We’ve helped companies with nuanced employment issues for a long time. Now something new has come our way. We’re seeing questions from business owners about whether they can pay employees in crypto. Because of employment and tax implications, this can be much more nuanced than paying vendors and contractors that way. We’ll skip the details on the story about how we helped a client pay a vendor years ago with $5,000 worth of Bitcoin that’s worth $200,000 today.
While paying vendors and contractors is risky from a volatility standpoint, paying employees is much more risky from a compliance and administrative standpoint (volatility still matters though). Not only do you have to make sure that you pay your employees correctly. You also have a duty to inform them of the policies and procedures that could affect their pay and livelihood. You have to make sure you get these things right and we recommend erring on the side of caution and conservatism. Employees don’t have the balance sheet of a vendor. There’s the risk that they may be much more negatively impacted if there’s a massive crypto downturn. (We Hodlers have come to know and love these downturns).
So here are 9 steps you should consider when paying your employees in crypto:
1. Do the obvious: get crypto (BTC, ETH, whatever)
You can start by opening up your own corporate account. It should contain some amount of Bitcoin, Ethereum, or whichever stablecoin you choose. Just as with any of your corporate accounts, someone will need to manage it, incorporate it into the set of books, and oversee transactions. Make sure that you know how long the setup process takes. And make sure you have all of the account information for the account that will purchase the cryptocurrency.
2. Inform employees of a crypto payroll option
You should make employees aware that the company is willing to pay employees in crypto on an after-tax (net) basis. You can communicate this to staff via written documentation like a policy, notice, or message. In this note you should explain why the company is undertaking these efforts and allowing for this option. Is it because the company founders believe in crypto? Is it because employees have requested to be paid in crypto? We like it when we see this policy contain direct language noting that payment in crypto is for convenience purposes. You’ll want to note that payment in crypto is not an attempt to skirt ethical, legal, or tax obligations. And the ‘after-tax’ payment method is because, frankly, the IRS isn’t taking Bitcoin (yet).
3. Obtain an employee release
Consider having employees who desire payment in crypto sign something acknowledging the fees, volatility, and uncertainty related to cryptocurrencies. The uncertainty piece could be related to individual taxation, regulation, theft/loss, and even potential confiscation. This acknowledgment is especially important if you have remote or global employees. We want to make sure that your company is protected in the event that regulators ever scrutinize your decision. Or if employees ever decide to try to claim that they weren’t informed, didn’t understand, or were coerced into using this option. Spell it out in the clearest and most risk-obvious language. Think: labels on a cigarette pack.
4. Establish a clear crypto conversion rate and costs policy
You should have a policy related to when you transfer the crypto. It should line up with your payroll pay dates. If the company absorbs the fees, then make sure to note this. In addition to fees, there may be additional administrative costs that the company incurs as part of making this an option to employees. This could include the costs associated with maintaining a crypto account, the cost of the transactions, and the cost to manage and track those transactions. Because of crypto’s volatility, there should be a standard fixed conversion date and time to calculate payouts. Make sure this is clearly declared and acknowledged.
5. Run payroll first in local currency, then pay out in crypto
You should run your payrolls as normal and pay all statutory taxes and filings with federal, state, and local governments as required. The after-tax net amount can then be transferred to the employee. As of right now, we recommend using a local currency conversion rate in order to determine what the payment should be in crypto. For example, if an employee’s net paycheck is $1,000, that $1,000 should be converted into an amount (e.g. Bitcoin) and should then be transferred to the employee. Again, remember that volatility matters. By the time that Bitcoin amount hits the employees crypto account, it may be worth substantially more or substantially less than the conversion rate. Also, see paragraph 8 below in order to make sure that you’re paying in a compliant manner.
6. Consider capping crypto payroll
Another option to mitigate risk to the company is to limit the amount of crypto that an employee can be paid per cycle. For example, a company might say that they only allow employees to convert their net paycheck up to 5% received in cryptocurrency. This decreases the risk that an employee will be wiped out by volatility or regulation. And it could place employees on more equal footing in the event that there is a massive correction.
You want to avoid scenarios where an employee is receiving their entire paycheck in crypto. And that scenario may not even be legal according to the FLSA (again, see paragraph 8 below). Imagine a scenario where your star employee – who also happens to be a highly compensated employee – opts to be paid in crypto. Imagine what would happen if their entire paycheck gets wiped out through volatility the day after being paid in crypto. This could easily become an HR issue as this downturn could affect an employee’s overall morale, focus, and performance.
7. Choose the cryptocurrency you pay with
Companies should limit the number and types of cryptocurrencies that they are willing to pay out to employees. We all know the staggering amount of altcoins and tokens out there. It is impossible (right now) to pay each and every employee in their own preferred cryptocurrency. Instead, we recommend offering one or two options (e.g. Bitcoin or Ethereum) or payment via a stablecoin that employees can convert into their cryptocurrency of choice.
8. Complying with Federal and State Law
From a compliance standpoint, paying employee bonuses or commissions in crypto is easier than paying employees’ salaries and/or wages in crypto. The Fair Labor Standards Act requires that you pay minimum payments for wages and overtime in US Dollars (USD). So if your crypto desiring employee is non-exempt, consider paying their minimum wage via USD. Any hourly earnings beyond that hourly minimum wage amount in crypto.
For example, if your non-exempt employee earns $15 per hour, and minimum wage in your state is $10 per hour, you could pay the $10 rate in USD, and the $5 per hour rate in crypto. Same goes for your exempt employees who want to be paid in crypto. You would need to pay them at least $684 per workweek via USD (meeting the FLSA’s salary basis test) and anything above that could be paid in crypto. Also, some states have wage and hour laws that require payment in USD, so employers who have employees working in Delaware, Illinois, Michigan, New Jersey, Pennsylvania, and Texas should make sure they’re not running afoul of state and local laws by paying employees in crypto.
9. Get a legal and accounting blessing on your setup
As with anything that you do that could have large legal and financial ramifications, check with your attorney or CPA before putting anything into place. Companies may also want to check with their insurance providers to make sure that they are covered in the event of a loss that is related to storing, transmitting, purchasing services in, or paying employees in crypto.
It’s important to note that if you don’t take these steps you could set yourself up for all sorts of compliance-related issues. If you are just paying individuals working for you with crypto, not only could you run into employment classification issues, but also tax issues, issues related to penalties, and fines. All of which you do not want.
We are still in the early days of Bitcoin and cryptocurrency, but following these general guidelines should put you ahead of the pack and give you some basic principles on how to embrace the use of crypto in your internal business affairs.
About the authors
Michael Gottlieb is the founder of Momentum Law Group, a law firm that represents entrepreneurs. The Momentum team serves as their outside counsel, and assists them with their corporate/business legal and strategic matters. In particular, Momentum provides guidance and support related to employment law, commercial real estate, estate planning, and litigation. Michael is a proud graduate of, and currently serves as general counsel to, Leadership Montgomery. He’s the facilitator of the Rockville Chamber of Commerce’s CEO Roundtable and the Chamber’s 2019 Entrepreneur of the Year. He was also recently named as one of this area’s top business lawyers by Bethesda Magazine. He has been profiled in several magazines and podcasts for the unique style and culture that he brings to the practice of law. In his spare time, he likes to play with cars.
Michael Cohen started Suitless in 2014 with the vision of providing small to medium-sized businesses with comprehensive back-office support. When he’s not busy helping companies with their growth plans, Michael spends his free time trying to learn Brazilian Jiujitsu and hanging out with his wife and their two little boys. Michael previously worked for SB Nation, Vox Media, MicroStrategy and the Consumer Technology Association. He has a B.S. in Sociology and a M.S. in Human Development from Virginia Tech, as well as a Masters Degree in HR Management from Marymount University. Michael holds the SPHR and SHRM-SCP designations.