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It can be especially difficult for startups to compete for good people. Google, Amazon, Facebook and other tech giants have hiring war chests that startups simply can’t match.
And it’s not just other tech companies that startups must compete with. In 2019, according to an analysis by Bain & Company, approximately 40% of software engineer and developer hires were made by companies outside of tech.
So what can the “Davids” of the tech hiring battles to do? As a lawyer who serves as fractional general counsel to startups, I have an up-close perspective on how companies are hiring. One trend I’m seeing is companies offering cryptocurrency in a bid to lure workers.
Some “Goliaths” are looking at crypto as an employee incentive, too. On CNBC, Twitter’s CFO said, “We’ve done a lot of the upfront thinking to consider how we might pay employees should they ask to be paid in bitcoin.” Even the City of Miami is getting in on the action. Mayor Francis Suarez announced in October that he is moving forward with a proposal to pay city workers in bitcoin.
So why are employers opting to incentivize workers with cryptocurrency?
Put simply, the calculus in most cases is that it’s a form of differentiation that may attract workers looking for a forward-thinking, innovative employer that offers strong benefits and compensation. For the right worker (and often it’s the type of worker that a tech startup is looking for), a $10,000 starting bonus in bitcoin — because of, not in spite of, its volatility — may be seen as more valuable than a $10,000 cash bonus.
Cryptocurrency compensation can also be an attractive option when a startup operates remotely and its workforce is dispersed around the world, as there is less red tape, time, and expense to pay with crypto than is often required to transfer U.S. dollars across jurisdictions.
As with most legal questions, the answer to whether it’s legal in the United States to pay workers in cryptocurrency is “it depends.” A number of factors must be examined, including whether the “pay” at issue is wages or other forms of compensation. The Fair Labor Standards Act (FLSA) requires “payments of the prescribed wages, including [minimum wage and] overtime compensation, in cash or negotiable instrument payable at par.”
Since cryptocurrency is not cash, the question becomes whether a payment of wages to an employee in crypto would qualify as a payment “at par.” Again, there’s no clear answer. Certainly, an argument can be made that bitcoin, for example, is akin to a currency (although the IRS classifies it as property) with a demonstrable value and liquid marketplace, but as of today neither the U.S. Department of Labor nor any court has provided clarity on the issue.
It’s important to keep in mind that federal law is not the only hurdle businesses face when it comes to using cryptocurrency as a form of employee compensation. Different states have different rules as well, including many with laws on the books (including California, Texas, and Illinois) requiring wages to be paid in United States currency. Employers that pay wages in cryptocurrencies in such jurisdictions run the risk of violating these state laws.
One way to avoid running afoul of the FLSA and other laws is to offer employees the option of having a designated amount of their cash wages from every paycheck automatically be converted to cryptocurrency. Another option is to pay wages in cash and reserve any crypto payments for bonuses or other benefits.
Beyond wages and benefits, another common means of attracting and retaining talent in the technology sector is the granting of stock awards and options. Companies are now using cryptocurrency in much the same way they use equity as an employee incentive.
If a company raises funds using an “initial coin offering” (ICO), it can use its cryptocurrency tokens to incentivize its workforce without diluting its capitalization table.
As with stock awards, token awards can be granted to employees outright or can be restricted and subject to a vesting period. Regardless of the manner in which a company decides to grant tokens, it’s important to understand the tax and other legal implications of doing so, and to work with experienced professionals (legal and tax, in particular) when implementing a token award program — or using cryptocurrency as an incentive in any manner.
A few years ago, many (perhaps most) were still questioning whether cryptocurrency was at best a fad or at worst a scam. What a difference a few years makes. Today, the understanding of the utility of cryptocurrency, including as an employee incentive, is virtually universal in the tech world and is steadily becoming more ubiquitous in the broader economy.
While using cryptocurrency as a means of attracting and retaining talent poses some legal and tax risks, there are ways to proceed and remain compliant. Companies need to get creative to win today’s war for talent. And crypto as a form of compensation is one way to gain a competitive advantage.
Kristen Corpion is the founder of CORPlaw.
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