Paying Employees In Cryptocurrency: Is That Lawful? – Technology

In recent years, more consumers, merchants, and financial
institutions have accepted cryptocurrency as a form of payment for
everyday products and services. Last November, mayors of two major
U.S. cities signaled what may be the next phase of
cryptocurrency’s melding into the mundane, when they announced
they would accept 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 the Mayors are trying to project their cities’
images as leaders in the technology and the crypto-wave, employers
are considering paying employees’ wages or other compensation
in cryptocurrency in order to position themselves as
forward-thinking companies that embrace change and the new.
Relatedly, employees may want to be paid in cryptocurrency because
of its potential to grow in value. Some experts predict that
Bitcoin’s price will continue to grow to $100,000, and
therefore some employees may want a portion of their salary to be
paid in this dynamic form as a way to structure part of their
income as a long-term investment as soon as it’s paid.

Before taking the plunge, however, employers should take note of
the New York’s Office of the Mayor’s January 20, 2022 press release on Mayor Adams’
cryptocurrency paycheck:

Due to U.S. Department of Labor
regulations, New York City cannot pay employees in cryptocurrency.
By using a cryptocurrency exchange, anyone paid in U.S. dollars can
have funds converted into cryptocurrency before 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 U.S. Currency or Its Equivalent

The Fair Labor Standards Act (FLSA) is the key federal
legislation that governs many aspects of both public and private
employment in the United States. The FLSA oversees wage-related
topics, including minimum wage and overtime pay, and the relevant regulations explain the FLSA requires
“payment of the prescribed wages, including overtime
compensation, in cash or negotiable instrument payable at
par.” Although there are some exceptions to this rule (e.g.,
in certain situations, the FLSA permits employers to count “food, housing, or other facilities” as
wages), in general, employers are left with two options for paying
FLSA-prescribed wages: cash or negotiable instruments “payable
at par,” which means payable at face value.

In a May 2006 opinion letter, the Department of
Labor (DOL) provided guidance on what constitutes a negotiable
instrument payable at par. There the DOL permitted an employer to
pay its employees with foreign currency in combination with U.S.
dollars to satisfy the minimum salary requirement of the FLSA’s
executive, administrative, and professional exemption. The foreign
currency was an acceptable wage when it met the relevant FLSA
threshold after being exchanged into U.S. dollars using 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).” The DOL and courts interpreting the
FLSA have yet to indicate whether cryptocurrency is considered
functionally similar to foreign currency and therefore a negotiable
instrument payable at par.  Accordingly, employers should be
cautious if they proceed with paying wages directly in
cryptocurrency.¹

State Considerations

As always, employers must also take relevant state and local
laws into account when formulating compensation plans. The majority
of states have laws specifying how employers can and cannot pay
wages. For example, California law prohibits employers from paying
employees’ 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.”  Similarly, the Illinois Wage Payment and Collection Act
states, “[a]ll wages and final compensation shall be paid in
lawful money of the United States, by check, redeemable upon demand
and without discount at a bank or other financial institution
readily available to the employee, by deposit of funds in an
account in a bank or other financial institution designated by the
employee, or by a payroll card that meets the requirements of
Section 14.5.” Finally, many states, like Washington, require that wages be provided at
no cost to the employee. This means that, to proceed with
crypto-paychecks, employers must ensure that any wages paid first
as U.S. dollars and then converted into cryptocurrency do not
include any costs for the employee.

Cryptocurrency’s Volatile Nature and Wage Compliance

Cryptocurrency’s volatility could also cause employers to
violate the minimum wage and overtime laws. Federal and state wage
laws set specific standards of exactly how much employees must be
paid. For example, the federal minimum wage is $7.25 an hour, and
an employer that pays below minimum wage is liable for unpaid wages
and liquidated damages, along with attorney’s fees and costs.
To qualify for an exemption to the FLSA’s overtime requirement,
employers must pay employees a salary of at least $684 a week, or
$35,568 a year. The minimum salary requirements for employees to be
exempt from overtime requirements are higher in some states, such
as California. Employers that fail to pay the requisite salary can
face potential misclassification claims, which could include
damages for unpaid overtime, potential fines, and possible loss of
the exemption for all employees in 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 potential unintentional wage
violations if employees receive amounts less than required by
applicable wage-and-hour law.

Moving Forward with Crypto-compensation

At this juncture, where more of ordinary life is converted to
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 paying wages
first in U.S. currency and then converting them to cryptocurrency,
if the employee chooses, free of charge to the employee.

Congress might also pass legislation authorizing the use of
cryptocurrency for 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 hesitant to provide non-exempt
employees with the opportunity to participate in stock option
plans, given employers’ concerns about whether the value of the
stock options needed to be included in the regular rate of pay for
purposes of calculating overtime, so Congress took measures to
avoid discouraging employers from providing stock options to
non-exempt employees. If cryptocurrency becomes seen as a favorable
mode of compensation, Congress might act to affirmatively authorize
the payments.  Even if Congress were to act, employers would
need to monitor updates to state law as well before proceeding with
crypto-compensation.

As employers proceed into this new territory, they must stay
vigilant and abreast of guidance from new legislation, as well as
new administrative or court decisions, to inform their payroll
practices. The complexities of using cryptocurrency as compensation
go beyond the wage concepts covered in this article and have many
other implications, including taxes, securities, and privacy. For
example, the DOL recently signaled that it may 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 a 401(k)
plan’s participants to direct investments in cryptocurrencies,
or other products whose value is tied to cryptocurrencies.”
While not directly related to paying wages in cryptocurrency, this
DOL announcement could forecast the Department’s thoughts on
the issue at hand. Employers venturing into this field should
consult with experts to mitigate potentially unforeseen risks with
their new compensation structure.

Footnote

1. The IRS has determined that cryptocurrencies are
property, not currency, for federal tax purposes. A number of
states have followed this approach.

Because of the generality of this update, the information
provided herein may not be applicable in all situations and should
not be acted upon without specific legal advice based on particular
situations.

© Morrison & Foerster LLP. All rights reserved