Author: hburkelegalgmail-com


Heads up! CDFA Regulations Prohibit Transfers of Cannabis During Power Outages

Clients, Community, Friends, Family:

Please note that “transfers” of cannabis to a distributor are prohibited whenever access to the track-and-trace system is down. (See § 8402 copied below and online HERE.) If someone relies on grid power to access their METRC system, then they may not transfer any cannabis to a distributor, even if that distributor is their own self-distro transport license (Type 13). 

Of course, while access is down, folks are required to “prepare and maintain comprehensive records” detailing the movement of any cannabis on their site, such as moving immature plants to the canopy area, harvesting-related activity, and any cannabis waste. Additionally, folks must also document (1) the date and time when access to the track-and-trace system was lost, (2) when it was restored, and (3) the cause for each loss of access.  

Once back online, that information needs to be uploaded to METRC within 3 days after power is restored. 

If lack of power is causing an inability to comply with any of the regulations, including but not limited to track-and-trace, please note that “sudden and severe energy shortage” may qualify for disaster relief under CDFA’s regulations. If that applies to you, check out § 8207 HERE for your next steps.

Please be safe out there! At least this is great training for how to run a compliant cannabis farm during a zombie apocalypse, so there is an upside!

~hb

*Huge SHOUTOUT to the folks at Oxalis for putting this issue on all our radars, and to Law Offices of Omar Figueroa for reminding us of the potential for disaster relief.

#teamworkmakesthedreamwork #risetogether #protectourfarmers

8402. Track-and-Trace System.

(e) If a licensee loses access to the track-and-trace system for any reason, the licensee shall prepare and maintain comprehensive records detailing all required inventory tracking activities conducted during the loss of access. 

(1) Once access to the track-and-trace system is restored, all inventory tracking activities that occurred during the loss of access shall be entered into the track-and-trace system within three (3) calendar days. 

(2) A licensee shall document the date and time when access to the track-and-trace system was lost, when it was restored, and the cause for each loss of access.

(3) A licensee shall not transfer cannabis or nonmanufactured cannabis products to a distributor until such time as access to the system is restored and all information is recorded into the track-and-trace system.

El Dorado County Opens for Cultivation Permits Up to Two Acres and All Other License Types (GO SIERRA NEVADAS!)

By: Heather Burke

The County of El Dorado recently enacted an ordinance authorizing all commercial cannabis license types, including cultivation, manufacturing, distribution, testing, and retail, which is super exciting for the Sierra Nevadas. This blog focuses on the process for cultivators, who can obtain up to two (2) acres of commercial cannabis permits, depending on their parcel size and zoning. Here’s the lowdown: 

CULTIVATION LICENSE SIZE/ZONING OVERVIEW

  • There are 150 total permits, 75 of which are reserved for outdoor and mixed light operations that are less than 10,000 sq ft of canopy.
  • 40 of the 75 smaller cultivation licenses are reserved for 3,000 sq ft gardens that is “grown exclusively with natural light and meets organic certification standards or the substantial equivalent.”
  • The zones in which cultivation may occur are (1) Rural Lands (“RL”), Planned Agricultural (“PA”), Limited Agricultural (“LA”) and Agricultural Grazing (“AG”).
    • RL properties are eligible to use up to 1.5% of their parcel for cultivation, but may not exceed 10,000 sq ft of canopy.
    • AG, LA, and PA properties between 10-15 acres are eligible to use up to 1.5% of their parcel for cultivation, but may not exceed .45 acres of canopy.
    • AG, LA, and PA properties between 15-25 acres are eligible to use up to 1.5% of their parcel for cultivation, but may not exceed 1.5 acres of canopy.
    • AG, LA and PA properties greater than 25 acres are eligible to use up to 5% of their parcel for cultivation, but may not exceed 2 acres of canopy.
  • The setback is 800 feet from the property line and 1500 feet from schools, which may knock out a bunch of properties. Folks can get around this setback in some instances if they owned or leased the property before November 1, 2018.
  • Parcels under 10 acres are not eligible for permitting.

APPLICATION REQUIREMENTS 

The application is a full Conditional Use Permit [“CUP”] process, meaning there will be a public hearing on the application. More about CUPs generally HERE. The main thing to know about CUPs is that they are “land use” determinations, which is great in that the permits will “run with the land,” thus increasing the value of the land. However, they are complex, time consuming, costly, and decisions are made on a case-by-case basis depending on the site particulars.

Secondly, El Dorado’s “pre-application” is not yet available, but is expected to be released on September 30. While the Code gives us some insight into what will be required, there are likely to be additional requirements standard in any CUP process, such as an NCIC letter or biological summary, that are not mentioned in the cannabis code. Here’s the rundown of the basic applications requirements:

  • Entity applicant information, including articles of organization/incorporation, operating agreement/bylaws, stock agreements, and “any other funding sources for the applicant.”
  • Written consent of the owner of the parcel (which may be you as an individual leasing the property to your LLC or corporation), which must be signed in wet ink and notarized within 30 days of the day the application is submitted.
  • A Site Plan showing the entire parcel, including (1) easements, (2) streams, springs, ponds, and other surface water features, (3) the area for cultivation in dimensions, (4) setbacks from property lines, (5) all areas of ground disturbance and surface water disturbance, and (6) any areas where cannabis will be stored, handled, or displayed.
  • A detailed diagram of the premises, including buildings, structures, fences, gates, parking, lighting and signage;
  • Various written plans, including (1) a Theft Prevention/Access to Minor Plan, (2) an Operating Plan, (3) an Organic Certification or Equivalent Plan, (4) a Security Plan;
  • For any hoophouses/greenhouses/proposed structures, all applicable building permit applications, which may include commercial plans that show ADA access
  • Most land use applications require an archaeological and biological inquiry. Expect that to be part of the application;
  • A copy of the entire state license application, which for some will be copies of multiple state license applications for different “small” licenses because the large (i.e. one acre+) licenses are not available from the state at this time. Each state license application includes the following, as well as a surety bond for each license type:
    • A Water Board permit;
    • A Waiver Letter or Lake & Streambed Alteration Agreement from the Dept of Fish and Wildlife (which can take months);
    • A Property and Premise Diagrams for each separate license;
    • A Well Completion Report from the Department of Water Resources;
    • The EIN/Seller’s Permit Info for the applicant entity;
    • A Lease/Rental Agreement and Landowner Authorization.

Notably, all applicants will have to indemnify the County, consent to a background check, and agree to inspections without a warrant, in addition to a host of other attestations/waivers/agreements.  

THE CALIFORNIA ENVIRONMENTAL QUALITY ACT [CEQA]

The County has deferred the required environmental impact analysis to the farmer, which is a huge cost, but will likely allow them to get up and running far sooner than if the County had performed a full Environmental Impact Report.

If someone does not have a CEQA consultant already on retainer, be prepared for a shocking price tag. One can usually expect the CEQA consultants to get overburdened and for projects to get put on a wait list if not at the front of the line. Additionally, both the state and County mandate that CEQA be complete before operations can begin, so I fully expect more than a few licenses to get held up next season because of the lack of a completed CEQA document.

CONCLUSION

In summary, the list of requirements will be far longer and more cumbersome than what anyone expect. While the applications may scramble once the pre-application is released, those who are working on their diagrams, CEQA/environmental compliance requirements, and have an operating company ready to go will likely be at the front of the line.

I’ll be at the El Dorado Growers Association meeting next Friday, October 3, 2019, at 6:30 p.m. discussing the application, with a focus on entity startup considerations. Hope to see you there. 🙂

Now go get ‘em, Sierra Nevada farmers!
~hb

NEWS FLASH! Nevada County proposes sweeping changes to Code Enforcement procedures (for cannabis and non-cannabis code violations) and they are super concerning.

A resolution to approve sweeping changes to the County’s ordinance enforcement rules for ALL LAND USE violations was quietly placed on the Board of Supervisors’ agenda for Tuesday. It is critical to note the County is now treating cannabis enforcement in the same manner as non-cannabis enforcement. But, rather than reduce the already strict cultivation enforcement procedures, the County is proposing to vastly increase their power over unregulated cannabis cultivation and, at the same time, subject enforcement for non-cannabis building and related code violations to these sweeping changes as well.

Here’s a rundown of the proposed changes:

REASONABLE CAUSE REMOVED

Currently, the Code requires “reasonable cause” to issue a citation. Under the proposed changes, a Notice of Violation, Abatement Order, or administrative citation may be issued, “[w]henever an Enforcement Officer determines that a Code Violation exists,” leaving the standard for citation (and massive fines) entirely up to the code officer’s discretion, rather than tethered to any verifiable standard of law.

RESPONSIBLE PARTIES

Perhaps worse than reducing the standard for issuance of a citation, these violations can be enforced against far more people, as the changes drastically expand the definition of who is responsible for code violations. While the “responsible party” is defined in such a sweeping manner that I am doubtful it would withstand legal challenge in all instances, here are the people who may now be held financially liable for the land use violations under the County’s proposed changes:

  1. The parent or guardian of a minor or “incompetent” person who gets an administrative citation from the County. If your minor or ward gets a ticket, you are financially responsible for their land use violations, even if you do not live on site or own the property.
  2. Any “independent contractor” who by their inaction maintains a code violation. By its terms, this includes contractors, engineers, architects, environmental consultants a landowner or tenant contracts with to bring a property into compliance, and subjects them to financial liability for simply doing nothing about a code violation when they come onsite, in some cases to cure a code violation.
  3. An “on-site manager” who regularly works on real property and is responsible for the business or other activities on that property.
  4. Owners, majority stockholders, corporate officers, trustees, general partners, or anyone else with the authority to act for a legal entity that is a responsible person. This means that anyone who owns any shares of an entity that owns the property, or the entity that owns a company that is running a business on that property, no matter how far removed they are from the operations.
  5. The new definition of “responsible party” includes a broad catchall that can rope in almost anyone: Any other individual, association, co-partnership, political subdivision, public entity, municipality, industry, public or private corporation, firm, organization, partnership, joint venture or any other person or entity whatsoever whose act or omission caused or contributed to a violation of this Code.”

JOINT AND SEVERAL LIABILITY FOR LANDLORDS 

Land owners who rent their properties will become liable “jointly and severally” with their tenants. So if the tenant skips out, the landowner is liable for the debts of their tenant, regardless of whether you had knowledge or not. 

Notably, this rule conflicts with a state statute, so again it is not likely the County’s proposed change would withstand legal challenge in instances where (1) there was a tenant, (2) whose written lease prohibited cannabis cultivation, and (3) the land owner did not have actual notice of the cultivation activity. 

GROUNDS TO DENY A PERMIT 

Folks who receive a Notice of Violation, Abatement Order, or administrative citation should know that the County may now consider these alleged violations as grounds to deny or revoke future permits, even where they are unrelated. Moreover, the County would have authority to suspend any and all permit applications until the purported code violations are cured, effectively halting forward progress and perhaps even denying pending permits, even after the code violations have been resolved successfully.

ADDITIONAL ISSUES OF CONCERN

  • Appeals of the County’s administrative hearing decisions will now be “limited civil actions,” rather than the “writ of administrative mandate,” as in the past. This may increase delay and legal costs for appealing the County’s decisions.
  • Folks who want to appeal their Notice of Violation, Abatement Order, or administrative citation must pay ALL OF THE PENALTIES IN ADVANCE, just to be eligible for the hearing! (*This is true of the current ordinance as well, but now would apply to all land use violations, not just cultivation.)
  • The inspection procedures for obtaining consent and inspection warrants is phrased in such a way to confuse a reasonable person about their ability to decline a request for an inspection.

WHAT YOU CAN DO

If you have issues with the County enacting an ordinance to expand their authority to enforce land use issues to such a sweeping extent, you’re welcome to speak out at the Board of Supervisors’ meeting tomorrow, September 24, 2019, at 9:30 a.m. at the Rood Center at 950 Maidu Avenue, Nevada City, CA 95959.

We’ll see you there.

Heather Burke and Sarah Smale
Origin Group Law LLP 

ALERT! CA Governor Newsom signs new law TODAY making it harder to use independent contractors


By Sarah Smale

Just hours ago, Governor Gavin Newsom signed AB-5 into law, which is designed to: 

“[E]nsure workers who are currently exploited by being misclassified as independent contractors instead of recognized as employees have the basic rights and protections they deserve under the law, including a minimum wage, workers’ compensation if they are injured on the job, unemployment insurance, paid sick leave, and paid family leave.” 

This new law makes crystal clear that California will NOT tolerate misclassification of employees as independent workers. The new law goes so far as to say the ”misclassification of workers as independent contractors has been a significant factor in the erosion of the middle class and the rise in income inequality.” Wow!

To be sure, the State of California via AB 5 has made a clear declaration of public policy–the state intends to protect workers who miss out on basic protections as a result of improper classification.

The ABC Test

As a quick refresher on the rule, Dynamex v. Superior Court, a 2018 court case, already established the three-factor “ABC” test for claims arising under the wage orders and Labor Codes. The ABC test assumes the worker is an employee. To show the relationship was actually that of an independent contractor, the hirer must prove the worker:

  • If free from the control and direction of the hirer as to performing the work (both under the contract and in fact);
  • Performs work outside the usual course of the hirer’s business; and
  • Is customarily engaged in an independently established trade or business of the same nature as that involved in the work performed.

In other words, most true independent contractors will be folks like a bookkeeper, the company who is hired to construct a building, or others providing a service different from what the farmer or cannabis operator does, which is something the contractor also does for others.

For farmers looking to bring in temporary help for the upcoming harvest–this distinction is critical. Even if someone will only be at the farm a few weeks, if they are engaging in work central to the cultivation operation, this is arguably an employment relationship, particularly if the farmer is overseeing the work.

Put ‘Em on Payroll

Wage claims are not claims a small business can afford to lose–there are multiple penalties for worker misclassification, ranging from a straight-up first-offense penalty of $5k-$15k for willful misclassification, to paying all the taxes that should have been withheld. Misclassification almost always means the hirer failed to maintain records required for all employees, and frequently results in a failure to ensure proper meal/rest periods and overtime policies.

The fallout from worker misclassification is a real and serious business risk–a risk no wise operator should take. And as of today, the State of California has made it abundantly clear that misclassifications are going to be taken more seriously than ever before.

~Sarah Smale
Co-Founding Partner
Origin Group Law LLP

PART 3 of 5: The Business Fundamentals Every California Cannabis Business Needs to Know: VETTING DEALS

Snakes in the Grass: Due Diligence and Proper Vetting of Potential Deals

By Heather Burke and Virginia Ryan

Considering the collective/cooperative model did not always allow sellers to vet buyers by anything more than word-of-mouth, today’s operators have a greater ability to vet those with whom they do business. Although business deals can and will still go sideways in the regulated era, licensees undoubtedly have more options in choosing business partners who give the deal a greater chance at success. When vetting a potential deal partner, I usually ask:

(1) Who are the potential deal partners (like, really, who are they?); and

(2) Will the deal benefit our goals?

Determining Who the Potential Deal Partners Are:

When figuring out who you’re about to do business with, I usually look at three areas: (1) regulatory vetting, (2) business vetting, and (3) the old school gut test.  Here’s a quick rundown of the first two:

1.  Regulatory Vetting

The law is clear that “all commercial cannabis activity shall be conducted between licensees.” 3 C.C.R. § 5032 (a). That means that a potential deal partner must have an active license from the State of California for the type of activity they will be providing to you.

For instance, if a manufacturer is offering to pick up your product, they will need both a manufacturing license and a distribution (Type 11) or transport (Type 13) license. Smart operators will utilize the BCC, DPH, and CDFA license search features to verify the validity of each license that will be involved in the deal and double check the validity of all relevant licenses prior to each transaction.

While each party has a duty to keep their licenses valid, and that representation or warranty should be included in any written agreement, that does NOT absolve the other party of the regulatory violation that would occur if they entered into a transaction with a party that did not have a license. As such, there is no substitute for double checking prior to each transaction.

2.  Business Vetting

Business vetting can also be called “due diligence,” both of which simply refer to the reasonable initial steps a wise operator will take in order to determine whether the company with whom they want to do business is trustworthy.  Here’s a non-exhaustive list of questions that you need answers to when determining whether they are worthy of your trust:
    • Is their entity filed properly on the Secretary of State website? Was the Statement of Information(s) filed timely?
    •  If they do business under a trade name, do they have a DBA on file in the County where their principal place of business is located?
    • Does the person you’re speaking with have “the capacity to bind the entity?”
    • Are written agreements acceptable?
    • Do they have references of people with whom they’ve done similar transactions?
    • Do they have an appropriate level of insurance based on the transaction?
    • Are they financially sound based on their financial statements or a due diligence call with the CFO?
    • What does an internet search or social media search tell you about the business and their founders or key personnel?
    • What do their facilities or operations look like?  Do guests go through a security protocol?  Is the facility organized with confidential documents appropriately safeguarded or does it look like a dorm room?

For some businesses, gathering this paperwork upon a request may be a struggle. If so, that is a strong indication the more complex negotiations required to engage in business at this level will make success almost impossible. Act accordingly.

Determining Whether the Deal Benefits Your Goals:

Desperation breeds lopsided contracts, meaning that a business desperate for a quick buck is more likely to accept unfavorable terms, which in turn increases the risk of a total loss. Instead, engage in the existential analysis regarding whether the other party shares your values and your vision, or can benefit your long term goals in the marketplace. Here are some examples:

  • Aligned Values: For example, if regenerative practices are important to your business model, do you want to do business with a company that does not value regenerative farming or does not employ sustainable practices themselves?
  • Longevity:  Is this a one-time event only, or are you setting up a longer term agreement? If it’s a one time thing, there is a greater chance of risk that it’s a cash grab by the other party.
  • Co-Branding: Is the other party open to having your logo and information on the final product, so that your company benefits from an increased brand identity? (*If building your own brand is your goal.)
Closing Thoughts
It is interesting to note that hyper-successful entrepreneurs invariably trust their intuition when vetting potential deals. Just as in the old world, sometimes you know a dud is a dud, so knowing when to walk away can be just as critical to one’s success as locating a potentially profitable deal. You got yourself to this point, which is historic in-and-of itself, so don’t be afraid to trust your instincts!
Much respect, ~hb
#protectourfarmers

**PS, keep a lookout for the final two blogs in this series:

PART 4: Contract Fundamentals: Dude, Where’s My Indemnity Clause and Other Super Fun Terms Every Cannabis Business Should Know

PART 5: Contracts Overview: What Paper to Push? (+ Sample Contracts)

Make sure you’re on the email lists!

To sign up for Virginia Ryan’s blog list, go here: https://virgielaw.com/contact/

To sign up for Origin Group LLP’s blog list, go here: http://hburkelegal.com/blog/

*This is a communication from a lawyer, but it does not constitute legal advice, nor does it create an attorney-client relationship. This is intended for educational purposes only. Please contact an attorney for specific legal advice.

The Momma Blog: The Rules About Children on a “Licensed Premise”

By Heather Burke

I’ve been asked several times about the ability to have children at one’s regulated commercial cannabis business, and the question always reminds me of those days when my girlfriends would strap their babies onto their back and get to work out in the garden. Sadly, those days are long gone and the new rule is clear:

No one under 21 is allowed on a “licensed premises” at any time.

No Rules Under the Collective/Co-op Resulted in Discriminatory Application of Child Welfare Rules.

Under the old rules, commercial cannabis activity was “unregulated,” meaning there were no rules except (1) the cannabis had to be cultivated, processed, or distributed to patient-members of a (2) collective or cooperative that (3) was not engaged in a profit making enterprise. Without rules for children, the primary consideration  was whether the child would suffer physical harm as a result of the parent’s inability to physically care for the child. (Check out the brilliant Jen Ani’s overview HERE.)

In most cannabis cases, the child was not at risk of harm unless the child had easy access to cannabis, or where there was inherent danger in the cannabis activity itself, such as with BHO manufacturing. However, due to the lack of certainty in the rules and cannabis discrimination by child welfare workers, application of the standard was often dependent upon the particular CPS’ worker’s view on cannabis. Unsurprisingly, I observed wealthy white parents treated with far more deference than African American and Latino parents for identical conduct, which is unacceptable on every level.

The New Rules are Clear: No Kids On the “Licensed Premises”.

California statutory law now clearly restricts a licensee from allowing anyone under 21 years of age from entering “its premises,” except that someone over 18 can enter a medical dispensary if-and-only-if they have a physician’s recommendation. (Cal. Business & Professions Code § 26140 (a)(2), (c)(1)-(2).)

Interestingly though, the regulations are less clear. Indeed, the regulations only address minors being on a retailer’s licensed premise, though none of the three regulatory packages address the effect of a child being on a farm, a manufacturing site, a distributor, testing lab, or microbusiness’ “licensed premise.” Nor do any of the three regulation packages set out a penalty for violating this statute

Thus, while it is not yet clear to me what a violation of the statute would look like for a licensee, we can presume it is a serious violation with severe consequences for the license holder.

When the Property is the Same as the “Licensed Premise”

Keep in mind that when you submitted your annual or temporary license application to the state, you had to submit a Property and/or Premises Diagram. If the Property and the Premises in those diagrams is the same, then your entire property is considered the “licensed premises.”

The legal effect of not carving out any non-cannabis areas in your Property Diagram is:

  1. Children are now arguably excluded from the entire property; and

  2. Law enforcement can arguably search an entire “licensed premises” without cause. (*This  is a whole other topic I won’t get into here.)

Thus, for those folks with children on site, it is imperative they re-define their licensed premises to exclude the home and the places children will be. For sites with homes on them, it is as simple as drawing the “premises boundary” around the home. For industrial or commercial sites, a break area or other safe space for a nursing mother to bring her child can sometimes be carved out of the “licensed premises” floor-plans.

Child Welfare Rules are Still in Effect

Although this blog focuses on the rules regarding children in “licensed premise,” note that child welfare rules relating to use of cannabis in the home or around children are still in effect. As such, child welfare workers will continue to hold preconceived notions about cannabis use, so wise parents will continue to ensure their children do not have access to the parents’ personal-use cannabis and that parents don’t consume cannabis near the children.

Final Analysis/Conclusion

Gone are the days of carrying babies in slings while mama and papa work the garden.

However, as CAMP-style raids and law enforcement actions against unregulated operators are already at a feverish peak this summer, regulated farmers and other licensees with young children can rest in the peace of knowing their business (and their family) will make it through the season unscathed by deputies arriving at 7:00 a.m. with a warrant.

For most families, that trade off will be worth it.

Much respect,

~hb
#protectourfarmers

PART 2 of 5: The Business Fundamentals Every California Cannabis Company Needs to Know: CLEANING YOUR OWN HOUSE, Regulatory Compliance & Entity Governance  

By Heather Burke and Virginia Ryan

As Virginia Ryan and I discussed in the first of our 5-part business blog series, “The Business Fundamentals Every California Cannabis Business Needs to Know,” one of the first steps to doing business is to ensure you have your own house in order. Sorry to tell you this, but people in business get sued and, yes, someone may try to take what you spent your lifetime to build. A successful business will be prepared for those situations before they arise.  In order to gauge the cleanliness of our clients’ houses, we often ask the following questions of potential clients:

1. Are your cannabis business operations strictly compliant with all state and local regulations?

Compliance includes recordkeeping for any sale of your product, maintaining those records in a particular way, and reporting certain information to the state regarding sales, and so on. If you do not know the recordkeeping rules, you may be compliant in certain ways, i.e. your farm operations could be set up in a compliant manner, but you’re not compliant with your records (and the records are one of the primary issues the CDFA will be most concerned about).

2. Are your entity’s governance documents in order, including appropriate resolutions and a workable procedure for making resolutions?

This article presumes the reader is strictly compliant with local and state laws, which require you to have a valid license, a Seller’s Permit, and an EIN. But many farms don’t have those documents organized on the farm in an easily accessible place, which they’re required to be for regulatory purpose.

Equally as important, if the farm got sued for some aspect of a potential sale, would the entity protect you or would the entity’s “veil” be pierced? In other words, can someone sue the farm and get the personal assets of the owners (such as the land)? Here’s what courts will be looking for to determine whether someone can take your personal assets:

  • Does the corporation have executed bylaws and minutes of the Board of Directors and Shareholders (for LLCs: does the LLC have an executed operating agreement?)?

  • Are you current on your state filing requirements (i.e., Statement of Information with the California Secretary of State) and franchise taxes with the California Franchise Tax Board.

  • Is the type of business you want to conduct included in the “purpose” language in those documents (or in a resolution, which is where our firm often places the purpose language for access to banking). Note: purpose language can be important.

  • Do you and the company have separate “personalities,” meaning do you treat your company as a different and distinct entity from yourself? If you own the property, do you have a lease between yourself as the landowner and with your corporation or LLC? Do you keep separate financial records and separate bank accounts? Do you do business in the name of your entity or in your own name?  Do you personally offer to “guarantee” the debts of the company (:i.e. “I got you bro.”)?

All of those are factors California courts may look to in determining whether the relationship between you individually and you as an owner of the company are truly “arms-length,” i.e. strictly professional.

In addition, to these basic requirements, there are a host of other items that you should implement in your business, such as obtaining a state or federal trademark for your brand, obtaining commercial and product liability insurance, executing buy-sell agreements with the owners to protect the business in the event a partner wants to leave, implementing confidentiality agreements with all consultants and employees, implementing appropriate terms and conditions for your website presence, to name a few.

If you’re new to business, this may seem like a lot to think through, but these are the BASICS required in order to enter into a business transaction, particularly where the product is federally prohibited, carries stiff mandatory minimum penalties, and the only defense is strict compliance with local and state law.

This may sound like a lot, but no need to worry, we will discuss these items and more later in our blog series, including:

Blog 3 of 5: Snakes in the Grass: Due Diligence and Proper Vetting of Potential Deals 

Blog 4 of 5Contract Fundamentals: Dude, Where’s My Indemnity Clause and Other Super Fun Terms Every Cannabis Business Should Know

Blog 5 of 5: Contracts Overview: What Paper to Push? (+ Sample Contract Templates)

Much respect, ~hb

#protectourfarmers

        To sign up for Virginia Ryan’s blog list, go here: https://virgielaw.com/contact/

        To sign up for Origin Group LLP’s blog list, go here: http://hburkelegal.com/blog/

This email is a communication from a lawyer, but it does not constitute legal advice, nor does it create an attorney-client relationshipThis is intended for educational purposes only.

Please contact an attorney for specific legal advice. 

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