating

Gartrell said that whether or not employers adjust compensation for relocating remote employees, they still need to comply with various state and local laws, rules, and regulations. First, wage and hour laws and their penalties vary by location, and employers may need to become familiar with each law. Gartrell noted, "For remote non-exempt employees, these will be harder to monitor, but employers should implement systems to do so."

Taxes are another potential area of concern. Zach Gladney, a partner at Alston & Bird specializing in tax issues, said that for remote employees, the primary obligations for employers are corporate income tax filings and payroll tax withholding. Gladney said companies typically must file corporate income tax returns in states where they have "nexus," which refers to a certain level of connection between a jurisdiction and an entity such as an employer. If an employer has full-time employees in a state, it usually has nexus there and therefore needs to file state corporate income tax returns. However, due to the pandemic, some states have issued emergency guidance indicating that this does not apply in certain circumstances, particularly when employees are working from home in neighboring states due to public health orders.

For example, New Jersey, which has many residents working in New York and Pennsylvania, issued guidance stating that the state Department of Treasury "will temporarily waive the sales tax nexus standard, which is typically met when out-of-state sellers have employees in the state," as a response to COVID-19. But Gladney said that if employees decide to relocate remotely after the pandemic, the situation could be different; "in that case, companies will have nexus in those states and therefore have income tax filing obligations." He added that after emergency orders are lifted, the need to track employee movements could become a "hot issue" in tax matters.

This also has implications for employees. A Wall Street Journal report in May noted that employees may also need to file tax returns in certain states where they work remotely, if they have not already done so. According to the report, only some states have declared that they will not tax remote employees during the pandemic.

As the pandemic continues, there are even pending lawsuits in this area. Gladney noted that New Hampshire has filed an original lawsuit with the U.S. Supreme Court against neighboring state Massachusetts, concerning Massachusetts' income tax on employees working remotely in New Hampshire during the pandemic. New Hampshire, which does not impose an income tax, stated in its filing that the levy "disregards New Hampshire's unique and deliberate policy choices."

Beyond potential pitfalls, there may also be incentives for employees to move to certain states during remote work. For example, Hawaii has launched a temporary residency program to attract American workers living outside the state. The program, called "Movers & Shakas," will offer discounted hotel space, coworking spaces, and other incentives. When asked how workers taking advantage of the program might be affected in terms of compensation, Movers & Shakas organizer and kWh Analytics CEO Richard Matsui said in an email to HR Dive that any such changes "depend on the remote employee and their employer." Matsui also offered advice to applicants that may also apply to remote workers beyond Movers & Shakas: be mindful of the cost of living in the new location and plan accordingly before relocating.