Restrict Payment in Cryptocurrency to Bonuses

Allen Smith, J.D. By Allen Smith, J.D. August 26, 2021
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a pile of cryptocurrency coins

​Employees who ask employers for payment of wages in cryptocurrency may not be aware of the legal constraints. The Fair Labor Standards Act does not permit the payment of base wages—such as salary or minimum wage—in currencies that have not been issued by a government, so-called fiat currencies. But payment of bonuses in cryptocurrency may be allowed.

Practically, this means that if an employer has paid base salary, hourly wages or overtime using cryptocurrency, the business may not have satisfied its obligations under the law to make those payments, said Wendy Moore, an attorney with Perkins Coie in Washington, D.C.

If an employer pays in cryptocurrency and employees lose access to the cryptocurrency, the employer may be on the hook to pay those wages again, Moore said. Employees might lose access if they lose the private key to their digital wallets or if their digital wallets are hacked.

Employers "may wish to consider paying the minimum exempt rate of salary or hourly wage and overtime using U.S. fiat currency and reserve the use of cryptocurrency for supplemental compensation like annual incentive bonuses or as a perquisite," Moore said.

Some states require wages to be paid in U.S. currency, noted Phillip Bauknight, an attorney with Fisher Phillips in Murray Hill, N.J.

Such states include California and Colorado, said Steven Suflas, an attorney with Ballard Spahr in Salt Lake City.

"Any cryptocurrency payment program for the remaining wages should be optional and authorized in writing by the employee," Bauknight said.

Moore cautioned that the documents governing such supplemental compensation include rules for payment in cryptocurrency. These rules include:

  • Exchange rates.
  • Risk of loss.
  • The employee's voluntary request to be paid in cryptocurrency.
  • Representations needed for compliance with regulatory regimes like "know your customer" and anti-money laundering, and those regimes governed by the Office of Foreign Assets Control.

What Is Cryptocurrency?

"Cryptocurrency is not easy to understand," said Fred Whittlesey, principal consultant with Compensation Venture Group SPC in Seattle. "Cryptocurrency is a label for over 5,000 types of electronic coins and tokens."

Examples include bitcoin, Ethereum, XRP, Litecoin, Z Cash, Dash, Tether and TrueUSD, Moore said.

"Consider that there was a time when employees were paid only in cash," Whittlesey said. Then they often were paid with a paper paycheck, then later by direct deposit, he said. Now they often rarely touch paper. "It's the employer's bank sending to the employee's bank, maybe with a payroll service firm in the mix. It's just computers sending 'money' from one single computer to another. Then the employee uses the electronic money to pay bills."

Cryptocurrency is "the next level of electronic payment labeled as a coin or a token—and payment processes are only one of an infinite number of applications of blockchain technology," Whittlesey said. "The crypto explanation you'll most often hear is an electronic ledger distributed among many computers."

In short, cryptocurrency is a form of electronic money. Imagine your employer asks an employee which country's currency the worker would like to be paid in, and the worker, a U.S. resident, chooses Mexican pesos, Whittlesey said. Payroll sends Mexican pesos to the worker's bank account in the U.S., but the pesos have to be exchanged for U.S. dollars, which costs the employee money and takes time.

"With crypto, it's much simpler," he said. "You ask to be paid in bitcoin, and bitcoin goes into your crypto 'wallet' almost immediately for free."

Why Else Pay in Cryptocurrency?

Typically, employers that are considering offering payment of compensation in cryptocurrency are companies whose goods and services are strongly tied to the blockchain ecosystem, such as companies that engage in cryptocurrency mining, trading or storage or companies that are creating a company-specific token ecosystem, Moore said.

"The employees who work for these employers are often strong believers in the potential for blockchain technology and the benefits of cryptocurrency and wish to have a meaningful stake in various cryptocurrencies," she said. "Employers, who are facing a competitive market for blockchain talent, may find that offering compensation in cryptocurrency is a meaningful recruiting or retention mechanism."

There also are advantages for employers with an international workforce in paying in cryptocurrency, as employers can make payments while avoiding costs related to wire fees and exchange rates, Bauknight said.

Challenges with Paying in Cryptocurrency

"While many employees are curious about cryptocurrency and may even request to be paid in crypto, many don't fully appreciate that volatility is a feature of cryptocurrency," he said.

"Employers must consider U.S. and foreign laws regulating taxes, securities, commodities, currency controls, privacy, sweepstakes and banking in developing these programs," Moore said.

She said employers must ensure they know:

  • Whether the cryptocurrency they are using as payment for compensation is or may become a security and, if so, whether the recipients are accredited investors.
  • The tax consequences of the structure being used. For example, could the payment structure be deemed deferred compensation under Section 409A of the Internal Revenue Code or give rise to additional income if the currency is provided at a discount to the market price?
  • How to address changes in value between the date the compensation is earned, paid and liquidated.
  • Who bears the cost of brokerage fees associated with obtaining the cryptocurrency used for payment.
  • How taxes and benefits plan premiums will be deducted from total compensation to account for the value of the cryptocurrency. For example, where will the employee's 401(k) contribution come from if compensation is paid only in cryptocurrency?
  • The tax and financial accounting consequences to the employer of using cryptocurrency.

"HR professionals need to understand the basic issues of crypto compensation," Whittlesey said. "They will be getting questions from employees any day now, if they haven't already."

[Want to learn more? Join us at the SHRM Annual Conference & Expo 2021, taking place Sept. 9-12 in Las Vegas and virtually.]

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