Author: hburkelegalgmail-com


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/

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*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

Hemp Update: USDA’s Position on Interstate Transport of Hemp and Hemp-Derived Products

As Sarah and I slowly begin to reopen our practice to select new clients (we have not openly accepted new clients for almost 5 full months), we are finding ourselves being called on to answer an increasing number of questions about hemp. Although we blogged about the federal hemp rules after the 2018 Farm Bill was passed last December, metric tons of legal changes have happened since then, including Tuesday’s issuance of the USDA’s “Legal Opinion on Certain Provisions of the Agricultural Improvement Act of 2019 Relating to Hemp,” a release that smashed my legal expectations and I think is a pretty huge deal. Here’s why:

1. A Winner in the Conflicting Application of the 2018 Farm Bill is Emerging.

The 2018 Farm Bill was unclear as to whether its key terms (such as the protection for interstate shipping) applied to hemp and hemp-derived products produced under the currently existing hemp laws, a.k.a. the 2014 Farm Bill. Two federal district courts, in Idaho and West Virginia, came to different conclusions on the application of the 2018 Farm Bill to hemp products produced under the 2014 Farm Bill:

  • In February, the “Big Sky” case held the shipment of hemp produced in compliance with the 2014 Farm Bill may violate STATE LAW where transported through states which do not authorize hemp. The driver in that case, Denis Palamarchuk, was arraigned on the illegal trafficking of over 6,000 lbs of marijuana through Idaho. *His pre-trial conference is set for October 2, 2019.
  • In March, the “Grassy Run” case held that hemp seeds produced in compliance with the 2014 Farm Bill were exempted from the federal Controlled Substance Act and thus no FEDERAL CAUSE OF ACTION could prohibit shipment across state lines.

Based on the USDA’s analysis announced this past Tuesday, the Grassy Run case is emerging the clear winner in the conflict created by these two cases.

2. An Increasing Number of Federal Agencies Seem to Agree.

Since March, several federal administrative agencies have weighed in on the application of the 2018 Farm Bill provisions to hemp produced under the 2014 Farm Bill, by implication or formal legal analysis. These agencies, including the U.S. Department of Agriculture (USDA), the U.S. Patent and Trademark Office (USPTO), and the U.S. Transportation Security Administration (TSA), each decidedly coming to a similar legal conclusion:

While the interstate shipment/transport of hemp and hemp-derived products produced lawfully under the 2014 Farm Bill may not be expressly authorized by the 2018 Farm Bill, the products are exempted from the Controlled Substances Act. 

3. The Lack of Prohibition is Not the Same as the Presence of Authorization.

Thus, the federal agency positions are not based on the express authority to interstate ship hemp, but rather upon the legal effect of deleting hemp from the Controlled Substance Act (“CSA”), a feat the 2018 Farm Bill also accomplished in a separate section. (Compare Section 10114, exempting hemp produced in compliance with the 2018 Farm Bill from interstate shipping prohibitions, with Section 12619, deleting hemp from the definition of “marihuana,” and therefore leaving the production of hemp arguably unprohibited for the moment).  

The legal underpinning for hemp produced under the 2014 Farm Bill (i.e. 100% of the hemp available on the market today) is more a lack of prohibition, as opposed to the presence of authorization, which here proves to be a distinction with a difference sufficient to give numerous federal governmental agencies the legal cover necessary to amend weighty governmental procedures.

  1. The USDA Legal Opinion Takes it a Step Further.

Most importantly, the USDA (a.k.a. the same federal agency tasked under the 2018 Farm Bill with promulgating the regulations everyone is fighting about) surprisingly (to me, anyway) released two documents yesterday which evidence the agency’s legal position on hemp.

Interestingly, one of the documents was a lengthy legal memorandum from the USDA’s own attorneys finding that hemp and hemp-derived products produced in compliance with the 2014 Farm Bill cannot be PROHIBITED BY STATE LAW. This interpretation was based on the grounds the 2018 Farm Bill provisions apply to states that do not have a federal plan under the “legal effect” language, a bold but supported legal analysis.

So What?

This is big. People are being indicted for this, so yeah, this is big.

It is important to note, though, that the USDA is not a federal law enforcement agency, whereas the Department of Justice (“DOJ”) and U.S. Drug Enforcement Administration (“DEA”) or Federal Bureau of Investigation (“FBI”) are. Thus, while the USDA’s civil attorneys may be ready to challenge the legal status quo (perhaps buttressed by the White House’s never-ending scandals), the criminal potentials inherent on the fringes of the federal hemp laws remains firmly in the hands of state and federal prosecutors.

Our nation’s prosecutors are constitutionally mandated to enforce the law as they see it, and while the USDA opinion is powerful in its clear guidance to other administrative and enforcement bodies, it is not a mandatory directive to state and federal law enforcement.

In terms of risk analysis, this does change the game. More importantly, less people will be indicted or sued under vague applications of the law. Clarity is a win-win for all, and Tuesday’s USDA opinion moves us closer to that goal, at least for one manifestation of the cannabis plant.

May the same soon come to all manifestations of the plant.

~hb
#protectourfarmers

The Business Fundamentals Every California Cannabis Company Needs to Know: a five-part blog series

By: Heather Burke and Virginia Ryan 

BLOG 1 of 5: INTRODUCTION TO THE BUSINESS BLOG SERIES

With Nevada County’s recent enactment of its commercial cultivation ordinance, cannabis farmers are scrambling to begin their growing season and to start building their businesses. As the bulk of the regulatory mountain-moving is behind us (for the moment), wise operators should be turning their attention to the business now at hand. And the business at hand today is the nuts and bolts of doing business.

The question of exactly how to do business in our newly regulated industry is largely still being figured out, as the mechanics are just beginning to work themselves out as more and more farms come online. Although we all have some idea of how the new supply chain works, no one has ever done this before (not even folks with regulated farms elsewhere because last season was not tracked-and-traced and NONE of them were in the Sierras).

While there are a lot of vulnerabilities in trying to start a small business in a field that has no operating history, the good news is that we get to write the rules of doing business in our region and for our license types. So, while those first few licensees who pushed through the tribulations of these past two years did suffer greatly, now is the time to reap the rewards by (1) having access to contracts with multi-year terms long before those who took a wait-and-see approach, (2) being able to do business as an industry leader/pioneer, and (3) having a greater voice in policy shaping regarding your business operations, to name just a few benefits.

However, since the scope of cannabis business is so vast and complex, one of my favorite local business lawyers Virginia Ryan has thankfully agreed to co-author this five-part blog series with me, which we’re calling “The Business Fundamentals Every Cannabis Company Needs to Know.”

We will be focusing on the following four areas:

(1) Cleaning Your Own HouseRegulatory Compliance & Entity Governance

(2) Snakes in the GrassDue Diligence & Proper Vetting of Potential Deals  

(3) Contract FundamentalsDude, Where’s My Indemnity Clause (and Other Super Fun Terms Every Cannabis Business Owner Should Know)

(4) Contracts OverviewWhat Paper to Push? (+ Sample Contract Templates)

Our goal is to push each of these out over the next couple weeks to both our blog lists, so make sure you’re signed up!

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/ 

Now let’s do some business.

~hb

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. 

Nevada County Strong: An Open Letter To Nevada County Farmers

My intuition is telling me they’ll be better days,
I sit in silence and and find whenever I meditate
My fears alleviate, my tears evaporate
,
My faith don’t deviate, ideas don’t have a date.

J Cole. “Change.” 4 Your Eyez Only.

***

Community, 

In October of 2015, I wrote a blog about the pressures farmers endure during trim season, and I recommended farmers take extra care to be kind to each other and to themselves in order to stay true to the honorable work of caring for this plant. During this last mad dash of local and state licensing applications these past few weeks, those words regularly come to mind. Since they are just as meaningful in this strange new season of regulation, I decided to share them again: 

“This is “Game On” time for your entire year’s work.  It is instead the time to be at your highest energetic level, and to put your best energy into this medicine that is about to be released to [consumers] around the state. So take this opportunity to abstain from alcohol or other unnecessary intoxicants if possible, increase your physical activity such as yoga or running, and take that extra moment to love on your partner who has to take care of the house and kids in your absence.”

These considerations ring true once again here in Nevada County, where application-fatigue has set in HARD and folks are visibly wilting under the pressure of looming deadlines, massive data gathering requirements, and what feels like never-ending costs. 

For those who are struggling, please take some level of comfort in the fact this too shall pass, and many of us will look back on this as a time in history where we endured, and overcame the impossible together. Farmers are the genesis. Farmers are the origin. Nevada County NEEDS our local farmers to be economically successful and to produce the products we consume, to the benefit of the entire community. 

So please stay focused on the higher meaning of your work these next few stressful weeks. Keep the reason we were all drawn to cannabis in the first place in the front of your mind. Hug your family, fellowship with friends, listen to good music, and then push this f**king paper though. We’re almost there. Heart up.

Finally, while we can’t do anything to halt the insanity, we can have a PARTY! And since Sarah and I are both hella Irish, it makes sense to host the First Annual OG Law Green Party next Sunday, March 17th, a.k.a. St. Patrick’s Day, at the office. Come out!

OG Law’s First Annual Green Party
431 Uren Street, Suite C
Nevada City, CA 95959
DJ Redlocks will be DJ’ing from 4-7 p.m.!!!
WEAR GREEN
*Family friendly, kids welcome
**Celtic Red from Old Republic on tap (first come/first serve).
***Heather will be manning the bar herself and will be serving green drinks of some fabulous sort.

***Please do not park on the opposite side of the street.  We will have a parking attendant to help point you in the right direction from 4-7 p.m.

What’s On Deck
Our next blog will be a technical analysis of the latest version of the Nevada County draft ordinance with some suggestions for upcoming public comment. Stay tuned.

Much respect,

Heather and Sarah
#protectourfarmers #madrespect