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Alternate Compensation Arrangements May Pose Challenges

In our quest to differentiate our organizations to attract, retain and motivate the best talent in an ever-tightening labor market, simply increasing pay alone might not be the easiest solution for many. So, we challenge ourselves to out-of-the box thinking and developing new approaches. Two approaches that are gaining buzz are the use of cryptocurrency as a form of compensation and on-demand pay arrangements.

Can I compensate my employees in Bitcoin?

This new trend to provide cryptocurrency as a form of compensation, whether as an alternative for wages or as part of an incentive plan, may allow companies to differentiate themselves. In a competitive labor market, this interest to provide innovative forms of compensation comes with risks:

Form of Payment – Cash or Negotiable Instrument

There are various issues under the Federal Fair Labor Standards Act regarding the use of alternate currencies, particularly relating to the FLSA’s definition of cash or negotiable instrument. As a result, an employer who chooses to pay minimum and/or overtime wages in cryptocurrency may violate the FLSA by failing to pay workers with an accepted form of compensation. There are also various state law issues that should be considered prior to moving ahead.

Volatility Concerns

Bitcoin, for example, has experienced tremendous fluctuations in value. Not only does this cause issues for payroll vendors but can lead to under-payment of wages.

Tax and Benefits Considerations

The IRS considers virtual currencies to be property, subject to capital gains tax rates. It has also confirmed in guidance materials that any payment to employees in a virtual currency must be reported on a W-2 based upon the value of the currency in U.S. dollars at the time it was delivered to the employee. This means that cryptocurrency wage payments are subject to Federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax.

Considerations for Employers

Given the above issues, it would seem prudent to limit the use of cryptocurrency compensation to payments that could run afoul of the FLSA or other state. It would seem then a potential strategy for the payment of incentives – either long-term or short-term – would be the use cryptocurrency as. Given the combination of uncertain risks, employers should consider limiting cryptocurrency compensation models to payments that do not implicate the FLSA or applicable state wage and hour laws.

Can I grant income access as it is earned?

On-demand-pay arrangements permit employees to access a portion of their earned wages in advance of their normal pay date. This trend is another option for companies to differentiate themselves in a competitive labor market. However, this practice also poses challenges:

Constructive Receipt

One of the potential tax concerns with these arrangements is that employees could be in constructive receipt of their earned wages, creating payroll withholding and funding obligations for employers regardless of whether the employee receives a wage payment. Under the rules of constructive receipt, as soon as an employee has earned the right to access compensation, it is treated as income at that time regardless of whether the employee actually gets a current payment. Additionally, the program can cause uncertainty regarding how to properly calculate the required payroll taxes and income tax withholdings when the employee elects to receive a payment of earned wages.

Impending Legislation

Congress is considering passing legislation to provide a more reasonable approach to the constructive receipt issues that would basically treat on-demand pay arrangements as weekly payroll periods, even if an employee has access during the week.

Employers who are contemplating adding this arrangement or have it in place already, should consider how the Administration’s position on current law affects them and how the new proposals can make this arrangement remain an attractive option.

For now, continue to challenge your organizations to develop alternative approaches to keep you competitive. But in doing so, proceed with caution.