Employers in the US likely cannot pay their employees in virtual currencies (VC) such as Bitcoin or Ethereum. For employers who are still interested (or not fully persuaded by my line of reasoning), I offer some liability minimizing strategies, below.
(Post updated 4/3/2017)
Sidebar: What are Virtual Currencies? In short, a virtual currency is a medium of exchange whereby purchasers (or miners) of a unit of virtual currency are able to transfer that currency to others who can then sell the virtual currency for goods or cash. The transactions are recorded in a ledger which records and authenticates each movement of the virtual currency – thereby making each transaction more trustworthy. For a more detailed explanation and a taxonomy of types (centralized, decentralized, etc), please see here.
Turning to paying employees, under the Fair Labor Standards Act, an employer must pay an employee “cash or negotiable instrument payable at par.” 29 CFR 4.167. The FLSA also prohibits payment in scrip. Id; see also 29 CFR 531.34.
- Not Cash… It is clear that VC is not cash – and, although not binding in this context, FINCEN agrees with this assessment. The IRS views VC to be property, not currency. Although the IRS allows payment in VC, it requires that employees include its fair market value in gross income. Indeed, VC may be securities. Undoubtedly, VC are money. See, e.g., SEC v. Shavers (E.D.Tex. 2013) (“It is clear that Bitcoin can be used as money. It can be used to purchase goods or services…. [I]t can also be exchanged for conventional currencies….”) but it isn’t quite cash. See, e.g., US v. PETIX (W.D. N.Y. 2016 (“Bitcoin operates as a medium of exchange like cash but does not issue from or enjoy the protection of any sovereign; in fact, the whole point of Bitcoin is to escape any entanglement with sovereign governments.”) Similarly, here, a bankruptcy court treats bitcoin as property, not cash.
- …Not a Negotiable Instrument… A unit of VC is not a negotiable instrument because it is not an “unconditional promise or order to pay a fixed amount of money.” U.C.C. § 3-104(a). To retrieve value from a VC, the holder has to go to a specialized private market, negotiate for a rate, pay transaction fees. This limited negotiability means that wages paid in VC are not paid “finally and unconditionally” or “free and clear” as 29 C.F.R. § 531.35 requires. See Parr v. State of Cal., 811 F. Supp. 507 (E.D. Cal 1992). Conceivably, an employer can eliminate these costs by paying an employee for all costs associated with conversion to currency.
- …Possibly Scrip. VC bear a stubborn resemblance to scrip. Consider this definition: “The term scrip, in a broad sense, indicates any type of substitutional currency that takes the place of legal tender. In many instances, scrip is a form of credit but is generally always some form of documentation of debt.” VC replace legal tender with a substituted currency – and a “documentation of debt” needs to be fully negotiable at par to be a timely payment of wages.
It is critical to consider state law, which tend to highly regulate payment methods; indeed, the vast majority of states permit wage payment by (and limit wage payment to) cash, check, direct deposit and/or debit card — the latter two of which are typically regulated (some states allow electronic transfers, too). Other than the small handful of states that do not regulate the form of wage payment, the wage payment statues typically seek to maximize negotiability and to remove fees and other barriers to obtaining a sum certain of US Currency (see, i.e., Fla. Stat. § 532.01 and California Labor Code § 212). A number of states require payment in US currency only.
As my look at federal law shows, VC have somewhat limited negotiability and are chock-full of barriers to an employee converting them into a sum certain of US currency.
In sum, state laws concerning wage payments methods are a significant barrier to paying employees in VC.
What is a company to do?
While the law isn’t there yet and so likely the best option is to choose a different path, here are some liability-minimizing strategies:
- Pay employees at least minimum wage in “cash or negotiable instrument payable at par.”
- Maintain scrupulous records about the price of the VC on the day it is paid to employees.
- Ensure that, when paid, the value of the VC is above the minimum wage.
- Ensure that, for employees who are exempt, the value of the VC meets the weekly salary-basis test each and every week (see an interesting DOL opinion here).
- Eliminate conversion-to-currency costs for employees by paying any fees associated with conversion to currency.
- Select a VC that has an active market; there are hundreds of VCs out there – choose wisely
- Be sure to select a currency that is not completely anonymizing. The burden of showing that an employer paid the employee is on the employer.
- As with any US wage payment, employees should receive a w2 detailing the payment.
- Employees may be liable for taxes on any gains on the value of the VC that may occur between issuance and exchange for currency. Employers are likely not responsible for loss of value.
I consider this a preliminary look at this complex issue and will likely revisit it in the future.
Some useful links (which may not agree with my analysis):
- Why I’m Getting 5% Of My Salary Paid In Bitcoin
- Bitcoin 101 – How to Pay Your Employees in Digital Currency
- We Pay Employees In Bitcoin And It’s Awesome!
- A “Bit” of a Challenge to Employers: Bitcoin and Other Alternative Payroll Methods