In recent years, more and more consumers, merchants and financial institutions have accepted cryptocurrency as a form of payment for everyday products and services. Last November, the mayors of two major US cities signaled what could be the next phase of cryptocurrency merging with the mundane, when they announced they would be accepting paychecks in cryptocurrency. On Twitter, Mayor Francis Suarez of Miami said he would accept his next paycheck in Bitcoin, to which Mayor Eric Adams of New York responded that he would accept his first three paychecks in Bitcoin.
Just as mayors are trying to project the image of their cities as leaders in technology and the crypto wave, employers are considering paying employee salaries or other compensation in cryptocurrency in order to position themselves as forward-thinking companies that embrace change and the New. Similarly, employees may want to be paid in cryptocurrency due to its potential for growth in value. Some experts predict that the price of Bitcoin will continue to rise up to $100,000, and therefore some employees may wish to have part of their salary paid in this dynamic form in order to structure part of their income as long-term investment as soon as it is paid off.
Before taking the plunge, however, employers should take note of the New York City Mayor’s Office of January 20, 2022 Press release On Mayor Adams’ cryptocurrency paycheck:
Due to US Department of Labor regulations, New York City cannot pay employees in cryptocurrency. By using a cryptocurrency exchange, anyone paid in US dollars can have their funds converted to cryptocurrency before the funds are deposited into their account.
Here are some things employers should keep in mind if they are considering paying their employees in cryptocurrency.
Employees must be paid in US currency or its equivalent
The Fair Labor Standards Act (FLSA) is the primary federal legislation that governs many aspects of public and private employment in the United States. The FLSA oversees wage issues, including minimum wage and overtime pay, and relevant regulations explain that the FLSA requires “payment of prescribed wages, including overtime pay, in cash or in negotiable instrument payable at par.” Although there are some exceptions to this rule (for example, in some situations the FLSA allows employers to count “food, lodging, or other facilities” as wages), in general, employers find themselves with two options for paying FLSA-mandated wages: cash or negotiable instruments “payable at par,” that is, payable at face value.
In a Op-ed from May 2006, the Department of Labor (DOL) has provided guidance on what constitutes a negotiable instrument payable at par. There, the DOL allowed an employer to pay its employees in foreign currency in combination with US dollars to satisfy the minimum wage requirement of the FLSA’s executive, administrative, and occupational exemption. Foreign currency was an acceptable wage when it reached the relevant FLSA threshold after being exchanged into US dollars using the “exchange rate prevailing at the time of payment (i.e. the rate generally available to a person individual in the neighborhood where the employee works).” The DOL and courts interpreting the FLSA have not yet ruled on whether cryptocurrency is considered functionally similar to foreign currency and therefore a negotiable instrument payable at par. payment of wages directly in cryptocurrency.[1]
Status Considerations
As always, employers should also consider relevant state and local laws when formulating compensation plans. Most states have laws specifying how employers can and cannot pay wages. For example, California The law prohibits employers from paying employees’ wages with any order, check or other instrument “unless it is negotiable and payable in specie, on demand, without discount, at a place of business established in the state”. Likewise, the Illinois The Wage Payment and Collection Act states:[a]All wages and final allowances will be paid in legal tender of the United States, by check, payable on demand and without discount at a bank or other financial institution readily accessible to the employee, by deposit of funds in an account at a bank or other financial institution designated by the employee, or by a pay card meeting the requirements of article 14.5. Finally, many states, such as Washington, require that the salary be provided at no cost to the employee. This means that, in order to proceed with crypto paycheques, employers must ensure that any wages paid first in US dollars and then converted into cryptocurrency do not include any cost to the employee.
Volatile nature of cryptocurrency and compliance with wages
Cryptocurrency volatility could also cause employers to violate minimum wage and overtime laws. Federal and state wage laws set specific standards regarding the exact amount of employees that must be paid. For example, the federal minimum wage is $7.25 an hour, and an employer who pays below minimum wage is liable for unpaid wages and damages, as well as attorneys’ fees and costs. To qualify for an exemption from the FLSA’s overtime requirement, employers must pay employees wages of at least $684 per week, or $35,568 per year. Minimum wage requirements for employees to be exempt from overtime requirements are higher in some states, such as California. Employers who do not pay the required wage may face potential misclassification claims, which could include damages for unpaid overtime, potential fines, and possible loss of exemption for all employees of the same job classification.
Certain types of cryptocurrency can fluctuate in value, sometimes drastically, for a variety of reasons. This volatility could leave employers vulnerable to possible inadvertent wage violations if employees are paid amounts less than those required by applicable wage and hour law.
Moving forward with crypto clearing
At this point, where more of ordinary life is converted into virtual space, a future where cryptocurrency retreats from its position in society is hard to imagine. Based on the current landscape, employers looking to participate in this new frontier may consider following Mayor Adams’ method of first paying salaries in US currency and then converting them to cryptocurrency, if the employee wishes, free of charge for the employee.
Congress could also pass legislation authorizing the use of cryptocurrency for the payment of wages. For example, in 2000, Congress passed the Worker Economic Opportunity Act, amending the FLSA to exclude the value of income received as a result of stock option grants from the regular rate of pay. Prior to this legislation, employers were reluctant to offer non-exempt employees the opportunity to participate in stock option plans, as they wondered whether the value of stock options should be included in the normal rate of pay for the purpose of calculating overtime, so Congress took steps to avoid discouraging employers from offering stock options to non-exempt employees. If cryptocurrency becomes seen as a favorable mode of compensation, Congress could act to affirmatively authorize the payments. Even if Congress were to act, employers should also monitor updates to state legislation before proceeding with crypto clearing.
As employers move into this new territory, they need to remain vigilant and stay abreast of the directions of new legislation, as well as new administrative or court rulings, to inform their payroll practices. The complexities of using cryptocurrency as compensation go beyond the salary concepts covered in this article and have many other implications, including tax, securities, and privacy. For example, the DOL recently signaled that it might implement a ban on crypto-funded 401(k) plans. In its March 10, 2022 Compliance Assistance Release, No. 2022-01, the DOL expressed “serious concerns about the prudence of a fiduciary’s decision to expose participants to a 401(k) plan. ) to direct investments in crypto-currencies or other products whose value is linked to crypto-currencies. Although not directly related to the payment of salaries in cryptocurrency, this DOL announcement may anticipate the Department’s thoughts on the matter under consideration. Employers venturing into this area should consult with experts to mitigate potentially unforeseen risks with their new compensation structure.
[1] The IRS has determined that cryptocurrencies are property, not currency, for federal tax purposes. A number of states have followed this approach. [View source.]
