Shortly after his election in November 2021, New York City Mayor Eric Adams announcement that he would accept his first three paychecks in Bitcoin. On Jan. 20, 2022, the day before his first city paycheck is scheduled to arrive, Mayor Adams confirmed that his salary will be automatically converted to Bitcoin and Ethereum via Coinbase – a cryptocurrency exchange – before the funds are available to him.
As cryptocurrencies continue to make their way into the mainstream consciousness, individuals – even beyond those in the tech sector – have been interested in receiving their salaries (or part of it) in cryptocurrency. This has prompted a growing number of employers to consider compensating their employees with Bitcoin, Ethereum or other cryptocurrencies. While a cryptocurrency compensation system can help spark the daily use of these currencies and attract tech-savvy talent to a company or organization, it can also expose the employer to pay violations and hours, and involve additional regulatory regimes such as federal securities laws. While lawsuits over such “crypto-clearing” matters have yet to materialize, employers should stay ahead of the game by protecting themselves against these potential pitfalls.
Do not pay employees in US currency or its equivalent
Employers can violate federal and state laws by paying their employees with non-fiat currency. The Federal Fair Labor Standards Act (“FLSA”)—which governs minimum wage, overtime pay, and other wage-related issues for the private and public sectors—”to require[s] payment of prescribed wages, including [minimum wage and] overtime pay, in cash or negotiable instrument payable at par.” There are specific and limited exceptions to the “cash or negotiable instruments” rule – for example, Section 3(m) of the FLSA allows an employer to count the value of food, accommodation or other facilities paid to employees eligible for overtime towards wages in certain circumstances. “Other facilities” must “be something like board or lodgingand includes general merchandise provided in company stores and commissaries, fuel, utilities for personal use, and some home-to-work transportation. Most “exempt” employees – those not entitled to overtime pay, including many executives, senior administrative and professional employees – are mandatory receive a minimum weekly wage “without board, lodging or other facilities”. The rule notes that the minimum wage for exemption must be “free and clear” and “independent of any credit claimed for non-monetary valuables that an employer may provide to an employee.”
The United States Department of Labor (“DOL”) – the federal agency responsible for enforcing the FLSA –allowed employers to pay with foreign currency to comply with the FLSA, so long as the amounts paid, when converted to U.S. currency using the exchange rate in effect at the time of payment (that is to say, the rate generally available to an individual in the neighborhood where the employee works), meet the relevant FLSA thresholds. However, it is unclear whether the DOL or the courts will treat cryptocurrencies as comparable to foreign currency as a legal method of paying wages under the FLSA, whether the payment is made in a cryptocurrency. relatively easy to convert into fiat currency. (for example., Bitcoin, Ethereum) or another less traded digital coin.
Notably, the FLSA’s “cash or negotiable instrument” requirements only apply to those portions of compensation that are required by law—that is to say, minimum wage and overtime pay for non-exempt employees, and a minimum weekly wage for most exempt employees. If an employer decides to pay its employees amounts in excess of what the FLSA requires—for examplebonus or other incentive compensation – the “cash or negotiable instrument” rule would not apply, and such non-required compensation could be paid in cryptocurrency or by any other means.
State and local wage laws
Employers should also be aware of state or local laws that place additional restrictions on their pay practices, and several states currently require wages to be paid in US currency. For example, New York allows the payment of wages in cash, cheque, direct deposit or payroll debit card. Although the New York rule does not expressly prohibit other methods of compensation, there is no indication that the New York State Department of Labor or the courts will condone this practice. California law prohibits an employer from paying wages by means of “[a]any order, check, draft, note, note or other acknowledgment of debt, unless it is negotiable and payable in specie, on demand, without discount, at an establishment established in the State, whose name and address must appear on the instrument” or by “[a]any certificate, coupon, card or other thing redeemable in merchandise or purporting to be payable or redeemable otherwise than in money”. Without clear state guidelines, it is unclear whether paying in cryptocurrency would violate these requirements.
Some state wage payment laws are more directly proscriptive. For example, Maryland law requires employees to be paid “in United States currency; or … by check which, upon demand, is convertible at face value into United States currency. Pennsylvania Law states that “wages must be paid in legal tender of the United States or by check”. Under Colorado Law“[n]o the employer … shall issue, in payment of … wages due to an employee, any order, cheque, draft, note, memorandum or other acknowledgment of debt, unless it is negotiable and payable on demand without discount in cash at a bank organized and existing under the general banking laws of the State of Colorado or the United States or at a place of business established in the State.
A number of states also have laws or rules requiring employees to access their pay easily and without fees, charges, or charges. This has been a recurring issue with the movement to allow debit card payroll; the fees associated with using these cards and potential limitations on employee access to funds on these cards have created legal barriers to implementing such a payroll system in some states. Generally speaking, unless employees have immediate access to a marketplace that will allow them to convert their cryptocurrency compensation into cash without fees or charges, the more problematic the compensation system will be seen by a number of people. ‘states.
Non-compliance with minimum wage and overtime requirements
Cryptocurrencies are subject to dramatic price fluctuations. Even if payment of compensation in cryptocurrency were permitted, fluctuations in value could make it difficult to comply with minimum wage and overtime laws.
Consider a scenario where an employee is due to receive an amount of bitcoin that exceeds the applicable minimum wage, overtime pay, or minimum wage, but the price of bitcoin spirals between the date the employer submits payroll for salary and the date the employee actually receives payment. If the value of the employee’s Bitcoin compensation ultimately falls below the required compensation thresholds, the employer risks violating wage laws. For overtime-eligible and exempt employees, this may expose the employer to claims for unpaid wages, which may include claims for damages and attorneys’ fees. For managerial, administrative and professional employees who do not receive the exemption minimum wage, the underpayment may:in certain circumstances— lead to the loss of the exemption not only for the employees themselves, but for the employees of the same job classification working for the same managers.
If and when payment of salaries in cryptocurrency becomes permitted, it is safe to assume that the DOL would apply the same valuation principles to such compensation as to foreign currency payments –that is to say, “using the exchange rate in effect at the time of payment.” At a minimum, therefore, an employer who pays employees in cryptocurrency should ensure that the value of those payments – at the time they are made – meets all wage and hourly obligations. The potential instability or fluctuations in the value of cryptocurrencies likely makes the DOL and state employment agencies quite skeptical of their effectiveness as an appropriate method of paying wages.
Pay employees with securities
The Securities and Exchange Commission (“SEC”) is still struggling to determine which cryptocurrencies constitute securities. This is an issue that should be closely watched by any employer considering paying their employees in Bitcoin, Ether, or any other cryptocurrency. While some cryptocurrencies are considered securities, employers who use them as part of their compensation package may have to comply with a host of state and federal securities laws in addition to wage and hour laws. .
Adhering to state statutes that require payment in US currency would require careful maneuvering. Although potentially impractical, employers may wish to work with a bitcoin payment processing company to formulate a system in which employees are paid in US dollars and employees can immediately convert those dollars into bitcoins.
To comply with minimum wage, overtime, and minimum wage laws, employers could protect themselves by paying a combination of US currency and cryptocurrency. The amount of U.S. currency paid to employees must exceed relevant wage law thresholds to ensure full compliance; the rest of the compensation would come from cryptocurrency. Employers who provide compensation in the form of cryptocurrency must have recipient employees sign written agreements confirming their consent to the arrangement, specifying which party is responsible for exchange or brokerage fees, and informing employees and declining the employer’s liability for potential risks that may arise from receiving their salary in cryptocurrency (for exampletax consequences, volatility risks, lost private keys or passwords, or lack of federal financial protections for deposits held in crypto wallets, such as FDIC protections).
Since the legal classification of cryptocurrencies remains ambiguous, employers would do well to remain aware that crypto-clearing may involve regulatory regimes beyond the immediate context of employment law, of which securities laws are only an example.
© 2022 Proskauer Rose LLP. National Law Review, Volume XII, Number 68