Crypto clearing? Bitcoin Bonuses? New York State Employers Must Weigh Applications Carefully | Harris Beach LLC

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If your employee wants their paycheck to be in cryptocurrency, should you, as a news-following employer, accommodate the request?

You don’t need to work in Silicon Valley or play for the NFL to answer this type of question. In 2022, more traditional workplaces, from manufacturing plants to municipal governments, have faced this dilemma. In January, New York City Mayor Eric Adams brought public attention to his decision to convert his first three paychecks to Bitcoin and Ethereum, via cryptocurrency exchange Coinbase. Since then, blockchain and digital assets have only gone mainstream, with investors viewing them as part of estate planning and businesses adapting, out of necessity, to digital asset-based transactions. Are wages and salaries next? Given potential wage and hour risks, tax compliance issues, and even federal securities regulations, should employers seriously consider paying wages in digital currency?

Federal Considerations: The federal Fair Labor Standards Act requires that all wages and other compensation governed by that act be paid “in cash or in negotiable instrument payable at par.” Limited exceptions exist, in certain circumstances, for things like food, lodging, transportation and fuel, or even company store credit. It’s one thing to distribute croissants and coffee to employees who arrive early, or to reimburse them for their gas consumption. Digital currency – intangible, not accepted in all stores and still poorly understood – is another matter. Would employers issuing cryptocurrency remain in compliance with federal law? The answer is not entirely clear at this time. The U.S. Department of Labor has generally allowed paychecks in foreign currencies — provided the amounts paid, at the current exchange rate, meet FLSA requirements. Mayor Adams was able to easily convert his salary into crypto. But whether cryptocurrency can be equated with a foreign currency remains an open question.

New York State Considerations: Many states and municipalities have their own statutes and rules for paying wages. New York, for example, explicitly states the methods by which wages must be paid, including cash, check, direct deposit, or payroll debit card. Crypto is not explicitly prohibited (or even mentioned) by New York rules. There is no reason to believe – at this time – that the New York Department of Labor or the courts will condone crypto wage payments. In the absence of clear guidance or an update to New York law, employers who pay in cryptocurrency, even when requested, do so at their own risk.

Price fluctuations – minimum wage and overtime considerations: Given the volatile market value of cryptocurrency on any given date, issuing compensation in digital currency creates the risk that employers will not meet required compensation thresholds – paving the way for wage claims Overdue – if the price of a given currency crashes between payroll processing and payday.

Securities Compliance Considerations: Securities and Exchange Commission (SEC) Chairman Gary Gensler and other senior SEC officials have said that Bitcoin is not a security subject to its jurisdiction. In fact, Chairman Gensler has often stated that Bitcoin should be treated as a commodity and regulated by the Commodity Futures Trading Commission (CFTC). Why? Because under the quadruple Howey Test, the judicial standard for determining whether a financial instrument represents an investment contract (i.e. a security), Bitcoin really only meets the first prong and arguably the third. The quadruple Howey The test used to determine whether an “investment contract” exists is: (1) an investment of money, (2) in a joint venture, (3) with a reasonable expectation of profit; (4) derived from the efforts of others. Bitcoin fails to meet prongs 2 and 4 primarily due to its decentralized nature. In other words, the Bitcoin market price is not affected by the efforts (or lack thereof) of a single person or group of people (i.e. joint venture). Unlike a traditional investment contract, where investors give money to a person or a company (i.e. startups) with the hope/expectation that the efforts of the management of startup will increase the value of their initial investment, Bitcoin is entirely affected by the market, not the decisions of individuals. Similarly, but to a lesser extent, the SEC has suggested that Ethereum is not a security. On the other hand, the SEC continues to state that the facts and circumstances of a sale or resale of other digital assets may meet the Howey Test and make it a security, subject to SEC regulatory oversight and enforcement. In this case, the issue must be registered with the SEC or benefit from an exemption from the SEC.

With these nuances in mind, employers who wish to explore paying wages in Bitcoin should consult with an attorney regarding the risks involved and potential ways to mitigate those risks.

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