Employee moved to Texas without telling me - now what? Payroll, tax, and compliance nightmare

We're a 15-person startup based in California. I just found out one of our engineers has been working from Texas for the past 4 months. He never told us he moved - just kept working remotely like normal.

Our payroll is still set up for California. Are we in trouble here? What do we need to do to fix this? I'm worried about tax issues, worker's comp, unemployment insurance, all of it.

He's saying he wants to stay in Texas permanently. Can we even allow that or do we need to make him move back?

Wait, so we might still have to follow California employment law even though he's in Texas? That seems insane.

What happens with the 4 months where we were withholding California taxes but he wasn't actually in California? Is that going to be a huge penalty?

On California law applying: It's complicated. California courts have held that California employment laws can apply to California employers even for out-of-state employees in certain circumstances. See Sullivan v. Oracle Corp. However, this is fact-specific.

The safer approach: create a Texas-specific employment arrangement that complies with Texas law while being mindful of any California obligations that might still apply.

On the tax withholding issue: Your employee will need to file for a refund of California taxes withheld for the period he was in Texas. You'll need to issue corrected W-2s. There may be penalties for failure to withhold Texas unemployment taxes, but since Texas has no income tax, at least you don't have that issue.

Immediate steps you should take:

1. Contact your payroll provider TODAY and update his work location
2. Register with Texas Workforce Commission for unemployment insurance
3. Get Texas workers compensation coverage
4. Consult with a multi-state employment attorney about your broader compliance obligations
5. Consider whether you need to register as a foreign entity in Texas
6. Update your employee handbook to require pre-approval for out-of-state moves

@lisa_nguyen_4 raises a good point about employee expectations, but from a legal perspective, employers absolutely need to know and approve state changes.

@RealEstateCounsel_13 - Whether to allow him to stay is a business decision, but consider:

Also consider: if you allow this, other employees will ask. Do you want to support 10 different states? That's where the compliance really becomes expensive.

Don't forget the corporate income tax implications. Having an employee in Texas may create nexus requiring you to file Texas franchise tax returns and potentially pay Texas margin tax.

We went through this when we had employees in 8 states. Now we're dealing with 8 different state corporate tax filings. It's not the end of the world but it's real overhead.

Our solution: We created an "approved states" list of places with relatively simple compliance requirements. Texas made the cut, but we won't support employees in states like California (too complex) or states with high corporate taxes unless there's a business reason.

Yes, you should absolutely update his employment agreement with a written amendment or new offer letter that:

• Specifies his primary work location is now Texas
• Confirms which state's laws govern the employment relationship
• Updates any location-specific provisions (paid leave, etc.)
• Requires notice and approval for any future location changes

This protects both of you and creates a clear record of when the change occurred, which will be helpful for tax authorities.

Good luck with the cleanup - it's messy but you're doing the right things!

Your state department of labor might handle this faster than a lawsuit. In California, the Labor Commissioner can issue penalties pretty quickly.