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