This post originally appeared in Bitcoin Magazine.

Far from its humble origins on the cypherpunk list server, Bitcoin now captures the attention of the general public on a seemingly daily basis. Prominent news outlets, once waffling between indifference and hostility, regularly feature the trailblazing cryptocurrency as part of their coverage of the global financial landscape. As time passes, an ever-increasing segment of the population — often entirely removed from Bitcoin’s familiar niche of computer scientists, mathematicians, and coders — find themselves asking the question: Can this really work?

Small wonder, then, that another question further down the line of acceptance is increasingly popping up among some intrepid entrepreneurs: Can I pay my employees in bitcoin?

The question is a natural one for those who have come to embrace both the present utility and the overall promise of bitcoin. Not unlike those early advocates expending (admittedly, modest amounts of) energy and computing time to mine bitcoin on their personal computers with no promise of any value in return, some innovative business owners are now willing to risk compliance troubles in the hopes they will attract the right talent to their teams while further establishing bitcoin as a viable monetary alternative to legacy currencies.

To be sure, those wading into the waters of bitcoin compensation packages are not just small-time operations. Jack Dorsey, CEO and co-founder of Twitter and founder of wildly popular payments app Square, recently floated the idea of using bitcoin to pay employees or contractors of his cryptocurrency payment counterpart, Square Crypto.

It is unclear whether Square Crypto actually pays its employees in bitcoin, but the fact that it is being considered highlights the idea’s rising popularity, even among more established organizations. That other companies are experimenting with this type of compensation should not, however, convince you that these are risk-free actions. To the contrary, as one of my colleagues put it recently, paying your employees in bitcoin can be “fraught with peril,” particularly in the United States. Here’s why.

Legal Implications

In the U.S. and elsewhere, the legal questions garnering the most attention in the cryptocurrency world seem to center on whether a cryptocurrency will run afoul of securities law, but that is only the tip of the iceberg. Those in the U.S. who are hoping to utilize bitcoin as a means of payment need to be considering two other big players: The Internal Revenue Code and the Fair Labor Standards Act.

The Internal Revenue Code and the IRS

Employers based in the U.S. should not ignore the reality of taxation related to bitcoin, especially if they’re using it to pay their employees. IRS Guidance from 2014 has remained largely unchanged, notwithstanding the dramatic gains in value and overall presence of bitcoin in that same timeframe. In its very brief guidance, the IRS informed employers that bitcoin used to pay wages must be assigned its value in U.S. dollars on the date each payment is made and reported on the employee’s regular W-2 form.

The employer must also make the applicable withholdings from such payments in the same manner. This process requires detailed records and will doubtlessly put pressure on the internal or external accounting service being utilized (to the extent the employer uses one at all). But even assuming the employer is above board with respect to taxes, they still must navigate the murky waters of the Fair Labor Standards Act (FLSA) and similarly situated state laws.

The Fair Labor Standards Act and the DOL (Department of Labor)

First, and quite by design, bitcoin is not fiat. While that is generally considered one of bitcoin’s finest selling points, it creates problems for an employer attempting to use it as a wage payment to employees. The FLSA requires “payments of the prescribed wages, including [minimum wage and] overtime compensation, in cash or negotiable instrument payable at par.”  

In the past, the United States has permitted payment in foreign currencies provided the U.S. dollar value of such currencies at the time of payment exceeded applicable minimum wage and overtime requirements. While we can analogize this to bitcoin, we do not yet have a real-world example where the U.S. Department of Labor (DOL), the agency charged with enforcing the FLSA, has specifically approved the practice for bitcoin.

To get around this, perhaps an employer will simply pay their employees a bitcoin-based salary, rather than an hourly wage. Assuming their employee is otherwise properly exempt from overtime requirements, paying them a fixed salary is a great way to ensure that they cannot later claim eligibility to overtime wage protections. But the notorious volatility of bitcoin presents a potential problem here.

“ … wild fluctuations in the price of Bitcoin could pull an otherwise overtime exempt position into one that is overtime eligible because the rapid changes in value of Bitcoin mean the employee is not being regularly paid a ‘predetermined amount.’”

The DOL utilizes a multipart test to determine whether an employee is entitled to overtime premium pay from their employer. One part of this test is called the “salary basis” test, which requires that an “employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis.” Although the issue hasn’t been squarely considered, the wild fluctuations in the price of bitcoin could pull an otherwise overtime exempt position into one that is overtime eligible because the rapid changes in value of bitcoin mean the employee is not being regularly paid a “predetermined amount.”

States Have Their Say

Employers will ultimately need to consider potential state law implications as well. Many states have laws or regulations prohibiting payment of wages in anything other than U.S. currency, regardless of what is permitted under the FLSA. Pennsylvania, for example, mandates that employees “shall be paid in lawful money of the United States or check.” Other states require employees be paid in wages free from any sort of encumbrance. The fees associated with converting bitcoin into fiat on an exchange could violate these prohibitions.

The Uncertainty of Alternatives

In order to combat these regulatory hurdles, many employers and employees utilize a conversion service that immediately converts a contract from U.S. dollars into bitcoin after payment. Others are simply limiting bitcoin compensation to independent contractors because they are subject to far fewer wage controls than employees. But employers should be careful that the person or persons they call an “independent contractor” is, in fact, legally classified as such. With the proliferation of companies like Uber, Lyft and other gig-economy-based business models, employee misclassification lawsuits and enforcement actions are on the rise.

Indeed, even when a contract clearly states, and both parties absolutely agree, that they are in an independent contractor relationship, a reviewing court or administrative body will not hesitate to rule that they are actually in an employment relationship, if the facts and the law ultimately compel that conclusion. The question courts consider revolves primarily on the actual relationship between the parties, not necessarily what they have agreed to. Moreover, some states are jumping ahead of the federal government and cracking down on employers attempting to skirt wage and hour law by utilizing independent contractors.

California, for example, has roundly repudiated the more forgiving multifactor federal test to determine employee status in favor of the simpler, but far more difficult, “ABC test.” In states adopting this view, a person is considered an employee unless the employer can prove each of the following three elements:

  1. The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
  2. The worker performs work that is outside the usual course of the hiring entity’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.

Under this increasingly accepted viewpoint, employers should be cautious before haphazardly classifying someone as an independent contractor to lessen the burden of paying them in bitcoin. The penalties for misclassification can rack up quickly, to say little of the costs of litigation that may follow in their wake.

The Battle for Bitcoin Continues

Since its inception, bitcoin has been no stranger to challenges. And despite the legal uncertainty discussed in this article, it’s not all doom and gloom for bitcoin compensation packages. Employers in this space often have a high tolerance for risk and the innovative approach to attracting talent by paying in bitcoin may be worth the potential legal complications it creates. Further, because bitcoin remains relatively new and widely misunderstood, there are real advances to be made by advocating for it directly with elected officials, whether individually or through organized lobbying efforts. The recent Libra hearings showcased some of the more responsive representatives at the federal level, and they doubtless have counterparts at the state level.

Ultimately, implementing bitcoin compensation is a judgment call each business must make, but that doesn’t mean it has to be made with blinders on. Hiring competent legal counsel that not only understands the legal landscape, but also understands bitcoin, will help put your company on the surest footing possible. Of course, due to the regulatory uncertainty in the space, it is unlikely that such an effort will completely remove potential liability. But doing so can better equip you and your business to weather the storm, should it ever come your way.

This is an op ed by Bryan Jacoutot. Opinions expressed are his own and do not necessarily reflect those of Bitcoin Magazine or BTC Inc. This article is for information purposes only and does not constitute legal or tax advice. Always perform your own due diligence and consult with legal or tax professionals.

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