By Andrew Masak
Has the water cooler talk at your workplace turned to the hottest topic in technology – Bitcoin? Are your employees clamoring to be paid in digital currency or include crypto currencies in their defined retirement plans? In a recent poll by Tech in Motion, 51 percent of IT professionals responded that they would be interested in accepting Bitcoins as payment for work, and major retailers, including Tesla Motors, Lord & Taylor, Overstock, and Tiger Direct are beginning to accept Bitcoin payments. When someone from IT comes knocking on your door asking you about Bitcoin, should you consider paying him in it?
What is Bitcoin? Bitcoin is a decentralized digital currency that allows parties to exchange virtual coins without a middle man. Moreover, Bitcoin is not controlled or backed by any bank or central government authority, like the Federal Reserve. As Bitcoin transactions do not require a centralized intermediary, payments can be processed at a very low, almost “frictionless” cost.
Where do Bitcoins come from? Bitcoins are pieces of computer code that represent monetary units. Each Bitcoin is “mined” by a computer solving complex algorithms. There are currently approximately 11 million Bitcoins in existence and only about 21 million Bitcoin will ever be generated or “mined.”
How do people buy or use Bitcoins? Bitcoins are bought online using traditional currencies (U.S. dollars, Euros, etc.) through Bitcoin exchanges (see, e.g., Coinbase, Bitstamp.net, or the infamously defunct Mt. Gox) and private sellers. Bitcoin users must first install a Bitcoin wallet on their computer or smartphone, or, alternatively, use a wallet in the cloud. Users can then share their wallet’s address with others to make or receive payments.
Payroll Processing Companies Paving the Way for Employers to Pay Employees in Bitcoin
Coinciding with the rise in digital currencies, venture capital is flooding into the Bitcoin space, making way for a rapidly expanding infrastructure. At least $72 million of venture capital poured into Bitcoin startups in the first quarter of 2014 alone. Part of this community includes online employee payroll companies. BitPay, the largest payment processor for crypto currencies, recently released a beta version of a Bitcoin payroll application for employers. In addition, a Canadian payroll company, Wagepoint, already allows employees to convert a portion of their net pay into Bitcoin, and then online Bitcoin payroll systems automatically exchange the dollars for Bitcoin at the current market rate. These companies and others are making it possible to entertain the idea of paying employees using Bitcoin.
Legal Implications of Paying in Bitcoin
Bitcoin has seen major fluctuations in value in its short life. Consequently, $100 worth of Bitcoin on one paycheck will almost certainly be a different amount on later paychecks. Thus, employers contemplating paying employers in Bitcoin as opposed to traditional currency are advised to review minimum wage and other state and federal employment law requirements. First, paying employees in Bitcoin may not count as “wages” under the FLSA. Employers may still be able to pay employees a base rate in traditional currency that meets FLSA and minimum wage requirements, while supplementing the rate with Bitcoins over and above the minimum wage. However, if Company X agrees to pay its employees one (1) Bitcoin each week (current value as of this posting $462.16) the employee has the chance of seeing that value rise (all-time high value of $1,216.73) or fall (all-time low value of less than $0.01). Thus, even if Bitcoin were allowed to satisfy minimum wage obligations, if the exchange rate were to fall below $290 for a non-exempt employee working 40 hours a week, earning one (1) Bitcoin per week, the employer would be in violation of the federal minimum wage.
Therefore, any employer interested in paying employees Bitcoin should consider:
- Paying employees in traditional currency that is then converted to Bitcoin instantly;
- Paying employees a base rate that satisfies all state and federal minimum wage and overtime requirements and supplementing these wages with Bitcoins;
- If paying in Bitcoin, consider applying a wage differential for weeks in which an employee’s Bitcoin-dollar equivalent falls below the applicable minimum wage; and
- Consulting an attorney experienced in labor and employment issues.
As with other areas of rapidly advancing technology, the legal framework and regulatory background is struggling to keep pace with Bitcoin. Legal challenges and government regulation will likely be forthcoming and offer significant clarity to the usage of Bitcoin.
Tax Implications of Paying in Bitcoin
Fortunately, in at least one area of the law important to employers, the IRS issued guidance on the tax treatment of Bitcoin. Determining that Bitcoin is “property” and not currency, the IRS informed employers of the following:
- Wages paid using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes;
- Payments using virtual currency made to independent contractors and other service providers are taxable – most often a Form 1099 must be issued;
- As with any other payments made in property, information reporting requirements are required for payments made using virtual currency.
Check back with Seyfarth Shaw’s Employment Law Lookout Blog for future updates on Bitcoin in the workplace, or contact the author or your Seyfarth attorney.