Can I pay my employees in bitcoin?
As bitcoin continues to experience impressive price valuations despite its sporadic and sometimes traumatic volatility, renewed interest in the cryptocurrency is has gotten some intrepid employers to thinking: Can I pay my employees in bitcoin?
For U.S. employers, the answer is a tricky one. Nevertheless, for those seeking to attract top tech talent and other trailblazing employees who see benefits in accepting such payment, navigating the legal and regulatory hurdles may be worthwhile.
For those still new to the cryptocurrency scene (and don’t feel bad if you are – it’s early yet) the first step is understanding what, exactly, Bitcoin is.
Bitcoin can perhaps best be understood as an attempt to create an “opt-in” form of private money. It is a non-sovereign currency issued by a computer network of voluntary participants that is not linked to, controlled by or directly subject to the policies and politics of any nation or coalition of nation-states.
The issuance of bitcoin — and thus its rate of inflation — occurs at regular intervals — on average every 10 minutes —and depends upon network participants expending computing effort and electricity to solve complex cryptographic puzzles (hence the term cryptocurrency).
This process serves the added purpose of securing the network against those who would seek to undermine the accuracy of the growing chain of transactions (hence, blockchain).
Accordingly, each issuance of bitcoin simultaneously secures the network; verifies recent transactions; and adds a predictable amount of bitcoin to the ecosystem, thereby controlling the rate of inflation in a way not currently possible with legacy currencies.
Impressively, the accuracy of the transaction history represented in the bitcoin blockchain has never been seriously undermined, notwithstanding the fact that no central authority controls the shared ledger and anyone participating in the network has the capacity to update it.
While the motivation for utilizing bitcoin varies, some employers are considering turning it into a legitimate form of payment for their employees. But even when employers and their employees have agreed on a bitcoin compensation package, a great deal of compliance trouble lurks.
Here are a couple of things to look out for.
Despite bitcoin describing itself as a form of “stateless money,” the state — in the form of the U.S. government — still expects its traditional cut of commercial activity. In 2014, the IRS provided high-level guidance with respect to utilizing bitcoin as a form of payment to employees, specifically that it will assist in determining how to value, and how to withhold, appropriate employment taxes. But much tax law on this topic remains ill-defined. When paying in bitcoin, a good accountant and lawyer are always worth consulting for this reason alone.
The Department of Labor generally requires employees be paid in wages that are “in cash or negotiable instrument payable at par.” Without direct guidance from the DOL, it is unclear whether payment in bitcoin satisfies this requirement. In the event it does not, an employer paying someone exclusively in bitcoin would run afoul of minimum wage and overtime requirements. Moreover, some states require that employees be paid in U.S. currency, which can create problems for even those employers who have achieved federal compliance.
Many employees are exempted from taking advantage of overtime premium pay when they work more than 40 hours a week because they paid at a regular, predictable rates. In other words, a salary. But a court or regulatory authority could view bitcoin as simply too volatile or unpredictable to be considered as a salary. The result would be that many employees who are paid a salary denominated in bitcoin could actually be eligible for overtime premium pay. This could create serious headaches for employers.
Potential solutions and workarounds
Keep in mind that the foregoing is not an exhaustive list of compliance conundrums facing employers considering paying their employees in Bitcoin.
There are, however, a few ways to lessen the potential burden.
Many employers are utilizing a payment service that allows the employment contract to be denominated and paid out in U.S. dollars, but which is then rapidly converted to bitcoin for the employee at the then-current exchange price. Still other employers are electing to pay independent contractors in bitcoin, as such workers traditionally are subject to fewer regulatory requirements than employees.
Still, employers using this method should be careful to ensure that the person they’re paying is actually an independent contractor. As gig economy business models grow, employee misclassification suits are on the rise, and businesses using contractors are under increasing scrutiny.
The bottom line is that bitcoin compensation is new territory. And while it remains so, staying above board from a compliance perspective will be difficult. Should your company desire to embark down this path, securing competent legal counsel is paramount.