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Champing At The Bit: Can You Pay Your Workers In Bitcoin?

by Rich Meneghello, Adam Bridgers, and Benjamin Ebbink of Fisher Phillips

Don’t be embarrassed if you’ve heard of bitcoin or other cryptocurrencies but don’t quite understand them (or if you haven’t heard of them at all). Created in January 2009, bitcoin is still a relatively new phenomenon that occupies only a very small slice of the worldwide economy. Nonetheless, it’s growing in popularity.

Cryptocurrencies such as bitcoin are simply digital currency. There aren’t any actual physical coins out there for you to hold or collect. It is a medium of exchange, more like gold than money, which consists of small chunks of computer code that can be “mined” by those spending the time and effort to hash blocks of bitcoin transaction data into smaller hash values. You can purchase bitcoins electronically and then use them to make payments and purchase products or services from companies accepting the currency, and the number of these companies continues to increase steadily.

Its appeal is that it is completely decentralized. There is no middleman between parties exchanging the currency, unlike regular forms of payment that are backed and controlled by a central government authority or a bank. Because there is no intermediary, payments can be made without the typical administrative hassles that, among other things, increase costs and delay traditional transactions by several minutes, hours, or days.

Every Little Bit Helps: Pros Of Paying In Bitcoin.

So what’s the appeal of paying your employees using this form of cryptocurrency? The single biggest advantage of bitcoin is its ease of use. When you make a payment, it’s received instantly. There are minimal waiting periods for payments to clear, and administrative or processing fees are lower. Moreover, there are no exchange rates to navigate or other hurdles to clear when it comes to making payments across international borders. Thus, bitcoin becomes especially advantageous if you are providing payment to overseas contractors or workers since you don’t have to worry about which currency to use or the daily exchange rate.

There is also a bit of cachet associated with the use of bitcoin. Announcing that you pay workers in bitcoin might signal to the community that you are a cutting-edge business on the forefront of modern strategies. Workers could be also attracted by the potential upswing in value that some predict will continue; holding onto that one bitcoin and selling it at the right moment could be an exciting prospect for a worker to consider.

A Bit Of Sobering News: Downsides (And Solutions) To Paying In Bitcoin.

But there are downsides, and foundational problems, to consider if you are interested in making bitcoin payment part of your compensation structure. First and foremost, federal and state law may not allow employers to use bitcoin to pay employees’ salaries. The federal Fair Labor Standards Act (FLSA) requires you to pay employees in “cash or negotiable instruments payable at par,” and because an employee in receipt of a certain number of bitcoins may not be reasonably capable of spending the currency as they see fit, it could create an illegal hurdle. Moreover, various state statutes require you to make wage payments in U.S. currency, and the IRS has said that bitcoin and other cryptocurrencies are considered “property” instead of “currency.”

However, there are solutions to overcoming these obstacles. You could offer bitcoin as an optional benefit your employees could receive on top of their standard U.S. dollar-based compensation. It’s crucial, however, that you provide your employees’ base compensation in standard currency that meets state and federal limits for minimum wage and overtime. For nonexempt employees, you would also need to use the correct bitcoin value to determine the employee’s average regular rate for purposes of calculating overtime.

Even if permitted, you probably want to avoid singular payment in bitcoin because the wild fluctuations in value create minimum wage dangers. A better option is to agree to pay employees in traditional currency that is automatically converted to bitcoin (assuming the employees agree in writing to such a conversion) or pay bitcoin only as a discretionary bonus.

Another concern, as noted above, is that the IRS considers bitcoin to be property, meaning you would need to report earnings based on fair market value of that property as of the date you pay the employee. This might complicate payroll reporting, tax withholding, and capital gains and losses reporting, and create an overwhelming administrative burden for your human resources department. If you are intent on making this leap you could use one of the many third-party services that are starting to emerge to assist businesses in handling these complications.

Also keep in mind that your workers may not be completely satisfied if the price of bitcoin drops precipitously right before payday. Although anyone entering into a cryptocurrency transaction should be quite aware of the hallmark volatility associated with its value, and a savvy organization will be sure to include a prominent disclaimer informing the worker about the risks of accepting such a business transaction, there could be hard feelings (and lawsuits) if a project valued in the tens of thousands of dollars is ultimately paid out at a much lower rate. This may be further exacerbated by the fact that it can take several days after a bitcoin payment is initiated before the bitcoin becomes available for use in the worker’s wallet. Similarly, any business entering into this kind of arrangement should be prepared to bear the risk of a steep increase in value that could lead to a dramatic cost spike.

Finally, it bears repeating that regardless of how employees are paid, you must ensure that nonexempt employees are paid the applicable minimum and overtime wages. Paying wages with bitcoins, in whole or in part, may complicate the calculations necessary to ensure compliance with federal, state, and local wage and hour laws.

 

Richard R. Meneghello is a partner with employment law firm Fisher Phillips in Portland, Ore. He represents employers in all facets of labor and employment law.

Adam Bridgers is an associate in Fisher Phillips’ Charlotte, N.C. office. Bridgers offers management-side counsel and represents businesses faced with workplace-related challenges in the areas of privacy, labor relations, employment litigation, and wage and hour law. 

Benjamin M. Ebbink is Of Counsel in the firm’s Sacramento, Calif. office. Ebbink focuses on legislation introduced at the state and local level, and he assists employers with navigating evolving legislative and regulatory landscapes in a variety of areas.

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This is an article contributed to Young Upstarts and published or republished here with permission. All rights of this work belong to the authors named in the article above.

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