Employment Law

Paying Non-Exempt Employee Salaries with Cryptocurrency Is a Risk Proposition

With the headlines that cryptocurrencies have been garnering for many years, some employers are trying to entice employees with job opportunities with compensation to be paid via cryptocurrencies. In other cases, employees themselves are seeking to have their salaries paid via cryptocurrencies. Both parties see the enticement of the possible exponential value of cryptocurrencies as creating potential earning capacity for the employee. While the parties will both be pleased if an increase in cryptocurrency used to compensate the employee increases in value, can an employee suffering from a decrease in the value of the cryptocurrency make a claim for this loss value by alleging a violation of the California Labor Code?

Issues such as the fluctuation in the value of the cryptocurrency between when you complete the payroll process and the time the employee receives the cryptocurrency in their wallet; the reduction in value of the compensation based upon the employee having to pay a fee to obtain access, and who will assume this cost; calculating withholding tax and W-2 income will be complicated; and, meeting the mandated paystub requirements could be complex.

Additionally, the federal Fair Labor Act requires an employer to pay regular and overtime wages in “cash or negotiable instrument.” This phrase has historically been interpreted to mean only money backed by a governmental authority. Therefore, paying wages via cryptocurrency could be a violation of the Fair Labor Act. Further, California law prohibits employers from paying wages that are not “payable in cash, on-demand, without discount.” If there is a delay in an employee being able to access the cryptocurrency they receive as compensation for regular and overtime wages, is this a violation of the “on-demand” requirement? If there are any fees associated with receiving, accessing, or converting the cryptocurrency, does this violate the “without discount” provision? For a detailed analysis on compliance with these regulations, employers should seek guidance from an employer defense attorney in Los Angeles.

At present there has not been a test case in California as to whether payment of an employee’s salary in cryptocurrency will satisfy the employer’s minimum wage requirement, nor has any California governmental agency issued any advisory information or rulings on this issue. Therefore, until such guidance is provided by the court or the State of California, it is risky for an employer to pay its employees’ salaries in cryptocurrency, in that any legal determination that payment in such a manner constitutes a violation of the California Labor Code could lead to significant economic damages for the employer.

If an employer does select to pay an employee by way of cryptocurrency, the employer should: 

  1. Obtain written authorization from the employee confirming their desire and authorization to receive cryptocurrency as payment for regular and overtime wages, and that they understand and acknowledge the risks associated with cryptocurrency,
  2. Use a third-party vendor as opposed to buying cryptocurrency and holding it until it is utilized for payroll purposes, 
  3. Provide written notice to the employee that the employer is still required to withhold payroll taxes from the employee’s regular and overtime compensation, and that the employee will owe income taxes on the fair market value of the cryptocurrency when it is received by the employee and will owe capital gains on the cryptocurrency if they sell it at an increased value. 

While an employer should be extremely cautious at this time with reference to a decision to pay an employee’s salary with cryptocurrency, there does not appear to be the same exposure to claims of federal Fair Labor Standards and California Labor Code violations by using cryptocurrency to compensate employees with reference to discretionary bonuses and other perquisites. 

As the use of cryptocurrency as compensation for an employee’s regular and overtime compensation is relatively new, it will still be some time before it should be seen as a reliable, safe, and legally understood business practice.