Fashion brands are warming up to crypto as a way to cater to buyers who have amassed sizable sums of currencies like Bitcoin, Ether, Binance Coin, Tether, etc., and who want to spend it on consumer goods/services. Gucci, Philipp Plein and Off-White, for instance, have joined the likes of Starbucks, Microsoft, PayPal, Etsy, and Overstock, among others, and now accept cryptocurrency as a form of payment (in certain stores), with others expected to follow suit and test the waters. As companies come to embrace crypto, some are opting to use it as a way to pay their employees, raising questions about whether fashion’s push towards Web3 will entail crypto wages and where – exactly – the law stands on offering up crypto as a form of compensation.
“A small but growing number of employees are asking for cryptocurrency as a form of compensation,” according to Hunton Andrews Kurth LLP attorneys Daniel Butler and Kevin White, who state that “whether a substitute for wages or as part of an incentive package, offering cryptocurrency as compensation has become a way for some companies to differentiate themselves from others.” At the same time, Littler attorneys Lisa Schreter and Justin Brown confirm that they are seeing an “uptick in questions from employers about using cryptocurrency as a signifier in a competitive labor market.”
For companies that are considering paying their employees in cryptocurrency, there are an array of issues and risks to consider, with the primary question being whether using crypto as compensation satisfies labor laws in the U.S., namely, the Fair Labor Standards Act (“FLSA”), which mandates that employees be paid “in cash or negotiable instrument payable at par.” In terms of negotiable instruments, the Department of Labor stated in a May 2006 opinion letter that payment in “both U.S. Dollars and foreign currency” may satisfy the minimum salary requirement under the FLSA’s executive, administrative, and professional exemption. Neither the Department of Labor nor courts “have indicated that cryptocurrency is considered functionally similar to foreign currency and therefore, a negotiable instrument payable at par,” Morrison & Foerster LLP’s Oswald Cousins and David Papas note.
Meanwhile, many state laws put additional mandates in place when it comes to what constitutes acceptable compensation, with Pennsylvania, for instance, requiring that wages be made in “lawful money of the United States.”
As a non-fiat currency, cryptocurrencies very well may fall outside the FLSA’s definition of “cash or negotiable instrument,” and if used as pay, may also run afoul of state mandates, thereby, putting it outside of the realm of recommended forms of base compensation. And while there “may be an argument that some forms of cryptocurrency are readily exchangeable for U.S. currency,” Schreter and Brown assert that “the legal system is still catching up to the use of crypto and has not issued any binding precedent to allow for the practice of payment of wages in crypto,” which should serve as a deterrent – or at the very least, a warning – for companies looking to pay out base salaries in crypto.
There are additional risks for companies to consider, particularly in light of the volatility that comes hand-in-hand with many cryptocurrencies. “When compared to the rather stable value of the U.S. dollar, the value of cryptocurrencies is subject to large fluctuations,” per Butler and White, who note that such volatility can lead to the under-payment of wages or violation of minimum wage or overtime requirements under the FLSA.
Beyond that, many states – from Washington to California – require that wages be provided at no cost to the employee. According to Cousins and Papas, this means that “to proceed with crypto-paychecks, employers must ensure that any wages … do not include any costs for the employee,” such as transaction fees that an employee must pay to redeem or access the cryptocurrency, including if/when it is exchanged for U.S. dollars.
And still yet, there are an array of tax and benefits issues to take into consideration since the IRS considers virtual currencies to be “property,” subject to capital gains tax rates, per Butler and White, and “has also confirmed in guidance materials that any payment to employees in a virtual currency must be reported on a W-2 based upon the value of the currency in U.S. dollars at the time it was delivered to the employee.”
While the desire of companies to differentiate themselves in the market makes sense (as does the desire to pay in crypto in specific scenarios, such as when employees are located internationally in order to avoid exchange rate differences), there is early-stage uncertainty from employers as to the risks that come with using crypto as compensation. Should companies opt to move forward with a crypto-as-compensation plan, Cousins and Papas say that companies may consider following in Mayor Eric Adams’ lead. The New York City politican has accepted his own wages in U.S. currency and then converted those U.S. Dollars into crypto, namely, Bitcoin and Ethereum. (In a statement in January, a spokesman for New York City said that “due to U.S. Department of Labor regulations, New York City cannot pay employees in cryptocurrency.” Against that background, the spokesman said that “by using a cryptocurrency exchange, anyone paid in U.S. dollars can have funds converted into cryptocurrency before funds are deposited into their account,” which is what Adams did.)
While payment in crypto appears to be a ways away for many fashion and luxury brands, Schreter and Brown, nonetheless, suggest four practical recommendations for companies that opt to issue crypto outright in connection with employees’ wages. Specifically, they suggest that companies …
(1) Limit the use of cryptocurrency to exempt employees. Calculating the correct regular rate of pay for non-exempt employees will be difficult and poses potential minimum wage and overtime concerns if you are using cryptocurrency for regular wages;
(2) Limit the use of cryptocurrency to bonuses. Given the variability and potential decrease in the value of a cryptocurrency, using cryptocurrency as part of a salary puts at jeopardy the salary level and salary basis requirements for exemption classification purposes;
(3) Draft clear bonus plan documentation discussing the potential variation in the value of the cryptocurrency bonus, the date the cryptocurrency bonus will be issued/earned so a valuation can be placed for tax and accounting purposes, the cryptocurrency exchange where the cryptocurrency is being issued, and that the bonus has no strings attached and is issued/cashed out on the day it is earned; and
(4) Consider including an acknowledgment in the bonus plan document where the employee acknowledges and accepts the risk of receiving compensation in cryptocurrency, the legal risks of receiving any form of compensation in cryptocurrency, and the potential drop in value.