As explained in our law firm’s prior blog article, nonprofit employers enjoy special privileges under unemployment laws. For example, nonprofit employers are “covered” by such laws only if they have at least four employees during at least 20 weeks of a calendar year. (Note that churches and other religious institutions are categorically exempt.) But what happens if a nonprofit has at least four employees scattered among multiple states?
For example, consider a nonprofit organization with two employees working at its office in Illinois, one employee working remotely from Seattle, and two employees working remotely from Mississippi. Is the nonprofit “covered” for unemployment tax purposes? Must it pay unemployment taxes into each state system? Or is the nonprofit completely exempt, since it does not have at least four employees in any one state? This is an increasingly common employment scenario, so a good understanding is important for effective legal compliance.
A. Four Tests to Determine Jurisdiction
In situations where employers have employees performing in multiple states, such employers must pay unemployment tax to the state to which tax is owed. States have generally agreed upon a four-step analysis to determine the state to which unemployment tax is owed. With the exception of the third test, the tests refer to factors pertaining to the employee. The below tests are to be performed consecutively, in the order specified, for each of the multi-state organization’s employees.
The employer should first consider the state in which the employee’s work is localized. If most of the employee’s activities are performed in a single state, the employer is usually considered subject to that state’s unemployment tax.
2. Base of Operations.
If the localization test is not applicable, the employer should next look to see whether some of the employee’s work is performed in the state in which the employee’s base of operations exists. For example, if an employee performs services in Virginia, North Carolina, and South Carolina, and the employee’s base of operations is in North Carolina, then North Carolina’s unemployment compensation law applies.
3. Place of Direction and Control.
If the first two tests do not apply, the employer should next look to the state from which the employer’s authority is exercised. If some of the employee’s work occurs in the state from which the employer exercises control, then that state’s law applies. If, for example, the employee works in Georgia, Florida, and Alabama, and the company exercises control from Alabama, then Alabama’s unemployment compensation law applies. But if the company exercises control from Mississippi, the employer should use the Employee Residence test.
4. Employee Residence.
If the first three tests do not apply, the employer should look to the place where the employee lives, is registered to vote, has his or her children in school, and refers to as his or her “home.”
B. Interstate Reciprocal Coverage Arrangement
Forty-five states have adopted the Interstate Reciprocal Coverage Arrangement (“IRCA”) that permits employers to bypass the four-step test articulated above and to elect to make payments to one specific state. The five states that are not signatories to the IRCA are Alaska, Kentucky, Mississippi, New Jersey, and New York. Puerto Rico also has not signed the IRCA.
Under the IRCA, employers may elect to be subject to a participant state’s unemployment compensation law. “Such an election may be filed, with respect to an individual, with any participating jurisdiction in which (1) any part of the individual's services are performed; (2) the individual has his residence; or (3) the employing unit maintains a place of business to which the individual's services bear a reasonable relation.”
To make the election, the employer must submit a form documenting its election to the agency of the elected jurisdiction that has authority to administer the unemployment compensation law in that jurisdiction. The election must receive approval from the elected jurisdiction and any other interested jurisdictions that might otherwise govern the employer’s activities.
As discussed in our firm’s previous article, nonprofit corporations are not liable for federal unemployment tax. In some states, however, nonprofits will be subject to state unemployment compensation laws. Furthermore, given that some nonprofits have employees in multiple states, such nonprofits may be subject to multiple states’ unemployment compensation laws, as determined under the four tests discussed herein.
Complying with multi-state unemployment requirements can be challenging for nonprofits, which generally do not have large HR departments. Use of a qualified payroll company can help. Such payroll companies are often able to automate the required filings and withholdings. Nonprofits that prefer to handle such matters in-house may seek qualified legal counsel. Such counsel may be necessary to help the nonprofit navigate various states’ laws and properly designate workers as employees or independent contractors.