Remote workers: When do they count for local economic development incentives?

Community and Economic Development – Blog by UNC School of Government

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Remote workers: When do they count for local economic development incentives?

By Tyler Mulligan

Published December 15, 2022

“Remote work is here to stay,” says a 2022 Forbes article. Research by McKinsey & Company released in June 2022 reveals that 58 percent of Americans reported having the opportunity to work from home “at least one day a week,” and 35 percent had the option to work from home “five days a week.”

According to Pew Research, the move to remote or hybrid work is not universal: “Most U.S. workers (60%) don’t have jobs that can be done from home, and others who do have these types of jobs are going into their workplace at least sometimes. For a large majority of these workers, their jobs continue to involve at least some in-person interaction with others at their workplace.”

The shift to remote work, whether universal or not, represents a significant challenge for public officials focused on economic development. It affects where and how much retail and office space is constructed in our communities. It has altered transportation use and the daily commute. And for local governments engaged in business location incentive negotiations with private employers, the prospect of remote or hybrid workers must now be explicitly addressed.

Constitutional context

Any discussion about economic development incentives must begin with the state constitution. Local government elected officials and all attorneys have sworn an oath to uphold the state constitution, which is the supreme law of the land. All statutes enacted by the General Assembly must be interpreted in a way that does not violate the state constitution. Thus, as a threshold matter, the constitutional limitations on business location incentives must be addressed.

The North Carolina Constitution, along with almost all other state constitutions across the nation, have long prohibited government aid to private enterprise. Following widespread government bankruptcies in the late 1800s, which resulted from government investments in quasi-public railroads, state constitutions were amended to include “public purpose” and “gift” clauses to avoid government entanglements with private enterprise. Those clauses reflect the national rule to this day. Osborne M. Reynolds, Jr., Local Government Law 515 (4th ed. 2015); John Martinez, 3 Local Government Law § 21:7, at 21-25 (2d ed. 2017) (“Local government property cannot be conveyed to a private party without adequate consideration, for to do so would constitute an improper gift of public property or the granting of a subsidy contrary to state constitutional constraints.”).

As stated by the North Carolina Supreme Court in multiple decisions, “direct state aid to a private enterprise, with only limited benefit accruing to the public, contravenes fundamental constitutional precepts.” Maready v. City of Winston-Salem, 342 N.C. 708 (1996). It is a foundational principle of North Carolina constitutional law that a government must receive valid consideration—performance of a public service—in exchange for any payment to a private entity. Local governments are not even permitted to make donations to charitable entities, as explained by my faculty colleague Frayda Bluestein in a blog post here. This is simply common sense. If grants could be made to private enterprises to further their enterprises, then longstanding legal requirements governing property conveyance at fair market value could be worked around; grants could be used to undermine uniformity of taxation by paying the equivalent of tax refunds; utility law requirements about treating similarly situated customers the same could be easily avoided; procurement rules and bidding processes could be manipulated by offering grants to favored businesses. State law, rooted in constitutional principles, contains a carefully constructed web of requirements and prohibitions designed to minimize government aid to private enterprises.

This ban on aid to private enterprises also extended, until recently, to business location incentives. Economic development subsidies have long been prohibited. Constitutional case law prohibits local governments from creating or operating their own businesses, such as hotels, and by extension they are prohibited from providing financial support for businesses. Case law has even struck down attempts by local governments to facilitate industrial revenue bonds (loans) for private businesses.

However, in the 1996 Maready case, the North Carolina Supreme Court made a limited exception to this longstanding national rule. There the state supreme court held for the first time that business location incentives could be provided to a business that promises to locate substantial jobs and tax base in North Carolina that, quoting the court, “might otherwise be lost to other states.” Lower courts have followed this rule, stating that business location incentives will be held constitutional so long as they are “parallel” to the incentives approved in Maready by the NC Supreme Court. Haugh v. County of Durham, 208 N.C.App. 304 (2010).

One of the primary rationales for the supreme court’s Maready decision was job creation: “The expenditures this statute authorizes should create a more stable local economy by providing displaced workers with continuing employment opportunities, attracting better paying and more highly skilled jobs, enlarging the tax base, and diversifying the economy.” Maready at 724 (emphasis added). “N.C.G.S. § 158-7.1 [of the Local Development Act of 1925], which is intended to alleviate conditions of unemployment and fiscal distress and to increase the local tax base, serves the public interest. New and expanded industries in communities within North Carolina provide work and economic opportunity for those who otherwise might not have it.” Id. at 727. Thus, the constitutional rationale for approving business location incentives was based substantially on creating a more stable “local economy” for communities “within North Carolina.”

Constitutional analysis alone leads to the conclusion that remote workers don’t count for incentive purposes. Remote jobs fail the constitutional test because such jobs are not “attracted” to a “local economy”; they cannot promise to alleviate local “conditions of unemployment”; and remote jobs cannot be contractually bound to “provide work and economic opportunity for those who otherwise might not have it” in “communities within North Carolina.” Even if the General Assembly were to change the statutes on this point, local government elected leaders and attorneys would still be obligated to apply the statute within these constitutional boundaries articulated by the state’s highest court.

Thus, constitutional law is essentially dispositive on the question of whether fully remote work can be counted for purposes of local business location incentives—those jobs cannot be counted. The statutes provide further support for this conclusion about remote workers and, importantly, provide local governments with ways to set standards for hybrid workers who report to work occasionally in person.

Relevant statutes

Two statutory provisions bear on the question of whether remote workers can be counted for incentives:

• G.S. 158-7.1(d2): “The governing board of the county or city shall determine that the conveyance of the property [or other location incentive] will stimulate the local economy, promote business, and result in the creation of a substantial number of jobs in the county or city that pay at or above the median average wage in the county or, for a city, in the county where the city is located.” [Note: this provision appears to apply only to property conveyances, but as explained in a North Carolina Law Review article, the NC Supreme Court treated those requirements as applying to all incentives, regardless of whether they involve real estate.]
• G.S. 158-7.1(h): “Events that would require the city or county to recapture funds would include the creation of fewer jobs than specified in the agreement … and failing to maintain operations at a specified level for a period of time specified in the agreement.”

These two provisions, which should be read together, suggest that jobs count for incentive purposes only when they meet all of the following requirements:

• they are among the “substantial number” of jobs required to be located “in the county” (not remote positions where the employee can work anywhere);
• they are subject to a wage standard that is based on wages “in the county;” and
• they are subject to an agreement that requires the business to conduct “operations at a specified level” with those jobs at the business location “in the county.”

What matters is the employee’s place of work—not the employee’s place of residence. A local government must require induced jobs to be located “in the county” and must impose requirements for a certain level of “operations” involving those employees at the location, typically by requiring a minimum number of employees to work at the facility for a minimum number of hours annually.

To address remote or hybrid workers, a local government could define “operations at a specified level” to include the number of hours per week (and/or annually) a full time employee must report to work in person “in the county” in order to be counted for incentive purposes. Many local incentive policies already establish a standard for “full-time employees” (35 hours per week is the State’s full-time standard at G.S. 143B-437.51(6); this standard could also address remote workers).

On one end of the spectrum, an employee who reports to work in person for the full time equivalent of 35 hours would certainly count for incentive purposes. On the other end, an employee who has no regular weekly requirement to report in person clearly wouldn’t count—there would be no way to verify that the job was “in the county.” In between those two ends of the spectrum, a local government could set its own standard provided it is reasonably designed to ensure the job is “in the county.” For example, a local government could require a job to be worked in person at the facility for at least 24 hours per week in order to count for incentive purposes. Ideally, from a local government perspective, the standard would be set to ensure that an employee would need to live within a reasonable commuting distance from the business location.

What about going beyond requiring the employee to work in the jurisdiction, and instead requiring employees to reside in the jurisdiction?

May the City require, as a condition of an incentive, for the employer to certify that it required employees to live in the jurisdiction or that it employed only those persons who already live in the jurisdiction? No, because such a scheme would violate the U.S. Constitution. Residency requirements—even if only in the form of aspirational goals or targets—will inevitably cause a company to impose hiring quotas or otherwise turn down a qualified applicant simply on the basis of residence. An excluded applicant would have several bases on which to file suit against the local government. For applicants located outside of North Carolina, they could argue that the local government is using its authority, public treasury, and contracting power to cause the business to violate (1) the Privileges and Immunities Clause, which protects U.S. citizens from discrimination on the basis of their state residence; or (2) the Commerce Clause, which prevents states from interfering with interstate commerce. For applicants who lived outside the jurisdiction but within North Carolina, they could file a complaint on the basis of the NC Constitution’s law of the land and equal protection clause.

Can local governments follow NC Department of Commerce guidance on remote workers?

No. Local governments should not—and cannot—rely on guidance issued by the North Carolina Department of Commerce for state incentive programs such as the Job Development Investment Grant (JDIG) program. A JDIG policy document sets a remarkably low bar for remote employees to count for JDIG purposes—they must report to work in person only “four days a month.” Indeed, the guidance focuses instead on whether the employee pays state income and payroll taxes. According to the policy document, “employees who are not residents of the State must perform full‐time work in the State to be considered eligible, as the only portion of the employee’s wages subject to North Carolina withholding are those associated with the services performed in this State.”

This standard for JDIG makes perfect sense for the State—which receives the same payroll taxes regardless of where an employee works—but it doesn’t make sense for local governments. Local governments have a different constitutional and statutory standard that requires jobs to be located “in the county” in order to be counted for municipal or county incentives. Remote jobs cannot be counted because they cannot be said to help the “local economy”—they fail the constitutional and statutory tests. Local governments rely on local sales and property taxes, so the motivation for keeping jobs “in the county” matters for local governments in a way that doesn’t for the State. Local incentive requirements should reflect that reality.

What if our local government already executed an incentive agreement and later the business switches its employees to remote work?

This is not uncommon. As the labor market has tightened, more employers have been forced to offer flexible or hybrid work arrangements in order to hire the workers they need. However, this fact does not—and cannot—change the terms of the incentive agreement. The first thing to do is check the agreement’s specific language. Most local governments have incentive agreements that require a certain number of “full-time” jobs to be located “at the facility” that was constructed as part of the agreement. The ordinary usage of “at the facility” or “at the site” means actually present in person at the geographic location.

When a business switches a job to remote work, the business can no longer count that position as a “full time” job “at the facility.” Nor can the incentive agreement be amended or modified to accommodate a desire by the business to count remote workers. The constitutionally permitted consideration for an incentive agreement is locating “substantial” jobs and tax base that “might otherwise be lost to other states.” There is no additional constitutionally-approved consideration the business can offer (except perhaps more jobs and tax base that might otherwise be lost to other states) in exchange for an amendment to accommodate remote workers. Any modification or amendment would be void for lack of consideration and would amount to an unconstitutional exclusive emolument (or gift) for the business.