Paying wages with crypto? Ontario ruling exposes risks for employers

John Hyde, a Toronto-based employment lawyer and founder of Hyde HR Law, said a big reason for the reluctance among employers to embrace it is around compliance with employment standards legislation.

“You can compensate people with it, but you can’t call it wages,” he said. “I think the way you would want to do it is you would get a base salary of X, plus we will give you X in cryptocurrency per annum.”

The Kinglory case

The Ontario Labour Relations Board recently weighed in on using cryptocurrency to pay staff — and it didn’t end well for the employer. Yujie Hou and Tong Huang filed a complaint against their former employer, Kinglory Inc., after it tried to pay half their wages in a company-created cryptocurrency.

Both workers had employment contracts that stated they were entitled to an annual salary of $240,000. But the employer argued that the compensation package consisted of $120,000 in cash and an equivalent amount of cryptocurrency. The board said that argument failed for a simple reason — that’s not what their employment contracts stated.

“Rather, they specifically state that the applicants’ base salaries are each $240,000,” the board said. “It was not open to the employer to pay their wages in a method other than those stipulated in (the Employment Standards Act).”

Under Ontario’s ESA, wages are required to be paid by either “cash, cheque, or direct deposit,” it says.

The employer filed a request for reconsideration of the ruling, but it was also shot down. Kinglory argued that the $120,000 in crypto was not “wages” and therefore was not prohibited by the ESA, pointing to other court rulings to back up its assertion. But the decisions the employer relied upon, including Milwid v. IBM Canada and Ruel v. Air Canada, dealt with wrongful dismissal and whether staff were entitled to long-term incentive plan payments, restricted share units, stock options, and damages for pension benefits.

“None of these decisions suggest that, having described an employee’s salary as a specific dollar figure, an employer can impose a contractual term that nonetheless purports to pay some portion of that salary in a manner other than cash, cheque, or direct deposit,” said Roslyn McGilvery on behalf of the board. “The employer appears to be conflating the terms ‘salary’ or ‘wages’ with the term ‘compensation package.’”

Value of crypto questioned

The board also noted there was zero evidence to suggest what the “Kinglory cryptocurrency” was actually worth in real dollars — since it was created out of thin air by the company.

“Moreover, I heard no evidence to suggest that at any time during the applicants’ employment, the employer succeeded in trading Kinglory cryptocurrency on the centralized cryptocurrency exchange as it had planned,” said McGilvery.

The board said what happened in this case speaks to the unequal bargaining position of non-union employees in relation to their employer.

“These employees bore the burden associated with the apparent uncertainty of the Employer’s cryptocurrency venture by suffering a significant reduction to their agreed-upon dollar-based salary,” said McGilvery.

Fluctuating values

Another significant hurdle to using crypto to pay workers is the fact it can fluctuate, significantly, in value over short periods of time.

“In 2010, one bitcoin was worth about nine cents U.S.,” said Hyde. “In 2021, it was worth about $68,000. Almost exactly a year ago, it was worth $20,000. And today, as we speak, it’s trading at $61,430 U.S.”

That volatility can cause headaches when it comes to things like overtime and vacation pay, he said.

“It’s very difficult, until it’s recognized as legal tender,” said Hyde. His advice to employers is to not go down the payment by crypto road when it comes to wages.

“I would recommend they don’t do it now, unless it’s by way of a bonus,” he said. “And by bonus, I mean a discretionary bonus.”

Another option would be to facilitate turning a cash bonus into cryptocurrency, if that’s what the worker wants to do with the money.

“That might be fine, but it has to be defined first as basic wages, a salary, and then allow the employees to convert,” said Hyde.

There are also potential tax implications for the worker to consider. For example, if an employee is awarded one bitcoin as a bonus — and it was valued at $20,000 at the time, but then soared in value to $60,000, there could be significant tax owing on the gain if it’s not in some kind of protected investment like a TFSA, he said.

“But it’s a double-edged sword. The value of crypto upon receipt could increase the next day, and it could be a significant benefit,” said Hyde. “It could fall, too. And that’s where you run into compliance issues as an employer.” 

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