Legal Ramifications of Paying Employees with Cryptocurrency

by Proskauer - Blockchain and the Law
Contact

Proskauer -  Blockchain and the Law

As cryptocurrencies surge in value and enter mainstream consciousness, an increasing number of employers may consider compensating their employees with bitcoin, ether, or other cryptocurrencies.  While a cryptocurrency compensation scheme may proliferate everyday usage of these currencies and attract tech-savvy labor talent to organizations, it may also put an employer at risk of wage and hour violations, and implicate additional regulatory regimes such as the securities laws.  Although lawsuits on such “crypto-compensation” issues have yet to materialize, employers should stay ahead of the curve by protecting themselves against these potential pitfalls:

1) Failing to Pay Employees with Cash or U.S. Currency

Employers may violate both federal law and state law by compensating employees with a non-fiat currency.

The Fair Labor Standards Act (“FLSA”) is a federal labor law that governs minimum wage, overtime pay, and other wage-related issues for both the private and public sector.  The FLSA “require[s] payments of the prescribed wages, including [minimum wage and] overtime compensation, in cash or negotiable instrument payable at par.”  29 CFR § 531.27(a).   The U.S. Department of Labor (“DOL”) has allowed employers to pay with foreign currencies to comply with the FLSA, as long as the amounts paid, when converted into U.S. currency, meet the relevant FLSA thresholds.  It remains unclear whether the DOL or the courts will deem cryptocurrencies to be a lawful method of payment of wages under the FLSA.

Of additional concern are state statutes that require wages to be paid in U.S. currency.  By way of example, Maryland’s Wage Payment and Collection Law dictates that the form of payment for wages must be “in United States currency; or by a check that, on demand, is convertible at face value into United States currency.”  Md. Code Ann., Lab. & Empl. § 3-502(c).  Similarly, Pennsylvania’s Wage Payment and Collection Law requires that wages “shall be paid in lawful money of the United States or check.” 43 P.S. § 260.3(a).  Many other states have similar “cash payment of wages” laws. Employers that pay wages in cryptocurrencies in such jurisdictions run the risk of violating these state laws.

Some states also have laws or rules requiring employees to access their wages readily and without costs, fees, or encumbrances.  This has been a recurring issue with respect to the movement to allow payroll through debit cards; the fees associated with utilizing such cards, and potential limitations on the employees’ access to the funds on such cards, have created legal barriers to implementing such a payroll system in certain states.  Unless employees have ready access to a market that will allow them to convert their cryptocurrency pay into cash without fees or encumbrances, the more likely the pay system will be viewed as problematic by a number of states.

2) Failing to Adhere to Minimum Wage and Overtime Requirements

Cryptocurrencies are prone to dramatic fluctuations in price. For example, this past May, bitcoin lost almost 30% of its value in two days, and on November 27, the price of bitcoin rose more than $1,000 in one day. These fluctuations in value may make it difficult to stay compliant with minimum wage and overtime laws.

Consider a scenario where an employee is set to receive an amount of bitcoin that exceeds the minimum wage and overtime requirements, but the price of bitcoin spirals downwards while the employer processes its payroll.  If the value of the employee’s bitcoin compensation ultimately falls below the minimum wage and overtime thresholds, can the employer be liable for violating these provisions?

The DOL has taken the position that, when analyzing whether an employee who is compensated in both foreign currency and U.S. currency has received the minimum salary for exemption from the overtime requirements, the foreign currency compensation should be valued “using the exchange rate current at the time of payment.”  DOL Op. Ltr. FLSA2006-17 (May 23, 2006).  It is safe to assume that the DOL—and likely the courts—would apply the same principles when analyzing minimum wage, overtime, and other wage payment issues in the context of cryptocurrencies.  At a minimum, therefore, an employer that pays its employees in cryptocurrencies (assuming that federal and state law would permit that in the first place) would have to ensure that the value of those payments—at the time they are made—satisfies all wage and hour obligations.  The potential instability of, or fluctuations in, the value of cryptocurrencies would likely make the DOL and state labor agencies quite skeptical about their effectiveness as a proper method of pay.

3) Paying Employees with Securities

The Securities and Exchange Commission (“SEC”) is still wrestling to determine which cryptocurrencies constitute securities.  This is an issue that should be closely monitored by any employer considering paying employees in bitcoin, ether, or any other cryptocurrency.  If certain cryptocurrencies are deemed to be securities, employers using them as a component in their compensation scheme may have to comply with a host of state and federal securities laws in addition to the wage and hour laws.

Potential Solutions

Adhering to state statutes that require payment in U.S. currency would require some careful maneuvering.   While potentially impractical, employers may want to work with a bitcoin payment processing company to formulate a system where employees are paid in U.S. dollars and employees are able to immediately convert those dollars to bitcoin.

In order to comply with minimum wage and overtime laws, employers could protect themselves by paying a combination of U.S. currency and cryptocurrency.  The amount of U.S. currency paid to employees should be above the relevant minimum wage and overtime thresholds to ensure full compliance; the remainder of the compensation would come from the cryptocurrency.  Employers can also comply by committing to the aforementioned solution of paying employees in dollars and immediately converting those dollars to bitcoin.

Additionally, because the legal classification of cryptocurrencies remains ambiguous, employers would do well to remain cognizant that crypto-compensation may implicate regulatory regimes reaching beyond the immediate employment law context, of which the securities laws are just one example.

[View source.]

DISCLAIMER: 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.

© Proskauer - Blockchain and the Law | Attorney Advertising

Written by:

Proskauer -  Blockchain and the Law
Contact
more
less

Proskauer - Blockchain and the Law on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.