June 2019


Cannabusiness Bosses: Labor & Employment Issues in the Regulated Era, Part 2: Hiring, Special Situations, and Wage & Hour Basics By Sarah Smale

Cannabusiness Bosses: Labor & Employment Issues in the Regulated Era

Part 2: Hiring, Special Situations, and Wage & Hour Basics

By Sarah Smale

This is part two of our Cannabusiness Bosses series, covering hiring, special situations, and wage & hour basics. 

Part 2: So, you’re an employer. Now what?

Employers must comply with employee reporting, tax withholdings, and wage and hour requirements. Front-end compliance is key because California does not play when it comes to employee protections.  Penalties add up fast and are often more expensive than the cost of paying overtime, giving mandated meal/rest breaks, and otherwise following the rules.

Hiring Basics

When you hire someone, you must report the employee to the Employment Development Department (“EDD”), gather multiple documents, and provide various brochures. You also have to display a labor poster (or binder) somewhere employees can easily access.

The required forms and brochures can be gathered online at the EDD’s website, which provides tons of great information. Read through the 2019 California Employer’s Guide to learn more than you ever wanted to know about being an employer.

Special Situations

I am often asked about non-traditional working relationships, such as employing family, casual labor, and volunteers. Don’t fall into the trap of believing these types of workers are categorically exempt from reporting and tax requirements. They are not!

While family members may be exempt from some (but not all) types of taxes, you still must report their employment. More importantly, family exemptions do not apply if the employer is a corporation, LLC, or other business entity.

Temporary or short-term workers are still employees. If the work is not in the course of your regular business, you must report casual laborers as employees if you pay them more than $50 and they worked at least 24 days in the preceding or current quarter.  If the work is in the course of your regular business (such as seasonal trimmers), these employees must be reported regardless of pay or how long they work.

As for “volunteers,” simply dubbing someone a volunteer is not a solution. True volunteers “perform work for a civic, charitable, or humanitarian reason” for public agencies or qualified corporations. Cal. Labor Code § 1720.4.

Wage and Hour Requirements

Employers must comply with wage and hour laws, including minimum wage, overtime, and meal/rest breaks.  Cultivation workers are not considered agricultural workers by the Department of Industrial Relations. Instead, MAUCRSA expressly places them under Industrial Welfare Commission (“IWC”) Wage Order 4-2001, so the overtime requirements are similar to office workers.

Employers must familiarize themselves with this wage order (and post it at the job site). It covers everything from overtime, tools of the trade, and lodging credits.  Read IWC Wage Order 4-2001 here. There are also tons of rules regarding when you have to pay an employee (you cannot wait until harvest), mandatory record keeping, and information wage statements must contain.

Termination

If you fire someone or they quit with more than 72 hours’ notice, you need to pay all wages owed on their last day.  Cal. Labor Code  §§ 201, 202.

Potential Fallout

Employees owed wages can file administrative wage claims relatively easily, and there are lots of attorneys who happily take these cases because they’re easy to win. Countless Labor Commissioner hearings have taught me these generally go in the employee’s favor, particularly when the employer did not maintain records.

The regulatory agencies take labor violations seriously. Violations in the past three years must be reported in your annual application, and post-licensure violations must be reported within 48 hours. 3 CCR §§ 8102(i)(15), 8204(c)(3).

Closing Notes

The best way to avoid headaches is to create an action plan before hiring.  Gather the documents you need. Pay the taxes you owe. Create a mechanism for workers to communicate concerns. Create  your system and stick to it. 

Next time—workers’ compensation: who needs it, who can be exempt, and what it will cost.

Sarah Smale
Founding Partner, Origin Group Law LLP

Unregulated Cannabis Cultivation in California: A 2019 Enforcement Overview

I’m often asked to advise on enforcement-related issues because of my past life as a criminal defense litigator, but enforcement is my least favorite subject. The reason is simple: conducting our lives based on the stringency of potential enforcement is NOT a viable business model. Although it may take a few years for unregulated grows to get pushed out (or worse, get pushed indoors), one thing is clear: the only meaningful path forward is strict compliance with state and local law.  

But since unregulated activity remains a hot topic, here’s a quick and dirty overview of the new world of enforcement:

There is NO legal protection for unregulated commercial cultivation.

The Collective and Cooperative as we knew them since 2004 are DEAD. In fact, this is the first season since the Compassionate Use Act in 1996 where there is no clear defense to unlicensed commercial cultivation. While unregulated commercial activity is a straight misdemeanor, conspiring to commit a misdemeanor is a felony, as is misdemeanor cultivation occurring in conjunction with an environmental crime.

Also, as this is the first season under the new rules, it’s within the realm of possibilities we see aggressive criminal enforcement on unregulated mom-and-pop farms. It is also possible law enforcement take a more measured approach by focusing on cartel grows, environmental degraders, and interstate interdiction.  

We just don’t know.

The fines/penalties are higher than ever and some properties may be foreclosed.

The biggest change to the penalty structure since last season came from a quietly-made change to Government Code § 53069.4, which used to require growers got a “reasonable time” to correct alleged nuisances before fines were imposed. That law changed this past January to allow IMMEDIATE IMPOSITION OF FINES for illegal cannabis cultivation.

Those fines can be levied as a lien against the property if left unpaid and some Counties even have the authority to foreclose on the property to recoup that money.  

Prosecutors and City/County attorneys can seek penalties of three times the license fee for each violation.

The state, the counties, and the cities are all authorized to bring a case against unregulated operators for civil penalties of up to three times the amount of the license fee for each violation. (Business & Profession Code § 26038.) For two unregulated greenhouses, the fine could be 60-freaking-thousand-dollars!! (at $20k yearly fees x3).

While these massive local and state penalties are subject to constitutional protections, you don’t wanna be the case that tests the constitutional limits. It ain’t fun.

The State can kick you out of regulated licenses you’re involved with anywhere in the State.

Getting dinged for unlicensed commercial cannabis activity can kick you out of the state’s licensing program for 3 years, even licenses in other jurisdictions that are totally unrelated.  (Business & Professions Code § 26057(b)(7).)  Local codes may also kick you out of their program, in some cases arguably for life.

Environmental crimes will be enforced like never before.

Environmental crimes are embarrassing because you’re getting called out for hurting Mother Earth, so there’s not love for folks charged with these crimes. Here are just a few:

  • The Water Boards: Knowing or negligent discharge of a pollutant into water without a permit can reap fines up to $50,000 per day for knowing violations,  as can illegal water diversion. (Water Code §§ 1052(a), 13387; Penal Code §§ 374.2, 374.8.
  • Department of Fish and Wildlife: Disposal of trash or “any substance that is deleterious to fish, plant life, mammals, or bird life” into waterways, or failing to obtain an LSAA for eligible water diversions can also bring about fines up to $20,000 per day!  (Fish & Game Code §§ 5650, 5652, 1602, 12025(b)(2).)
  • CalFire: Failure to obtain a Timber Harvest Plan or a waiver can result in a misdemeanor or civil penalties up to $10,000 per day, per violation. (Forest Practice Rules, 14 C.C.R. §§ 4601, 4601.1.)

Unregulated farmers are subject to federal enforcement for the first time since 2013.  

Keep in mind that unregulated farmers do not have protection from federal enforcement under Rohrabacher-Farr Amendment (now called the Joyce Amendment), which prohibits the DEA from coming after state-legal cannabis businesses.

If you don’t have a license, you arguably lose that protection, which is a serious weakness in light of this administration’s uneven take on cannabis thus far.

The penalties will only increase over time.

The Governor’s last incarnation of the trailer bill would imposes fees on non-license-holders of up to $30,000 per violation. So fees for unregulated activity are likely to go up, not down, as we move forward.

Summation

I hear a lot of people saying they are going to keep going without a license because “they’ve always done it this way.” But very few folks were growing in these hills prior to 2004. In fact, we’re essentially back in the pre-1996 era for the governing laws and almost no one was out there before 1996. So, no, you have not done this before. No one has.

Unregulated sungrowers (i.e. outdoor and light-dep) are at the greatest risk of law enforcement intervention because they are literally rooted in the earth, sitting ducks in clear view of ever-present helicopters. That means mom-and-pop farms will take the brunt of the criminal enforcement this summer, despite the wild proliferation of far more pernicious activity in garage/warehouse grows, massive cartel grows, and unregulated deliveries selling pesticide-ridden cannabis to unsuspecting consumers.

In closing, the biggest risk of unregulated cultivation is the risk of the unknown.  While some farms may slip through this season, enforcement will only increase in the coming seasons and the word is NOT out in the community about how nasty this season could be. But it is clear that large scale unregulated cannabis farming is a thing of the past. As Jerry Garcia says, its time to move along.

Much respect, ~hb

#protectourfarmers

Musical meditation for this post: Jerry Garcia Band: Ain’t No Bread in the Breadbox .

Cannabusiness Bosses: Labor & Employment Issues in the Regulated Era, Part 1: Employee or Independent Contractor?

Part 1: Employee or Independent Contractor?

With many operators receiving their state license and local permit, it is time to consider business operations.  This blog is the first in a series of articles we’ll be publishing over the next few months focusing on labor and employment law, broken into four parts: (1) who is an employer; (2) employer wage & hour basics; (3) workers compensation; and (4) other issues such as OSHA and farm labor contractors (FLCs). First off, the threshold question:

Who is an Employer?

An employer is defined as:

Any person… who directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours, or working conditions of any person. (Cal. Labor Code 1182.12(b)(3); Cal. Code Regs., tit. 8, § 11040(2)(H).)

From a labor perspective, one of the biggest mistakes businesses make is trying to get around being an employer in the first place.  Most often, this is done by either: (1) paying folks under the table; or (2) classifying workers as independent contractors.

Don’t Pay Workers Under the Table!

This is all bad for countless reasons. Paying workers under the table may meet the requirements for tax evasion if specific elements are met, and can subject you to significant financial liability. If the worker is injured on the job, or you fire them and they file for unemployment, you are in for a world of hurt when they file a claim and you are faced with a payroll audit.

Be Wary of Calling Workers Independent Contractors

One of the most common mistakes I see is misclassifying workers as independent contractors.  Calling someone a “contractor” can be appealing, because you simply pay the worker the agreed wages, issue a 1099, and let the worker handle the tax issues. It’s a tempting short-term solution, but VERY risky business.

California doesn’t like improper worker classifications, and will err on the side of finding an employment relationship in close calls. Employers can be penalized up to $15,000 for “willful” misclassification of an employee for the first offense.  Moreover, having a written “independent contractor agreement” is not determinative.

Right to Control

Exercising control is critical to employee classification, and often overlooked when folks “1099” workers to simplify payroll, overtime, and other employer requirements.  Further complicating things—there are different tests depending on the claims being made. But in almost every test, the right to control the means and manner in which the worker completes their job will be scrutinized.

Wage & Hour Law: the ABC Test

The most common claims employees make are wage and hour violations, because they’re easy to file (they can be submitted via email) and are generally heard in a streamlined administrative setting.

When analyzing whether someone was properly classified as an independent contractor, three factors are evaluated under the “ABC” test. Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal. 5th 903, 916-917, 964.  The ABC test starts by presuming the worker is an employee. To rebut this, the hirer must show the worker:

  1. Is free from the control and direction of the hirer as to performing the work (under the agreement, and in actuality); and

  2. Performs work outside the usual course of the hirer’s business; and

  3. Is customarily engaged in an independently established trade or business.

Generally, true contractors will be those you hire for a limited time, or to complete a specific task (i.e.: to build a structure, bookkeeper, etc.)  If you’re not sure, consult with an attorney to ensure you are not misclassifying workers.

So, you’re an employer. Now what?

Once you are an employer, you must comply with wage and hour laws, tax remittance, and workers’ compensation requirements.

For members of the Nevada County Cannabis Alliance, I’ll be leading a detailed discussion on these requirements on the monthly members call this Wednesday, June 19th at 9:00 a.m. More info about that here:

https://www.nccannabisalliance.org/calendar/monthly-associate-member-call/

And the next blog in this series, Wage & Hours Basics, will review the most common issues related to proper worker pay.

Stay tuned.

Sarah Smale
Founding Partner, Origin Group Law LLP