Crypto-wages in Swiss law

On several occasions, Swiss companies have considered paying their employees in Bitcoin or Ethereum. Some companies have also already turned their plans into reality. While the Swiss legal system allows crypto-wages in principle, there are certain limits to be observed when designing them. This article is intended to provide an overview of the current legal situation and to explore the question of how crypto-wages should be structured.

Good news from New Zealand

Since September 1, 2019, employers in New Zealand can pay their employees in crypto-currencies. The New Zealand tax authority "Inland Revenue Department" is responsible for the binding regulation (Tax Information Bulletin, vol. 31, no. 7, 2019). It may be surprising at first sight that it is a tax authority that issued the regulation and not the legislator or a civil judge. However, this is due to the "pay as you earn" principle or "PAYE", under which a New Zealand employer must deduct income tax directly from the employee's salary and pay it to the tax authority.

What is a crypto-wage?

There is a need for clarification regarding the question of what is meant by a crypto-wages. The New Zealand authorities speak of "crypto-assets", but primarily mean crypto-currencies. This differentiation is subject to three conditions regarding crypto-wage payments:

1. The crypto-currency, which is paid as a wage, must not be subject to any lock-in period. It must be immediately at the free disposal of the employee, be it for consumption or other expenditures or be it for the purpose of exchange into a national Fiat currency.
2. It must be possible to exchange the crypto currency directly into a fiat currency (e.g. New Zealand dollar or US dollar) on a crypto exchange. This means that there must be a corresponding trading pair consisting of crypto currency and fiat currency. In contrast, a crypto-currency wage would be inadmissible, which the employee can only exchange for a fiat currency via the detour of another crypto-currency.
3. The crypto currency used as a wage must primarily have a monetary function. Alternatively, the value of the crypto currency can be linked to one or more fiat currencies. In short, it must be coins and tokens that are traditionally considered to be used primarily as a means of payment. These include mainly crypto currencies such as Bitcoin and Litecoin and probably also Ether and Dai. For example, USD Tether and Paxos come into question for Fiat Stablecoins.

With the conditions mentioned above, the New Zealand authorities want to ensure that only crypto currencies that are sufficiently "money-like" are used as a reward. Crypto-currencies that do not meet these conditions are at best considered non-monetary benefits by the employer.

The salary under Swiss law

Under the Wages Protection Act 1983, New Zealand employers must pay wages in "money". This refers to the New Zealand dollar, and it is in the form of cash. However, employers and employees can deviate from this in writing and, for example, provide for bank transfers as a form of payment. Thus, the New Zealand legal situation does not appear to be fundamentally different from the Swiss Code of Obligations.

The main features of the Swiss labor law are regulated in the Swiss Code of Obligations, the Labor Act and its ordinances as well as in general and standard employment contracts. While the employee primarily makes his or her work available to the employer on a temporary basis, the employer owes the employee a salary. The salary is generally paid in cash, but a payment in kind can also be agreed (Art. 322 para. 1 of the Swiss Code of Obligations).

Monetary wage

Pursuant to Art. 323b para. 1 of the Swiss Code of Obligations, the employer must pay the employee a "cash wage […] in the legal currency". However, the employer and employee may, by "agreement", provide for a different form of monetary remuneration. It is also possible that a certain form of monetary remuneration is "customary".

Art. 84 para. 1 of the Swiss Code of Obligations also confirms that monetary debts are in principle to be paid in legal tender in the currency owed. The concept of legal currency or legal tender is regulated in the Federal Act on Currency and Payment Instruments. For Switzerland, this is the Swiss franc. Accordingly, coins issued by the Confederation, banknotes issued by the Swiss National Bank and sight deposits denominated in francs at the Swiss National Bank are deemed to be legal tender. Some may be surprised that bank and postal transfers are not legal tender. These are privately issued forms of the Swiss franc, although they are de facto more important in everyday legal life than coins and banknotes (although the counterparty risk is likely to vary considerably depending on the issuer).

The wording of the law allows employers and employees to deviate from the standard legal solution by agreement. For example, the Federal Supreme Court confirmed in a ruling that employers and employees can agree to pay wages in foreign currencies (e.g. euros). Furthermore, a monetary wage in a form other than the legal currency may even be "customary", namely on the basis of corresponding industry practice.

We can therefore state that privately issued currencies are in principle permissible forms of a monetary wage under the Swiss Code of Obligations. Moreover, there is no compelling reason why private currencies should be considered as banking book money. Unlike crypto currencies, however, book money claims are still denominated in Swiss francs. However, as mentioned above, Swiss labour law does permit the payment of a cash wage in a foreign currency. Crypto-currencies should therefore be treated in the same way as foreign currencies for this purpose (they are already treated like foreign currencies for tax purposes).

Wages in kind

One could object that crypto-currencies, due to their still scarce distribution and the high price volatility, do not represent any form of money in the sense of the Code of Obligations. Crypto-money wages would thus be excluded from the outset. According to economic theory, money fulfils three functions: (i) medium of exchange, (ii) unit of account and (iii) investment of value. While the medium of exchange function does not pose any particular problems compared to fiat currencies, very few people use crypto-currencies as a unit of account in everyday life. Moreover, the suitability of crypto-currencies as a long-term investment has not yet been proven. However, the Federal Council, the ESTV, FINMA and the Swiss National Bank seem to assume that Bitcoin and presumably some other crypto-currencies have monetary character or are at least similar to money.

However, if one were to take the view that crypto-currencies do not constitute money and therefore cannot be paid out as money wages, then they could qualify as wages in kind under civil law. A payment in kind consists, for example, in the provision of food and accommodation, the provision of a company car for private use or the payment of shares and options in the company. Since wages in kind are fully compatible with Art. 322 para. 1 of the Swiss Code of Obligations, it is ultimately irrelevant to the question of admissibility whether crypto wages qualify as cash or in kind. (Marginal note: Regardless of the above remarks on wages, the payment of a bonus in crypto-currencies should not cause any legal problems).

So we can summarize that employers and employees may provide for a different regulation compared to the law - i.e. cash denominated in Swiss Francs. There are nevertheless certain limits to private autonomy.

Attention employee protection!

The employer has a statutory duty of care towards the employee (Art. 328 et seq. of the Swiss Code of Obligations). In particular, the employer must respect and protect the personality of the employee, take due account of his or her health and ensure that morality is maintained. The same applies to the processing of personal data (which can be a challenge when using the block chain).

In particular, the employer has a duty to safeguard wages. This obligation is intended to guarantee that the employee receives the agreed wage actually, on time and in as full an amount as possible. For example, the New Zealand Ruling also requires that a blocking period or similar restrictions on availability are not permitted. The employee must be able to freely dispose of the wage on the due date of the wage claim.

Furthermore, according to case law, the employee must be able to foresee the amount of his or her salary. As the principle of nominal value applies to the employee's wage claim, i.e. 100 Swiss francs correspond to 100 Swiss francs, irrespective of the actual purchasing power of a monetary unit, predictability is particularly important in cases where the purchasing power of the monetary wage fluctuates. Compared to established fiat currencies such as the Swiss franc, euro or US dollar, the short-term price volatility of crypto currencies is actually much higher. In other words, the same crypto currency unit can be used to purchase different amounts of goods and services depending on the time of payment. The high volatility of crypto currencies is therefore also seen as the crux of crypto wages.

Implementation options

Crypto wages can be implemented in the following two basic variants:

Fixed crypto-wage: The crypto-wage, the payment of which is linked to a fiat currency, is basically unproblematic. Employer and employee agree that the crypto-wage must correspond to a previously fixed Swiss franc amount at the time of payment (the amount of the crypto-wage to be paid is calculated in this case at the current exchange rate at the time the wage claim becomes due). In such a constellation, the amount of the crypto wage is in any case sufficiently predictable for the employee. Similarly, protective considerations are of secondary importance in cases in which stablecoins, whose prices are linked to a fiat currency, are the subject of the wage. Here, the employee can also reliably estimate how high the wage will be.

In this case, the employer bears the volatility risk until the crypto wage is aligned. The risk that unfavourable price fluctuations occur in the period between the payment of the crypto wage and the possible exchange into fiat currency is generally borne by the employee. In particular, there is no fundamental legal obligation for the employer to bear the volatility risk over a longer period of time after payment. For example, the employer does not have to compensate the employee for any loss of purchasing power due to inflation after the wage has been adjusted (no statutory right to compensation for inflation). In a recent decision dealing with the issue of the strength of the Swiss franc, the Federal Supreme Court confirmed that it is not excluded that the employee may have to bear certain exchange rate risks himself, provided this was agreed with him in advance and he was aware of the special circumstances.

On the other hand, it is sometimes argued that the risk of salary volatility is part of the business risk and must therefore be borne by the employer in any event. Accordingly, some claim that the employer must guarantee the purchasing power of the crypto wage for one month after the payment. This view is based on the assumption that the main purpose of the wage is to cover the cost of living for the following month. However, this view does not take sufficient account of the different circumstances of the individual case. Already today, employees of a start-up company can receive their wages partly or fully paid in participation rights. Even if, unlike with crypto-currencies, they are likely to have a certain influence on the success of the company and thus on the value of the shares, their (high) risk of default must be borne by the employees.

If the employee is aware of the volatility risks of crypto currencies and can estimate their effects, there is no reason why he should not bear the associated risks himself. However, the New Zealand regulation, according to which it must be relatively easy for the employee to exchange the crypto wage for fiat currency (see above), makes sense.

Genuine crypto-wages: In the case of crypto-wages whose payment amount is agreed in crypto-currency, the employee bears the full price volatility risk and thus any possible fluctuation losses, unless otherwise agreed. In such cases, the actual amount of the wage can vary considerably from month to month, which may indeed be problematic with regard to the employee's fixed costs such as rent and insurance premiums. Such crypto-wages are therefore regarded as fundamentally sensitive for protection reasons.

How technical can it be?

Given the level of innovation of crypto-currencies, it is also important that the employer takes into account the technical skills of the employee. Already the setting up of a wallet, but especially the exchange of crypto currency into fiat currency could pose a challenge for many employees that should not be underestimated. The consequences of a possible loss of the private key for the employee should also not be underestimated. De facto this means that employers should only pay crypto wages on the initiative of their employees. An exception should only be made where the employer himself operates a crypto business model.

Finally, the employee is protected by the fact that agreements on the use of the salary in the employer's interest are null and void (Art. 323b para. 3 of the Swiss Code of Obligations). This provision is intended to protect the employee in particular from the fact that instead of receiving a remuneration in money, he or she must purchase the goods produced by the employer. However, crypto-currencies in principle do not pose any risk in this respect, since a crypto-currency such as Bitcoin by definition does not represent a product of a particular employer. A problem could already arise, however, if the employer issues a "crypto currency" controlled by him within the scope of an Initial Coin Offering and wishes to allocate this to his employees as a wage. A void agreement would probably be assumed if the crypto-currency could only be exchanged for goods and services of the employer (e.g. on the employer's Internet platform).

What should be considered when structuring a crypto-wage?

Although the crypto-salary is basically compatible with Swiss law, a more conservative structure should be chosen until the legal situation is clarified by a court.

A sensible way of structuring the crypto-wage would probably be that not the entire wage, but only a part of the wage total is paid in crypto-currency. As a rule of thumb, the crypto-wage portion is often limited to 25% of the total wage. However, this is not a legally fixed amount. Depending on the circumstances, lower and higher values may be justified. Furthermore, it is recommended that the nominal salary continue to be set in Swiss francs in order to avoid any unforeseeable salary fluctuations. Despite being bound to the Swiss franc, the employee must be aware that the price of the crypto currency can change to his disadvantage between payment and exchange. The employer should explicitly point out this risk. It would also be conceivable to conclude agreements that safeguard a crypto-nominal wage by means of a value adjustment clause.

However, it is also clear that the employee does not have to accept any form of crypto wage. Not every offer of crypto currency is equally suitable as a wage. Thus, it seems to be against the employer's duty of care and good faith if the employer offers the employee a crypto-currency as a wage, which the employee can only exchange for a fiat currency or other crypto-currencies at great expense or whose prices are particularly volatile. Wages in Bitcoin, Ethereum and other market sizes, on the other hand, seem less problematic, as they can be exchanged in whole or in part into fiat currencies relatively quickly on most crypto exchanges. At the same time, this approach allows employees to keep part of their savings in crypto currencies.

Finally, it should not be forgotten that social security contributions are still payable in Swiss francs.

Keeping up with the times

Historically, the form of remuneration is subject to constant change. Not so long ago, there was no other option than to pay wages in the form of coins and notes. In contrast, bank cheques were of rather minor importance in Switzerland. Today, postal and bank transfers are the absolute standard. The next step in development could be crypto-wages.

We have seen that crypto-wages are basically permissible under Swiss labor law. So the question is not whether it is allowed, but how crypto-wage should be structured. According to the present view, a technically skilled employee who has expressly agreed to the structure and who is particularly aware of the price volatility risk, should be free to decide to draw part of his or her wages in crypto currency. However, since the legal situation has not yet been clarified in the last detail, it is advisable for most companies to opt for a rather conservative structuring of the crypto wage.

Literature on the subject:

• Jean Christophe Schwaab, Le paiement du salaire en monnaie virtuelle comme le bitcoin, Jusletter vom 12. Mai 2014
• François Piller, Virtuelle Währungen – Reale Rechtsprobleme?, AJP 2017, S. 1426 ff.
• Angela Hensch, Die Sicherung des Lohnes, AJP 2014, S. 747 ff.