Bitcoin, Ethereum, Stellar, Ripple, Litecoin... - Cryptocurrency as a Compensation Component

September 2022 · Estimated read time: mins

We are increasingly advising our clients on the question of whether and how cryptocurrency can be used as a remuneration component. This form of salary payment is already a reality in many places, for example in the USA. In Germany, on the other hand, companies are still entering uncharted territory with it. As with many alternative methods of remuneration, this does not only raise questions of purely labor law. Just as important for the decision whether cryptocurrency should be used as a compensation component at all, as well as for the practical handling, are questions about the treatment under tax law. To provide you with an overview of both aspects, we are pleased to publish this two-part article in cooperation with tax consultant Arne Keller from ba-Group. First, we would like to inform you about the general background and the labor law issues. The tax law issues will be considered in the second part of the article.



What is cryptocurrency?

According to the definition of the European Banking Authority (EBA), a cryptocurrency is a digital representation of value that is not created by a central bank or public authority and does not need to have a link to legal tender. Cryptocurrency is used as a medium of exchange by both individuals and legal entities. Its transfer, custody and trading is done electronically.


Are there any legal regulations on cryptocurrency? Is cryptocurrency prohibited in the EU?

So far, there is no legal regulation on cryptocurrency. However, due to the high energy consumption of cryptocurrency, a ban on the proof-of-work method, has been considered for a long time. This method is used to create bitcoins.

Labor Law


Are companies allowed to pay their employees in cryptocurrency?

Under certain conditions yes: Due to the fact that cryptocurrency is subject to high exchange rate fluctuations, which no insurance on the market cushions, a secure livelihood is not ensured by the salary consisting exclusively of cryptocurrency. Therefore, a full salary in cryptocurrency is so far inadmissible under German law. For this reason, it is at most possible to pay out only part of the salary in cryptocurrency. For guidance, a ruling by the Düsseldorf Regional Labor Court on limits for stock options can be used (ruling dated October 30, 2008, Case No. 5 Sa 977/08). According to this, a payment in cryptocurrency would be permissible up to an upper limit of 25 to 30% of the total remuneration. In addition, one would have to be guided by Section 107 (2) sentence 5 GewO, according to which at least the unseizable part of the remuneration must be paid out in euros.


Why cryptocurrency as compensation?/ Does cryptocurrency as salary have advantages for employees?

Cryptocurrency can be extremely attractive due to its high transparency and transaction speed. In addition, high increases in value are possible.


For whom is the payment in cryptocurrency worthwhile?

On the one hand, companies that want to offer a new interesting way of remuneration in the modern world of work consider using cryptocurrencies in order to stand out from the crowd. Especially in startups, they are often issued as an alternative to stock options. The goals are the same in each case: this form of participation of the "startup team" can enormously increase the identification with the company and at the same time ensure that more cash is available in the company.


On the other hand, cryptocurrency can be interesting for employment relationships with a foreign connection. If the selected cryptocurrency is accepted or not prohibited in both countries, there is the advantage that transactions are faster and cheaper.


Are there any disadvantages or risks when paying out in cryptocurrency?

Problems arise with regard to the regulation of Section 107 (1) GewO. According to this, remuneration for work must be paid in euros. A violation of this legal norm leads to the result that the company's payment does not constitute fulfillment of the employee's remuneration claim - the issuance of the cryptocurrency does not "count". Employees may therefore continue to claim the agreed wage.


In addition, the market for cryptocurrencies is very small relative to other currencies, making it easier to manipulate. In addition, cryptocurrencies enjoy great popularity on the black market and in the underground, so that the first countries are already taking action against them by means of (partial) bans. For example, China has an absolute ban, where all transactions with cryptocurrencies are against the law.


How is cryptocurrency regulated in the employment contract?

It is important to specify contractually who bears the risk of exchange rate fluctuations. Or at least to assume a certain exchange rate for the calculation, to avoid disputes regarding the amount of salary,.


The problem of "dry income" also deserves special attention. This occurs when the taxpayer is taxed without a direct cash inflow (for more details, see the section on tax law). In order to avoid such a risk, it is advisable not to transfer the cryptocurrency directly to the employee, but to conclude a contract regarding the possibility of acquisition. According to this contract, the employee can purchase a portion of the tokens due at a fixed purchase price after a certain period of time has elapsed.

Will the compensation model soon find its way into the mainstream?

It is unlikely that such a payment model will be applied in the broad mass of companies in the near future, because the uncertainties are currently too great, particularly due to the price fluctuations. It will also be interesting to see when the first court decisions on this issue come out. These are likely to be groundbreaking for the fate of cryptocurrency as a remuneration component.

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