Expert Q&A on Bitcoin Compensation

August 6, 2014

Practical Law logo newCan you pay your employees in Bitcoins?  To answer that question, Practical Law reached out to David Prather, a partner with Ford & Harrison LLP. You can read the extensive Expert Q&A with David here.

First it’s important to answer this question: What are Bitcoins? Bitcoins are probably the best known example of digital currency or “cryptocurrency.” Created in 2009 by an unknown person with the alias Satoshi Nakamoto, Bitcoins enable users to send money via the Internet with no transaction fees, no “middle man,” and no disclosure of personal information, such as the user’s name or credit card number.

How do you get them? Bitcoins can be acquired by:

  • Buying Bitcoins on an online exchange.
  • Receiving Bitcoins as payment for goods or services.
  • Transferring Bitcoins between users (similar to a wire transfer).
  • Creating new Bitcoins by using a computer and the Bitcoin software to compete with other users to solve complex math problems in a process called “mining.” The first user to solve a problem receives a fixed number of new Bitcoins, and another competition begins.

Why so much interest in them? Bitcoins are popular with individuals and businesses because:

  • There are no transaction fees, such as credit card or foreign transaction fees.
  • Users do not need a bank account or credit card.
  • Users do not disclose private information, such as credit card numbers.
  • Although usernames and transactions are encrypted, transactions can be verified by any computer or smartphone on the Bitcoin system.

Because Bitcoins and other digital currencies are not issued by a government as legal tender, they are not true “currency.” However, Bitcoins are often used as a substitute for currency. For example, some merchants accept Bitcoins and businesses in the US and elsewhere compensate employees and other service providers with them.

As the popularity of Bitcoins grows, so might interest in Bitcoin compensation. Generally, the primary federal law governing employee compensation, the Fair Labor Standards Act (FLSA), requires employers to pay nonexempt employees minimum wage and overtime compensation, and exempt employees a minimum weekly salary, in US dollars. Under certain circumstances, the FLSA allows employers to count the fair market value of facilities, such as meals and lodging, toward minimum wage obligations. However, the FLSA does not allow an equivalent credit for currency substitutes like Bitcoins. Also, although the IRS has determined that Bitcoin compensation is subject to employment taxes, the US Department of Labor, responsible for enforcement of the FLSA, has yet to weigh in on the issue.

State laws vary, but many have minimum pay and currency requirements similar to federal law. Absent regulatory guidance, employers should assume that Bitcoins do not satisfy their state or federal minimum pay obligations. However, the form of compensation above federal and state minimums is often left to employers and employees to negotiate. So, while Bitcoins currently don’t satisfy minimum pay requirements, Bitcoin compensation above those minimums may be coming to an employer near you.

To learn more from the expert, see: Expert Q&A: Bitcoin Compensation.