Paying Remote Workers – What Are Your Options?

By Clifford C. Sandsmark, CCP, CSCP, SPHR, SHRM-SCP

Since the onset of Covid we have witnessed what some call ‘the great migration’ of workers moving from a corporate environment to their ‘home office.’  Employers weren’t ready for them to send their workforce home into hibernation – but thanks to technology it has worked well.  This created the opportunity for companies to witness the ability for workers to be productive somewhere other than the traditional office – and once employees had a taste of it created a rising demand to maintain that workstyle.

It looks like remote work is here to stay.  There are estimates that 22 – 30% of the workforce will work remotely by 2025.  Some of the advantages of working remotely is an expanded pool of talent, the option to work at a location that is closer to your personal preferences, improved purchasing power at a location with a lower Cost of Living (COL) to name a few.

As the migration continued, highly paid employees discovered that their salaries could go much farther living in low Cost of Living areas other than for example Silicon Valley.  Some employees recognized this, and they decided to relocate, and their companies acted.  Probably the most notable example of adjusting pay for remote locations is Google.  They are one of several tech companies that designed controversial plans to lower pay for remote workers who relocated from expensive areas where their headquarters are located to an area with a lower Cost of Living.  Google felt that if an employee wanted to take their current earnings and move from San Francisco CA (COL 178.4% above National Average) to live and work in Tulsa OK (COL 91.3% of the National Average), it wasn’t fair to get an automatic 87.1% increase from a lower Cost of Living.  According to Reuters they even designed a calculator that showed how much less they will be paid – ranging from 5.0% to 25% – depending on the new location.

What is the right answer?  How do you effectively set pay for a remote workforce?  What do I do when an employee chooses to work from a different location than the traditional office?  There are basically three options:

1. Adjust their pay based on the Cost of Living.
2. Adjust their pay based on the Cost of Labor.
3. Use one standard nationwide regardless of the Cost of Living or Cost of Labor differentials.

What is the difference using the Cost of Living or Cost of Labor?  Aren’t they the same?  Here are some definitions from the Economic Research Institute (ERI):

“Cost of Labor is determined by the supply and demand of labor across all industries and occupations by geographic location.”

“Cost of Living measures the required costs to maintain a certain standard of living within a geographic location (based on a market basket of goods and services including consumables, transportation, health services, housing and taxes paid by an employee).”  

Many managers think their pay practices should mirror the Cost of Living for a work location, but some feel that there are problems with that approach.  The first consideration here is that Cost of Living will not necessarily correlate to the Cost of Labor.  Miami FL for example has a Cost of Living that’s 55.3% higher than National Average, but the Cost of Labor is 1.2% below National Average (per ERI).  Expensive places to live do not affect wage levels since they’re two different markets and follows the old adage “what you make depends on what you do and where you do it.”

The other consideration is that Cost of Living varies by the individual worker based on the economic decisions they make to sustain a certain lifestyle.  The argument here is the individual has some control of their Cost of Living by the choices they make (“pay me a salary that affords my chosen lifestyle”).  The danger with using Cost of Living to set salary levels is that if you peg your pay practices to an area with a high Cost of Living and a low Cost of Labor, you could overpay your employees and inflate your costs in relation to the market price for labor.

“Where cost of living is very valuable in managing relocations and temporary global assignments, cost of labor is most valuable in managing ongoing, regular assignments for new hires and existing employees.” (ERI).

If you decide to base remote worker pay for their home location, you can also have a problem with adjusting and maintaining pay on a one-by-one basis (whether Cost of Living or Cost of Labor).  As the number of remote workers increases, determining their pay and maintaining them as they move around can become an administrative nightmare.

This leaves us a third option: pay all the remote worker’s using the same pay level regardless of the differential.  Here companies will usually use pay reflecting the National Average.  Both Mercer and Korn Ferry are projecting that over time, pay for all remote workers will normalize to the National Average for labor.  This is easier to administer as a group rather than individually and you may consider adding special modifiers for hard to source talent such as IT.

Here are some other factors to consider.  There is a need to be consistent when making pay adjustments or offers for remote worker.  Avoid potential discrimination charges if two or more people have the same job description and do the exact same work but are paid differently due to differences in Cost of Living or Cost of Labor.  Be sure you can justify your pay decisions by basing them on compensable factors for seniority, time in job, verified experience, education, etc.

Remote workers are subject to the wage and hour laws of the states and localities in which they are working.  Non-exempt remote worker’s pose a compliance challenge with FLSA issues.  Small wage and hour mistakes can be compounded into large class action lawsuits unless employers develop policies as to where and when non-exempt employees can work.  You can never eliminate the risks, but careful management practices can mitigate the possibility of litigation.

Payroll practices in the home state may not satisfy the requirements of the remote worker’s state resulting in noncompliance issues.  “Remote work has tax compliance risks for employees” says Stephen Miller in a recent SHRM article (Employees Working Out of State Often Fail to Let HR Know).  “…28 percent of employees have worked outside their home state or country but only one-third reported all those days to HR, a 2021 survey shows.  Consequently, their employers may have failed to withhold payroll taxes appropriately without realizing it.”  This includes Unemployment Taxes as well.

No employee should be able to declare themselves a remote worker headed for Belize to work on the beach with their immediate manager’s blessing, and not notifying HR.  There should be a mechanism or approval process to ensure that everyone who needs to know is notified and the employee is going to meet all the requirements to operate in that location.

Terminating employees can pose another challenge.  UI claims, final paychecks, access to personnel files, retrieval of company property (computers, phones), etc. can be a logistical challenge.  Also state laws can influence your non-competes and severance agreements.

If you decide to make pay adjustments for your remote worker, the Pros suggest that you be consistent in your practices and communications.  High salaries at the new location may be at the top or over the Max of your salary plans.  If you decide not to reduce their pay, consider freezing salary growth where the employee is no longer eligible for increases.  Recruiting for remote worker positions can also be challenging.  Work with your recruiters as they source remote talent to ensure the company will be compliant with the laws of those states.  

HR professionals are acknowledging that remote workers are here to stay, and we need to be prepared for the new paradigms of how and where we do work.