For nearly two years, the predominant COVID-19 driven incentive compliance issue looming over companies has been the difficulty to achieve and report on headcount performance as part of economic development incentive agreements.
The evolving workplace landscape precipitated by the COVID-19 pandemic adds another wrinkle to this process. With the trend toward remote work — whether a hybrid scenario or fully remote — our clients, particularly those with an office-based workforce, are evaluating their long-term footprint needs. Seemingly nothing is off the table with respect to the workplace, including hoteling models, employer choice models, flex-worker models, or pure remote worker strategies. All of the above will have implications for incentive compliance reporting.
Many incentive programs are looking toward the future to address the new workforce reality and have already started to formulate policies to address changing workplace dynamics. These policies may help to keep companies in compliance, even if switching to a flex/remote environment. While some of these policy changes are temporary, others are likely to outlive the COVID-19 pandemic and become permanent.
As discussed in this article, navigating this transitory period requires case-by-case considerations based on companies’ individual circumstances.
How Have State Agencies Responded?
Across the U.S., we have seen states, as well as some local communities, adopt a wide variety of incentive compliance accommodations, including some that are temporary, while others more permanent. Some examples of near-term waivers that do not address long-term workplace changes include:
North Carolina Job Development Investment Grant (JDIG): Allowed companies to push their job creation schedule by one year, but they could not lower their minimum job commitments.
Georgia Job Creation Tax Credit: Allowed all companies to use 2019 head counts for the calculation of 2020 and 2021 tax credits, thus nullifying any impacts due to
COVID-19 in the near term.
Many incentive programs are looking toward the future to address the new workforce reality and have already started to formulate policies to address changing workplace dynamics.
Oklahoma Quality Jobs Program: Temporarily waived minimum payroll requirements, allowing companies to continue receiving benefits when they would otherwise be disqualified.
New Jersey GrowNJ Grant: Allowed companies to push their job creation schedule by a year and allowed companies to exclude COVID-19 impacted months from the monthly headcount average.
California Competes Tax Credit: Offered a one-year extension to meet job goals, but only for job creation projects in the final year.
Some examples of long-term policy changes that do address long-term workplace changes include:
Texas Enterprise Fund (TEF): Offered all companies an amendment option to permanently allow for Texas-based residents to count, even if working remotely.
New Jersey GrowNJ Grant: Offered companies the option to renegotiate their job creation commitments, and permanently lowered the on-site workplace from 80 percent to 60 percent for all companies.
Missouri Works Program: Companies still in the job creation phase can apply to lower their starting headcount level to today’s levels, effectively allowing all job growth to be measured against COVID-19 levels.
Kansas PEAK: Companies may now include any remote worker provided they continue to pay state UI Tax and receive direction from the project site.
Many states have communicated that they will address COVID-19 compliance issues on a case-by-case basis rather than by adopting blanket policies. With the emergence of the highly transmissible Omicron variant, states that implemented temporary accommodations may choose to extend or adopt new policies for 2022 and beyond. It appears that incentive programs with built-in pro-rata payouts have been overall less likely to adopt long-term policy changes.
Local community willingness to work with companies that have been impacted by COVID-19 has been overwhelmingly positive. Most cities and counties understand the importance of helping their local businesses and often have policy flexibility to do so on a situational basis.
HR, Audit and Payroll Considerations
Many incentive agreements define a qualifying position as one which is full-time and performed at a defined project site or sites. Other common criteria include specified wage targets as well as that the employee is covered by a health insurance plan and is reported for state SUI or SIT purposes. Most commonly, states use a 50 percent or more test to determine if someone is working at a project site. This is good news for companies that adopt flexible work policies that require at least three in-person days per week. Some agreements may allow a company to include any new positions created within a particular state/county/city, which will allow for built-in geographical flexibility, even as people continue to work from home.
One recurring incentive compliance issue that many companies are still working through is their HR and payroll policies with respect to the employee’s official work location.
One recurring incentive compliance issue that many companies are still working through is their HR and payroll policies with respect to the employee’s official work location, particularly since many companies do not yet know if their flex/remote workplace policies will be temporary or permanent. It can be challenging to accurately capture evolving employee worksites in HR or ERP systems. We’ve seen a mixed bag, with most companies continuing to code employees to their legacy worksite, despite having many employees (mainly office workers) working remotely for the past 22 months. Furthermore, many of these employees no longer legally reside in their original state! Some companies have adopted hybrid worksite codes to designate someone as flex/remote but still attached to a specific site, while others will simply classify everyone as remote and unattached to a location.
These internal payroll decisions have direct consequences for incentive compliance reporting since the qualifying job requirements are often technical, well-defined, and require tracking. How employees’ locations are coded could have incentive compliance implications since states often validate new jobs against SUI or SIT tax rolls. We’ve already seen some states entirely shift the burden to the company to prove that every reported new job worked on site throughout the year, regardless of the official workplace policy or SUI/SIT data. As flex/remote workplace becomes more common, companies should be prepared to prove which employees meet the incentive’s on-site work requirement.
Beyond immediate incentive compliance concerns, companies need to be prepared to respond to future audits to substantiate their job creation compliance. Atlas Insight routinely works with our clients’ HR and payroll functions to ensure that we create a documentation trail to evidence which employees have worked on site, and for how long. Your company should be prepared to present formal employee communications, adopted workplace policies, and employee logs to help substantiate which individuals continue to meet the requisite on-site requirement for your incentive.
Nationally, we’ve found that about 35 percent of all incentive agreements contain a force majeure clause, or an “out” provision based on industry/economic events outside of the company’s control. Very few of these clauses specifically cite a “pandemic,” but we’ve been successful in leveraging these clauses to navigate through impacts stemming from the implementation of flex/remote workplace policies.
Every agreement should be reviewed carefully for discretionary clauses that may allow the administering jurisdiction to provide an accommodation or waiver due to noncompliance that ultimately stems from the existence of the COVID-19 pandemic.
About 35 percent of all incentive agreements contain a force majeure clause, or an “out” provision based on industry/economic events outside of the company’s control.
State vs. Local Accommodations
State-level incentive programs can sometimes choose to accommodate remote workers who still reside in-state, whereas local governments will often find it hard to justify the inclusion of employees who now reside and work at home in other neighboring cities.
In the case of the Texas Enterprise Fund program, for example, the state has afforded grantees an election to temporarily or permanently count newly created positions that reside anywhere within Texas, provided they are still associated with the project (e.g., “teleworker”). However, local communities in Texas (as well as in other states) are more restricted in their ability to accommodate the remote worker concept, as only a percentage of newly created positions will inevitably reside in the locality, and incentives are often awarded based on local spending and economic impacts associated with workers commuting to a specific community every day. This benefit will be reduced once companies shift away from a 100 percent on-site work policy.
Companies should engage with their communities to understand whether administrative compromises can be worked out. Some examples of compromises may include setting up a lower on-site percentage requirement, utilizing the full-time equivalent (FTE) concept, or if subleasing now-unused space, requesting that the subtenant’s positions count toward performance.
Incentives for 100 Percent Remote Work Projects
Traditionally, incentive programs for pure remote work operations have been few and far between. Legislation for existing programs is often centered on specific project site(s), mainly because the economic impact of a dispersed workforce can be difficult to model, and remote work companies find it challenging to commit to a certain percentage of workforce that will reside within a specific state. Additionally, most state programs require a local incentive match — which is impossible if there’s not a singular community to host the project.
Despite the embrace of a company-wide remote work option by some firms, states have been slow to adopt new programs to help grab a larger slice of their employees.
Despite the embrace of a company-wide remote work option by some firms, states have been slow to adopt new programs to help grab a larger slice of their employees. There are, however, some exceptions. For example, the Colorado Location Neutral Employment Incentive (LONE) program can provide grants for hiring remote workers in rural communities — but only if they are tied to an in-state job creation project at a specific site.
At least for now, it seems that job creation projects that are strictly limited to remote workers will mostly be left on the economic development sidelines until states develop new programs to specifically target these types of projects.
Looking ahead toward the rest of the decade — and beyond — we have little doubt that workplace practices will fundamentally shift in the direction of a greater percentage of remote and flex work environments. Only time will tell how significant or permanent this shift will be and whether incentive programs will adapt. For new projects, we expect to see states and communities be more receptive to the idea of a flex workplace model, provided that incentives can be justified and be proportionate to the economic impact delivered by the project.
Most states and communities have been sensitive to today’s workplace realities. While a switch to a remote or flexible work environment could result in early termination or recapture, careful attention to incentive compliance issues, along with proactive planning and communication, can lead to a favorable outcome.
Bottom-line, companies should consider how workplace policies may impact their existing incentive agreements, as well as the implications they could have on the incentive compliance process.