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.
This alert is not a substitute for advice of counsel on specific legal issues.
Harris Beach has offices throughout New York state, including Albany, Buffalo, Ithaca, New York City, Rochester, Saratoga Springs, Syracuse, Uniondale and White Plains, as well as Washington D.C., New Haven, Connecticut and Newark, New Jersey.