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Dear Littler: We are a multi-state employer with operations in multiple technology hubs, including Silicon Valley and Austin. Over the past several months we have heard from multiple applicants and employees about whether the company offers cryptocurrency as an option for compensation. While I am generally aware of what cryptocurrency is, I do not have enough understanding to make an informed decision. Is paying cryptocurrency as a component of compensation an option?

Confused on Crypto

Dear Confused on Crypto,

While cryptocurrency has been around since at least 2009, it has become more mainstream recently and you are seeing that widespread recognition with your applicants and employees. For the uninitiated, cryptocurrency is a digital peer-to-peer payment system secured and verified through private codes housed on an encrypted public ledger called blockchain, without the use of banks or any other financial institute. We are seeing an uptick in questions from employers about using cryptocurrency as a signifier in a competitive labor market. While there are mayors,1professional athletes,2and at least one country3that are embracing cryptocurrency, we recommend a cautious approach to using cryptocurrency as wages for your employees.

The paramount question is whether it is legal to pay wages to employees in the form of cryptocurrency. Under federal law (Fair Labor Standards Act), wages must be paid in cash or negotiable instrument payable at par. 29 C.F.R. 531.27. Multiple states, including California, require that wages be paid in cash or negotiable form of U.S. currency. Cal. Lab. Code 212 (prohibiting payment in scrip, coupon, cards, or other thing redeemable, in merchandise or purporting to be payable or redeemable otherwise than in money). Cryptocurrency is neither cash nor a negotiable instrument in the United States, and is not backed by the government or other legal entity. Therefore, use of cryptocurrency for base wages (hourly or salary) is not recommended. While there may be an argument that some forms of cryptocurrency are readily exchangeable for U.S. currency, the legal system is still catching up to the use of cryptocurrency and has not issued any binding precedent to allow for the practice of payment of wages in cryptocurrency. Therefore, we recommend the use of traditional U.S. currency for payment of all wages to ensure compliance with federal, state, and local minimum wage requirements, overtime statutes, and salary thresholds for exemption classifications.

A separate issue related to paying any form of wages in cryptocurrency is the associated transaction fees for selling cryptocurrency, exchanging cryptocurrency to U.S. dollars, or using a cryptocurrency exchange card. Many states, including California, expressly require that wages be paid without discount. Even without an express statute prohibiting the practice, providing wages in a manner that cannot be utilized without incurring a fee effectively lowers the employees take-home pay and may compound any employee frustrations if the value of the cryptocurrency decreases. Certainly, a number of retailers are accepting some cryptocurrencies, but until employees can pay their rent, mortgage, utilities, and other essentials in cryptocurrency, there are risks associated with paying wages handcuffed with transaction fees.

Considerations for non-exempt employees further complicate matters. Given the inherent nature of value fluctuations with cryptocurrency, the appropriate regular rate of pay for overtime, paid sick time, meal and rest break premiums, or reporting time pay would be a constantly moving target and may be difficult to determine. Any unpaid time or historical time/pay adjustments would require not only a recalculation based on the value of the cryptocurrency at the exact time of the adjustment, but also a recalculation of all other regular rate of pay payments in that time period. Assuming the calculations could be done correctly, there would be a significant administrative burden and cost for your payroll department and/or external payroll provider.

In addition to wage and hour risks, there are accounting and tax reporting difficulties that you should discuss with a tax professional or tax attorney.

Practical Recommendations

We understand that using cryptocurrency may be viewed as a differentiator in attracting or retaining talent, so if you are considering using cryptocurrency, we have the following recommendations:

The bottom line, Confused on Crypto, is that until our wage and hour laws catch up with the technology, traditional forms of wage payment, particularly for non-exempt employees and for base pay, should continue to be the norm in most instances. As with most issues, please run any proposed changes to your methods of payment by wage and hour counsel before implementing them.

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Dear Littler: Is paying employees with cryptocurrency an option? - Littler Mendelson PC