I would advise that you check with your legal counsel to make sure you have the employee set up correctly as there are employee rights, worker’s compensation, and payroll tax issues involved here, to mention a few, which can vary by state. From a payroll setup perspective, in the case you outlined, generally speaking, employees who perform work in multiple states, would need to pay non-resident income taxes in the work state (CA) and resident income taxes in their state of residence (NJ), unless the states involved have reciprocal agreements. As the employer, you have a withholding responsibility in both states where work is performed, even if you have no physical presence in the state. As far as workers’ compensation is concerned, because coverage is state-specific and each state has their own requirements, you may want to check your policy to see if it covers operations in both states. Of greater concern are the wage and hour laws and employee rights that apply. As a general rule, the laws of the state where the employee is physically working is the law that would apply to that employee, regardless of the state your company is located or based. It’s worth noting that California offers broader protections that go beyond federal and other states’ employment laws.