Telecommuting Climate Getting Chilly

Before the advent of the Internet, telecommuting was considered an abnormality, something done in rare circumstances by select individuals. However, when broadband connectivity became widely available, telecommuting opportunities became more common. Surprisingly, after a few years of healthy growth, that trend may be losing its steam.

Working from home offers employees and employers a number of potential advantages. Employees gain flexibility, so they can balance professional and personal responsibilities. Employers may be able to attract and keep coveted talent by offering individuals more flexible work arrangements. Consequently, telecommuting has become a common work option for millions of individuals.

However, interest in telecommuting seems to have leveled off. Market research firm International Data Corp. (IDC) expects the number of telecommuters to increase from 8.9 million to 9.1 million in 2005 and grow at rate of less than two percent through 2009.

"There hasn't been as much growth in telecommuting as some observers had expected," stated Merle Sandler, a senior research analyst at IDC.

Be Seen or Be Fired

One of the reasons is the changing economic environment. "During the past few years, the economy has been tight and companies have been cutting back," IDC's Sandler told the E-Commerce Times. "Employees seem to think that being in the office -- and being seen doing productive work -- makes it more likely that they will keep their jobs."

Another issue is that the definition of the term seems to be changing. IDC classifies telecommuters as individuals who spend at least three days a month working at home rather than in the office. While there may be instance when employees stay home so the cable company can install their services or a parent can tend to a sick child, these ad-hoc situations do not meet IDC's criteria.

Changing processes also play a role in muddying today's work categories. "Companies have embraced wireless technology and employee mobility, which has blurred the classic definition of telecommuting," noted Gil Gordon, a telecommuting consultant based in Monmouth Junction, N.J. Many companies have opened more remote sites, so rather than working at home, an employee may work from one of these locations on occasion and gain the benefits associated with telecommuting.

Some companies have cut back on their telecommuting programs. Initially, corporations looked at telecommuting as a way to lower their operating costs by reducing their real estate expenses. At the turn of the millennium, large enterprises -- Ford (NYSE: F), for example -- embarked on ambitious programs to outfit users with home computers and network connections. Now, in order to curb expenses, they are cutting back on the number of items offered to employees.

"In many cases, a company will pay part or all for an employee's monthly Internet charge but few now pay for hardware or software," noted IDC's Sandler.

A Taxing Situation

Cost is becoming more of an issue for telecommuters because states -- New York, for one -- have been searching for ways to increase their tax revenue. The rules for taxing telecommuters who live in one state but are employed in another are not uniform throughout the country. In most cases, states have a rule requiring that telecommuters pay a proportional state income tax. For example, if they work in state two out of every five days, 40 percent of their income may be taxed.

New York follows a different formula: Regardless of how much time is spent working in the state, it taxes 100 percent of an employee's income. Consequently, a telecommuter may have to pay all of New York's income tax, as well as a portion of his or her home state's income tax.

Thomas Huckaby, a programmer who lived in Tennessee and worked for a company in New York, went to court to try and lower his tax burden. In October, the US Supreme Court decided not to hear his case, a ruling that left New York's tax laws on the books.

Although no state has been as aggressive as New York in collecting income tax from telecommuters, Delaware, Nebraska and Pennsylvania have enacted similar laws.

"We are afraid that the Supreme Court ruling will encourage other states to aggressively tax telecommuters," noted Nicole Belson Goluboff, a lawyer who has published books on telecommuting and is a member of the The Telework Coalition, a telecommuting lobbying group.

Little Risk for the States

States have little to lose by taking such steps. They are often looking for ways to increase revenue and balance their budgets. Since the affected telecommuters live out of state, they have little political pull -- no voting power -- and find it hard to influence debate about a state's taxing policy.

Since there is virtually no impetus for the states to alter their rules, such groups as the The Telework Coalition have been working for change at the federal level. They have been lobbying Congress to pass the Telecommuter Tax Fairness Act, which would prevent states from taxing all of a telecommuter's income. Although the bill remains in committee, and no date has been set for a vote, Goluboff remains hopeful that it may be enacted.

If not, then opportunities for telecommuting could diminish at a faster pace. "Right now, few telecommuters are aware of the potential tax implications from the New York ruling," concluded Goluboff. "If they do become aware of it, that could have a chilling effect on interest in telecommuting."