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If your staff member wants his or her paycheck in
cryptocurrency, should you – as an employer keeping up with
the times — accommodate the request?
You don’t have to work in Silicon Valley or play for the NFL
to field this type of question. In 2022, more traditional
workplaces from manufacturing facilities to municipal governments
have faced this dilemma. In January, New York City Mayor Eric Adams
drew public attention to his decision to convert his first three
paychecks into Bitcoin and Ethereum, through the cryptocurrency
exchange Coinbase. Since then, blockchain and digital assets have only become
more mainstream, with investors considering them as part of estate planning and companies adapting, by
necessity, to transactions grounded in digital assets. Are salary
and wages next? Given potential wage and hour risks, tax compliance
issues, and even federal securities regulation, should employers
seriously consider wage payment in digital currency?
Federal considerations: The federal Fair Labor
Standards Act requires that all wages and other compensation
governed by this statute be paid “in cash or negotiable
instrument payable at par.” Limited exceptions do exist, in
certain circumstances, for things like food, lodging,
transportation and fuel, or even credit at the company store.
It’s one thing to distribute croissants and coffee for
employees coming in early, or to reimburse them for gas mileage.
Digital currency – intangible, not accepted at all stores,
and still poorly-understood – is another matter. Would
employers issuing cryptocurrency remain in compliance with federal
law? The answer is not entirely clear at this time. The U.S.
Department of Labor has generally permitted paychecks in foreign
currency – provided that the amounts paid, under the current
exchange rate, meet the requirements of the FLSA. Mayor Adams was
easily able to convert his salary into crypto. But whether
cryptocurrency can be likened to foreign currency remains an open
question.
New York state considerations: Many states and
municipalities have their own wage payment statutes and rules. New
York, for example, explicitly states the methods by which wages
must be paid, including cash, check, direct deposit or a payroll
debit card. Crypto isn’t explicitly prohibited (or even
mentioned) by the New York rules. There is no reason to believe
– at this time – that the New York Department of Labor
or the courts will condone crypto wage payments. Lacking clear
guidance or an update to New York law, employers paying in
cryptocurrency, even by request, do so at their own risk.
Price Fluctuations – Minimum Wage and Overtime
considerations: Given the volatile market value of
cryptocurrency on any given date, issuing compensation in digital
currency creates the risk of employers failing to meet the required
pay thresholds – opening the way to claims for unpaid wages
– if the price of a given currency crashes between payroll
processing and payday.
Securities compliance considerations:
Securities and Exchange Commission (SEC) Chairman Gary Gensler and
other high-ranking officials at the SEC have stated that Bitcoin is
not a security subject to its jurisdiction. In fact, Chairman
Gensler has frequently stated that Bitcoin should be treated as a
commodity and regulated under the Commodity Futures Trading
Commission (CFTC). Why? Because under the four-pronged
Howey Test, the judicial standard for determining whether
a financial instrument represents an investment contract (i.e. a
Security), Bitcoin only truly meets the first prong and arguably
the third. The four-pronged Howey test used in determining
whether an “investment contract” exists is as follows:
(1) an investment of money, (2) in a common enterprise, (3) with a
reasonable expectation of profit; (4) derived from the efforts of
others. Bitcoin fails to meet prongs 2 and 4 primarily because of
its decentralized nature. In other words, the market price of
Bitcoin is not affected by the efforts
(or lack thereof)of a single person or group of persons (i.e.
common enterprise). Unlike a traditional
investment contract, where investors give money to a person or
enterprise (i.e. startups) with the hope/expectation that the
efforts of startup’s leadership will increase the value of
their initial investment, Bitcoin is wholly affected by the market,
not the decisions of individuals. Similarly, but to a lesser
extent, the SEC has suggested that Ethereum is not a security. On
the other hand, the SEC continues to advise that the facts and
circumstances of a sale or resale of other digital assets
may satisfy the Howey test and render them a security,
subject to the SEC’s regulatory oversight and enforcement. In
that case, the issuance must be registered with the SEC or qualify
for an SEC exemption.
With these nuances in mind, employers who wish to explore wage
payment in Bitcoin should consult with counsel regarding the risks
involved and potential ways to mitigate those risks.
Our Blockchain and Digital Assets attorneys are monitoring
developments closely to support your business in staying ahead of
the cryptocurrency curve.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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