Cryptocurrency, if nothing else, is a cultural phenomenon that is gaining more acceptance and adoption over time. A poll by the deVere Group last year noted that more than a third (or, 36%) of millennials, and more than half (or, 51%) of Generation Z, would be happy to receive 50% of their salary in Bitcoin and/or other cryptocurrencies.[1]
As cryptocurrencies gain this increased adoption, especially among younger generations of workers, requests to be paid for work in cryptocurrency will likely increase as well. In light of this, companies and employees alike should be aware of the ramifications and risks of paying compensation in cryptocurrency.
For Independent Contractors, There Are Clear Benefits to Paying Them In Cryptocurrency.
Independent contractors can bring massive savings to companies in the form of reduced labor costs, unemployment insurance, workers’ compensation, taxes, and employee benefits. It can also reduce the risk of liability under various employment discrimination, and wage and hour laws. However, companies need to keep in mind that the risk of misclassification is significant since classifying a worker incorrectly brings liability for unpaid wages, meal and rest break violations, unpaid overtime, penalties for failing to withhold taxes and file proper documents with the state, along with attorneys’ fees and costs.
Still, provided a worker is properly classified as an independent contractor, paying them in cryptocurrency has several advantages. For one, payments are nearly instantaneous no matter where in the world the recipient is located and depending on the type of cryptocurrency being paid, is relatively inexpensive. Paying global workers in cryptocurrency will also reduce the cost of foreign currency exchange, which is an important benefit in a competitive market that is increasingly international. Companies may also value the reputational benefit of being seen as cutting-edge adopters of a burgeoning technology. This could be most effective among the younger cohort that is increasing cryptocurrency adoption and who tend to work in the “gig economy” where independent contracting is typical.
For Employees, Paying in Cryptocurrency Must Be Done Carefully as the Current Law Is Murky and Inconsistent Among Jurisdictions.
In the United States, the federal Fair Labor Standards Act (“FLSA”) requires “payment of the [FLSA’s] prescribed wages, including overtime compensation, in cash or negotiable instrument payable at par.”[2] The term “payable at par” means payable at face value, so the question becomes, since cryptocurrency is obviously not cash, can it be considered a “negotiable instrument payable at par” such that the FLSA permits it to be used for wage payment?
The views of the IRS and the DOL shed some light on potential answers to this question although they are far from definitive. On the one hand, a DOL opinion letter from 2006 held that foreign currency was an acceptable wage after being exchanged into U.S. dollars at the “exchange rate current at the time of payment (i.e., the rate generally available to an individual person in the vicinity where the employee is working).”[3] On the other hand, the IRS has determined that cryptocurrencies are property, not currency, for federal tax purposes.[4] Given the ability for cryptocurrency to be easily and immediately exchanged for U.S. dollars across many cryptocurrency exchanges, it is conceivable that the DOL and/or courts could analogize certain cryptocurrencies to foreign currency permitted as payment under the DOL’s 2006 opinion letter. However, the DOL also may not care and given the IRS’s position that cryptocurrency is not currency at all, the conception that other agencies or courts would hold otherwise is far from certain. Thus, anyone paying employees’ wages directly in cryptocurrency should proceed with high caution.
At the state level, multiple states require wages to be paid in lawful money of the U.S., including Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Kansas, and Tennessee, and any exceptions applicable to each of these states vary. For example, in Georgia, the requirement to pay wages in lawful money of the U.S. does not apply to salaried workers, and other categories of employees including in certain industries.[5] Moreover, other states have laws that would likely be implicated if an employer paid an employee in cryptocurrency. In California, for example, employers are prohibited from paying employee wages with any order, check, or other instrument, “unless it is negotiable and payable in cash, on demand, without discount, at some established place of business in the state.”[6] Other states, like Washington, require wages to be paid at no cost to the employee.[7] All of this likely means that cryptocurrency payments that lose their value in U.S. dollars, or are converted from U.S. dollars to cryptocurrency for a fee, could be violative of these various state laws. All in all, companies need to be very careful to consult applicable state laws to see if payment in cryptocurrency is prohibited.
Volatility Is an Inherent Risk to Compliance with Wage and Hour Laws.
Anyone familiar with cryptocurrency, even if only by way of news headlines, is familiar with the volatility in its price action. This volatility could cause employers to unintentionally violate applicable wage and overtime laws if they pay their employees in cryptocurrency. For example, if the value of cryptocurrency drops below what an employee must be paid in minimum wage or overtime under the law, the employer could be liable for a wage violation since the employee received an amount less than required. Not only would the employer potentially be liable for unpaid wages, but an employee having their salary drop below what the minimum salary requirements are for exempt employees could lead to liability for misclassification claims, unpaid overtime, liquidated damages, and attorneys’ fees.
Options for Paying Employees in Cryptocurrency and Reduce Risk.
Even with all the uncertainty attached to paying employees in cryptocurrency, there are ways to provide employees with the ability to be paid in cryptocurrency, if they so desire. In any event, employers should probably pay employees at least the minimum wage and overtime (or the threshold amount to claim an exemption from overtime) required under applicable law in U.S. dollars, and not in cryptocurrency. This would help prevent issues arising from cryptocurrency price fluctuations and any attendant wage and hour liability. Further, provided it is not prohibited under applicable state law, an employer should also ensure that any amounts to be paid to an employee in cryptocurrency be paid in U.S. dollars first, with that U.S. dollar amount converted into a cryptocurrency of the employees choice, and without any cost to the employee. Moreover, and before doing any of this, any employee being paid in this way should be first required to sign a written authorization containing strong language explaining that the employee fully authorizes and assumes all risks of a conversion from U.S. dollars to cryptocurrency and the concomitant transfer to and storage in, a digital wallet, whether custodial or noncustodial. The employee should also clearly represent that they have control over such digital wallet and provide a release concerning liability relating to the transfer. Finally, any new payment procedure should come with a clear update of company policy to account for any changes.
Future Developments.
It is possible that Congress and/or state legislatures could pass legislation expressly authorizing payment of wages by way of cryptocurrency. Some point to the Worker Economic Opportunity Act of 2000 which excluded the value of stock option grants from an employee’s regular rate of pay and ended up removing the hesitancy employers had in issuing stock options to their employees. Congress could make a similar move to remove hesitancy in cryptocurrency payments by passing a law permitting it.
However, there may be an uphill battle ahead before cryptocurrencies are clearly authorized for wage payment. The DOL recently issued guidance stating that 401(k) plan fiduciaries should “exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu”.[8] If the DOL’s position on cryptocurrency 401(k)’s can give us any sense of Congress’s viewpoint on cryptocurrency payments for wages, then it could be some time before that sentiment changes and we see legislation clearing this issue up.
In the meantime, we will continue to monitor for additional developments. If you need any individualized counseling on whether, or how, to offer employees or other workers payment in cryptocurrency, contact Mattiace Tetro LLC.
[1] See https://www.nasdaq.com/articles/survey-shows-some-millennials-prefer-to-be-paid-in-crypto [2] See 29 CFR § 531.27(a) (linked here). [3] See U.S. Dep’t of Labor, Wage & Hour Div., Opinion Letter FLSA2006-17 (May 23, 2006) (linked here). [4] See I.R.S. Notice 2014-21, 2014-16 I.R.B. 938 (linked here). A number of states in the United States have followed this approach for their own tax purposes as well. [5] See O.C.G.A. 34-7-2 (2010) (linked here). [6] SeeCal. Lab. Code § 212(a)(1) (linked here). [7] SeeWash. Rev. Code § 49.46.010(7) (linked here). [8] U.S. Dep’t of Labor, Employee Benefits Security Administration, Compliance Assistance Release No. 2022-01 (Mar. 10, 2022) (linked here).