A trend has emerged where some celebrities, professional athletes, or other high net worth individuals are asking to be paid at least part of his or her salary in cryptocurrency. The practice has trickled down to at least one company in Mesa that is paying employees in Bitcoin. What does this mean for the mainstream? Should or can Arizona employers start paying employees in cryptocurrency? Here are some considerations.
Right out of the gate, this form of payment would not work for the majority of employees. According to a recent CNBC report, 61% of employees live paycheck to paycheck. Even well-compensated employees would likely need to be paid a portion, if not the majority of their paycheck in cash in order to pay expenses on an ongoing basis.
It also would not be advisable to pay employees only in cryptocurrency. That would exclude many potentially qualified applicants and there are additional issues with this method as described below. Even NFL quarterback Aaron Rodgers is only taking a part of his salary in Bitcoin.
If you are still interested, you need to be aware of wage-and-hour issues in this area.
Wage-and-Hour Law Considerations
At the federal level, employers in the public and private sectors need to comply with the Fair Labor Standards Act (FLSA), which governs minimum wage, overtime pay, and other wage-related issues. Relevant here, the FLSA requires payments of the prescribed wages including minimum wage and overtime compensation, in cash or negotiable instrument at face value. This requirement applies only to compensation required under the FLSA, including: (1) minimum wage and overtime pay for non-exempt employees; and (2) a minimum weekly salary for most exempt employees.
Most exempt employees need to be paid at least $684 per week in order to be classified as exempt, assuming other requirements of the exemption are met. If an employer paid an employee in cryptocurrency and that was not deemed an acceptable mode of payment under the FLSA, then the employer would lose the exemption for that employee for the period in question and would owe overtime for all weeks in which the employee worked more than 40 hours.
Therefore, to avoid the risk that payment in cryptocurrency is not considered “cash or negotiable instrument” under the FLSA, an employer should not use cryptocurrency to pay: (1) a non-exempt employee’s minimum wages or overtime compensation; or (2) an exempt employee’s salary that is necessary to satisfy the salary portion of the exemption.
State law governing wage and hour practices is also a critical consideration. In Arizona, employers may pay an employee in any of the following ways: (1) in lawful currency of the United States; (2) in negotiable bank checks; (3) in warrants payable on demand and bearing even date with the payday; or (4) by deposit on the payday to the employee’s credit at a financial institution, with certain requirements being met. It is not clear that paying an employee with cryptocurrency falls neatly within any of these categories and therefore may be illegal under A.R.S. § 23-351(D). Other states have different rules. Pennsylvania law requires that wages “be paid in lawful money of the United States or check.”
Another consideration is the volatility of cryptocurrency, which can have significant wage-and-hour implications under federal and state law. Non-exempt employees must be paid a certain amount in minimum wage and in overtime, if owed, at the time wages are paid. If the value of the cryptocurrency spirals downward so that the employee now receives below minimum wage or doesn’t receive the correct overtime amount, the employer could find itself liable under the FLSA or under state law for unpaid wages.
The same is true for exempt employees if the cryptocurrency fluctuates downward between when payroll is sent to the payroll administrator and the date of payment. In that instance, the employer is at risk of losing the employee’s exempt status for that period if the employee ends up receiving less than the $684 weekly threshold. Arizona employers who assume the risk of paying their exempt employees in cryptocurrency need to ensure that they are having near-instantaneous reconciliations.
Best Practices in a World of Unknown
If an employer intends to pay some part of an employee’s compensation in cryptocurrency, the employer should have a clear written agreement signed by the employee in which the employee agrees to the process, acknowledges the risk associated with receiving compensation in this fashion, understands there may be personal tax consequences, and acknowledges, among other things, the lack of federal financial protections for deposits held in crypto wallets, such as FDIC protections.
To comply with minimum wage, overtime, and minimum salary laws, it is best not to pay non-exempt employees with cryptocurrency. For exempt employees, it is best to pay a combination of U.S. currency and cryptocurrency and make sure to satisfy the salary requirement under the FLSA with U.S. currency.
Employers need to monitor this area because there may be advice coming from the Securities and Exchange Commission regarding whether some cryptocurrencies constitute securities. Advice may be coming from the Department of Labor whether cryptocurrency is considered “cash or negotiable instrument” under the FLSA.
Employees who want to be paid in cryptocurrency may take control of this issue directly as some cryptocurrency exchanges such as Coinbase offer account holders the opportunity to automatically convert their paycheck into cryptocurrency on direct deposit.
Jessica Post chairs the Labor & Employment Practice Group at Fennemore where she assists companies in employment discrimination, wage and hour, restrictive covenant and trade theft matters. Reach Jessica at [email protected]emorelaw.com. David McCarville is a Director at Fennemore and is a member of the firm’s Blockchain and Cryptocurrency practice group. He also is an adjunct professor at ASU’s Sandra Day O’Connor College of Law teaching a Blockchain & Cryptocurrencies Law & Policy course. Reach David at [email protected]