With increasing regulatory scrutiny, Web3 teams are asking themselves; “Are we hiring and compensating our contributors legally and compliantly?” This is an extremely complex question. Labor regulations present perhaps the most involved requirements of any type of regulation in human history. They are among the oldest rules, with deep contextual common law interpretations, and they are often the most varied across jurisdictions.
Web3 is a global movement, made up of people from all corners of the globe. The outdated regulations that govern employment don’t mix well with this ethos. And yet without addressing these regulatory considerations, Web3 organizations are wantonly risking the wrath of legal systems on themselves or their contributors.
In this article, I want to break down some of the required considerations for your organization when looking for a solution to provide compliant and legal employment to contributors.
1) Formalizing contributors as employees or contractors
The first step is to formalize the employment relationship between the DAO and its contributors - either as full-time employees or contractors. Without this, the contribution model looks more like a freelance model. While this may suit a small minority of Web3 contributors, it will not suit them all as it results in them missing out on a range of benefits and securities that they’d otherwise receive in formalized employment.
Web3 organizations that are solely on-chain or without a legal entity attached will find this difficult. Those that do have legal entities will find it easier, but not by much. Nearly every labor code, in every jurisdiction, requires a locally registered corporate presence as a precondition and ongoing condition to employment. The costs of establishing these entities for every organization separately are prohibitive but critical to avoid violating labor regulations.
2) Organizing and operating global payroll for crypto and fiat
Contributors want compensation for their time. But they also want it on their terms. Organizations within Web3 need to be able to provide compensation structures that meet these demands (a combo of fiat, crypto & tokens) but do so in a way that is compliant with existing regulatory requirements.
Taking the US as an example, the laws around crypto-compensation vary wildly. In some states, provided the compensation structure is “payable at par” with wage-and-hour laws (i.e. the same monetary value), it is deemed legal. In others, the minimum wage has to be met in fiat before crypto compensation is considered. Extrapolate this globally with hundreds of varying municipal laws, and you start to see the difficulty of doing this case-by-case.
3) Paying proper taxes on fiat, crypto, AND token distributions, in every country and jurisdiction
Technically, the burden of this falls on contributors. But it is a burden so heavy that if Web3 is to encourage the next wave of talent into the ecosystem, it is a burden that needs to be reduced by the DAOs and other Web3 organizations.
Accurately calculating and paying employee tax is a huge undertaking. It involves having a comprehensive understanding of tax regulations relating to fiat, crypto, and token distribution... and all of the nuances in between. The only real solution is to engage local crypto-accounting expertise who can navigate the nuance of local regulations. A task that is monumental, and extremely costly for contributors.
4) Avoiding regulated activities when appropriate
Many DAOs and Web3-native companies are already struggling with the task of ensuring that the DAO isn’t inadvertently entering (or entering their contributors) into any regulated activities through employment relationships. And if they are, ensuring that they are complying with laws in every jurisdiction where they have contributors.
One example of an inadvertent law violation (and there are many), is if you’re deemed to be a Money Services Business (or MSB). MSBs are required to be registered with local authorities and oftentimes also with any jurisdictional authority where they are transmitting money. The requirements and definitions of this vary jurisdictionally. In Canada for example, an MSB is an organization that is:
- Exchanging funds for virtual currency
- Virtual currency for funds
- Virtual currency for virtual currency
This definition encompasses the majority of organizations operating in Web3. Just paying contributors alone can mean your organization is required to register. In Canada this would require registration of your organization with FINTRAC and that you undergo compliance, risk, KYC/AML programs, and much more to meet the regulatory requirements.
It’s key to note, that this isn’t just for organizations based in Canada, it’s for any organization transacting with a Canadian national. Again, extrapolate this globally - and there’s a big hurdle between your organization and legal & compliant employment.
The TL;DR of the above is, that it is prohibitively expensive and resource-heavy for any Web3 organization to legally & compliantly employ contributors. Yet, it is critical for the continued growth of Web3 and to avoid inadvertently violating employment laws given the increasing regulatory pressures.
The common workaround is to engage traditional employment platforms (EORs, PEOs, etc) to handle the contracting and employment procedures of Web3 organizations. However, the challenges of the Web3 employment ecosystem are unique, and the traditional solutions are not designed with these specific problems in mind. They cannot answer the challenges specific to Web3 employment such as legal employment structures, compensation in crypto or tokens, crypto taxation regulation and so much more.
Next time you ask yourself; “Are we hiring and compensating our contributors legally and compliantly?”, make sure you are looking for an employment solution that can tackle the problems specific to Web3.