News Type: Blogs

There is big, BIG news out of the California Supreme Court that impacts every employer in the Golden State. At the very least, for California employers, the recent decision in Dynamex Operations West Inc. v. Superior Court is something that should grab their attention. And that’s because for the first time in nearly three decades, the standard to classify an individual as an employee or independent contractor has been altered.

Since 1989, courts have adopted a multifactor test to determine an individual’s employment status. More particularly, an employer’s control over a worker claiming to be an employee was the critical consideration by the courts making an employee/independent contractor classification; that, along with several secondary factors (e.g., among others, whether the work undertaken was a part of the regular business of the principal or alleged employer; whether the principal or the worker supplied the instrumentalities, tools and the place for the person doing the work; the alleged employee’s investment in the equipment or materials required by his or her task; and whether the service rendered required a special skill). Not any longer, as control has taken a back seat to a three-pronged “ABC test.”

With its decision in Dynamex, in which a delivery company challenged a decision decertifying a class of delivery drivers in a wage and hour case, the Court now leans into a presumption that workers are employees. It has done so by adopting a standard (the ABC test) that labels a worker as an employee unless a business can show (1) the worker is free from its supervision or control, (2) performs work that is outside the hirer’s core business, and (3) customarily engages in “an independently established trade, occupation or business.” The Court expressly ruled that “the hiring entity’s failure to prove any one of these three prerequisites will be sufficient in itself to establish that the worker is an . . . employee, rather than an . . . independent contractor . . ..”

Without question, this approach to employment classification is much more liberal than what had been the norm for 29 years. Now, an individual may be denied the status of employee “only if the worker is the type of traditional independent contractor – such as an independent plumber or electrician – who would not reasonably have been viewed as working in the hiring business,” this according to the Court in Dynamex, which provided the following example:

A plumber temporarily hired by a store to repair a leak or an electrician to install a line would be an independent contractor. But a seamstress who works at home to make dresses for a clothing manufacturer from cloth and patterns supplied by the company, or a cake decorator who works on a regular basis on custom-designed cakes would be employees.

The burden is now squarely on the hiring entity to establish that a worker is an independent contractor, and that burden appears to be a hefty one. No doubt, more employers will have to consider (or reconsider) whether their arrangements with certain workers support independent contractor classification, a reality that will be felt across industries and is sure to “shake the halls” of the gig economy (read: Uber, Lyft, et al.).

Of course, the difficulty lies in making the necessary classification modifications and minimizing exposure.  That being said and despite the new standard’s presumption of employee status, it remains to be seen – likely through subsequent judicial and labor commissioner interpretation – just how different in practice the ABC test will be from the longstanding, and familiar, standard based primarily on control. Whatever the case may be, employers are encouraged to revisit their practices and take steps to best position themselves to withstand challenges to their contractor relationships. Rest assured, M&R’s California employment team stands ready to help in that regard.

This blog post is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.

No doubt, Airbnb has found its way prominently onto the radar screens of those occupying the hospitality space. But the question remains: how much of a threat is the short-term rental platform to hotels and resorts?

Some commentators have surmised that competition to hoteliers by Airbnb is not necessarily a negative, nor an overwhelming concern given the projection of shared growth in the overall hospitality marketplace going forward-not to mention the strong grip that hotels continue to have on business travelers, the great majority of whom favor traditional accommodations over Airbnb. They also raise the increasing legal impediments in the form of regulations, zoning laws, and the like confronting Airbnb hosts that might place a ceiling on-or at least slow the pace of-Airbnb’s supply-side growth.

The New York Times recently elaborated on this latter point, emphasizing steps being taken by the American Hotel and Lodging Association to frustrate Airbnb’s march for market share. In her article, “Inside the Hotel Industry’s Plan to Combat Airbnb,” NYT journalist Katie Benner reports on a multipronged, national campaign by the hotel industry to reduce the number of Airbnb hosts. According to Ms. Benner, the national hotel association is making it known – systematically, at the local, state and federal level – that many Airbnb hosts fail to comply with anti-discrimination legislation, tax collection laws, and safety and fire standards imposed on hotels and resorts. It is the hope that these efforts will disrupt Airbnb hosts (undeniably operating as quasi-hoteliers), and lead to more laws and restrictions that will ultimately inure to the benefit of hotel operators.

With a projected market capitalization in the neighborhood of $30 billion, Airbnb’s value sits squarely between that of Hilton’s (~$19 billion) and Marriott’s (~$35 billion). Clearly then, despite the calculation that Airbnb does not pose a significant threat to the traditional hotel model, its size and market penetration cannot be ignored. The American Hotel and Lodging Association certainly agrees. How about you?

This blog post is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.

Sir Paul McCartney has filed suit against Sony/ATV Music Publishing in New York Federal Court, seeking a declaration that he can exercise his termination rights under the Copyright Act of 1976 in order to reclaim the rights to many of his musical compositions for The Beatles. The songs, which McCartney either wrote, or co-wrote with John Lennon, and which were once owned by pop music star Michael Jackson, are immensely valuable. It is anticipated that Sony/ATV may challenge the former Beatle’s termination notices in order to preserve its rights.

According to McCartney’s complaint, he assigned rights to the songs in question to various music publishers between 1963 and 1971, and such rights were eventually acquired by Sony/ATV. When Congress adopted the Copyright Act of 1976, it created a mechanism for authors like McCartney who had assigned their interests under the old U.S. copyright statue to terminate the assignment and effectively reclaim the U.S. rights (but only the U.S. rights) during a window period of 56-61 years after the original copyright date. A similar right exists after 35 years for contracts entered into starting in 1978.

This termination right exists regardless of any contract that the author may have signed; in other words, the Copyright Act allows writers to “undo” their prior contracts, and any contract that attempts to prevent a writer from exercising this right is not enforceable in the U.S. Section 304(c) of the Copyright Act requires authors to serve advance notice with the U.S. Copyright Office between 2 and 10 years prior to the termination date, which McCartney began doing in 2008 in anticipation of recovering his share of the copyrights in The Beatles songs beginning in 2018.

This matter is complicated by a recent decision by an English court involving Sony (in a similar action brought by Duran Duran), in which it was held that the band’s termination notices constituted a breach of the original contracts that assigned the rights to its music publisher. However, these contracts were governed by U.K. law, not U.S. law. Ultimately, the English court ruled that contracts governed by U.K. law trumped the band’s rights under U.S. copyright law, even though the U.S. copyright law says the exact opposite, and despite the fact that many ex-U.S. writers have exercised these termination rights in the past, regardless of the law governing their contracts.  Duran Duran has indicated that it may appeal the ruling. In light of this ruling, Sony/ATV may feel that McCartney faces an uphill battle in reclaiming his song rights since his original contracts are governed by U.K. law.

McCartney’s complaint asserts that Sony has refused to provide confirmation of termination and has “thus attempted to reserve Defendants’ right to assert that once Paul McCartney’s terminations go into effect, Paul McCartney will have breached his contractual obligations to Defendants. Rather than provide clear assurances to Paul McCartney that Defendants will not challenge his exercise of his termination rights, Defendants are clearly reserving their rights pending the final outcome of the Duran Duran litigation in the U.K.”

McCartney’s suit is clearly an attempt to expedite a U.S. court ruling counter to the ruling in the Duran Duran matter, with the goal of avoiding a protracted saga or a potential breach of contract suit by Sony/ATV. However, we may also be seeing the start of a trend of writers (whose contracts are governed by non-U.S. law) seeking assurances from U.S. courts that they can still exercise their termination rights regardless of their original non-U.S. contracts. Lawyers practicing in this area will likely receive questions about whether clients (publishers or writers) should race to the courthouse either in the U.S. or abroad to preserve their rights. The ruling in the McCartney case, as well as any appellate ruling in the Duran Duran case, will be closely watched to determine how to address these concerns.

This blog post is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.

The estimate is staggering: $30,000,000,000. That’s a lot of zeros and a forecast of annual legal cannabis sales by 2025-this as more and more states legalize marijuana for medical or recreational use. No question, the cannabis business is booming, which is something of a given. Less obvious is what you, as a budding cannabusiness entrepreneur, should consider in making cannabis your business. Toward that end, there’s a broad range of issues to think about.

1. Licensing

Step one for the would-be cannabis titan is getting your licensing in order. Indeed, having the appropriate license in place is critical because you can’t operate a legitimate cannabusiness without it. Unfortunately, navigating the license application procedure can be confusing, onerous and expensive. Knowing this in advance, and aligning yourself with experienced consultants and professional service providers who can streamline the process, will go a long way in helping to achieve the best results possible.

The new recreational license application in Illinois-my home state, where legalization of cannabis for recreational use is soon to come online-is instructive. As of this writing, all of the following is required to be included in a compliant license application:

• a non-refundable application fee of $5,000 for general applicants;
• a business entity operating agreement, by-laws, or articles of incorporation;
• an agent training and education certificate;
• a business plan;
• a security plan;
• a proposed floor plan; and
• an inventory monitoring and recordkeeping plan, among other things.

If you have designs on planting your cannabis flag in Illinois, the assumption-and recommendation-is that you’d have these various agreements and plans professionally prepared, which equates to a significant up-front cost. But the initial monetary investment directed at tackling the licensing application-no matter the jurisdiction-will be money well spent to the extent it results in your application being accepted, in which case associated costs can be recouped.

2. Corporate, Banking and Tax Matters

Of note, the licensing requirements listed above include the submission of business entity documentation. But beyond what you may have to provide to any licensing officials, there’s another critical reason to create a corporate entity or limited liability company under which your cannabusiness will operate-the limitation of liability and protection of personal assets in the event debts or legal judgments are claimed against your business. Which begs the question: what type of entity should you settle on? Entity selection and formation must consider and address the complexities resulting from state-specific statutes and conflicts between federal and state law. Legal counsel can help in that regard. Ultimately, whether you decide upon a corporation or LLC, you must govern your business to the letter of the law (and any by-laws or operating agreement) to ensure that all stakeholders maintain their inherent protection in terms of personal liability.

On the topic of federal and state law conflicts-spoiler alert: the possession, cultivation and distribution of medical or recreational cannabis remains illegal under the federal Controlled Substances Act-you must be sensitive to the banking and tax issues your cannabusiness will face. Presently,federal banking laws severely restrict access to financial services (read: bank accounts and loans) for companies, startup or otherwise, selling marijuana. This creates a real challenge for several reasons, not least of which is that if you enter the cannabis sector, you must maintain large amounts of cash on hand for payment of expenses, including inventory, employee salaries and the like.

Taxes present their share of headaches too. That’s because the IRS currently doesn’t allow cannabusiness entrepreneurs to deduct ordinary business expenses from gross income associated with the sale or distribution of Schedule I or Schedule II substances as defined by the CSA-yes, that includes marijuana. Translation: without the ability to leverage the typical deductions and credits taken by other businesses, you’ll be left to pay taxes on gross income, which is something to be pondered before jumping into the cannabis space.

3. Real Estate

Not deterred by any of the foregoing? Still want to open a cannabusiness? If so, you’ll need a storefront (if retail is your game) and, in all likelihood, that means you’ll be leasing commercial space. Here are some of the key lease provisions you should keep top-of-mind:

• Compliance with law: a cannabusiness lease should specifically exclude the requirement that the tenant abide by all federal laws.
• Landlord acknowledgment: the tenant should demand a lease provision stating that the landlord expressly acknowledges and authorizes the tenant’s cannabis-relateduse of the subject property.
• Landlord cooperation: a cannabusiness should demand robust landlord cooperation provisions obligating the landlord to sign any documents and make necessary acknowledgments in furtherance of the tenant’s core cannabis operations.
• Lease termination: the termination provision in any cannabis-centric commercial lease should afford the tenant the right to terminate early in the event of a change in the law or enforcement patterns, nuisance claims or other occurrences that disrupt or hinder the purpose of the lease.
• Contingency:the tenant should negotiate for a contingency provision allowing for early termination in the event it fails to obtain the necessary license or financing contemplated when the lease was executed.

4. Insurance

When starting a cannabusiness, you should engage an insurance broker with specific cannabis industry experience. Doing so will educate you as to the significant carriers providing the types and amounts of coverage necessary for your venture, as well as any other policies required by law, including CGL and workers’ compensation insurance (depending, of course, on jurisdiction).

Without question, the insurance coverage you procure should be consistent with the types of risks inherent in your particular business. Which is to say, for example, that dispensaries will be impacted by different risks than will cultivators. Also, it’s critical that you always be honest, transparent and forthcoming about the nature of your cannabusiness when dealing with insurance brokers and carriers. You should never hide the specifics of your operations from your broker or carrier; doing so can set you up for rejection of claims and fraudulent procurement issues.

5. Employment

Your cannabusinesses will be exposed to most, if not all, of the same employment-related issues that companies in other industries face-those having to do with wage and hour laws; benefits and compensation; employee hiring, discipline and termination; employment contracts; privacy rights; and disability, harassment and discrimination claims, to name a few. Regarding the latter, you should adopt well-drafted anti-harassment and anti-discrimination policies, and then consistently enforce them.

There is more. As a cannabusiness entrepreneur, you must understand that the Equal Pay Act applies to all employers regardless of the number of workers employed. In fact, some states have similar employee protections that are even more restrictive than the federal law. No doubt, it’d be wise to consult with legal counsel to be certain you abide by all relevant mandates having to do with your newfound employer status.

And given your core product, what are you to do about marijuana use in the workplace, which is a major employment law issue facing business owners every day? You must decide whether to allow (or if you’re obligated to allow by way of workplace accommodations) medical or recreational marijuana on the job. A clear policy and consistent enforcement are vital.

Finally, before launching a cannabusiness, you should consider including non-compete provisions in your employment contracts. As the cannabis space has blossomed, competition between businesses has increased exponentially. As a result, there’s a significant risk that an employee-especially a key employee-bolts for a competitor or starts a new competing company. Consequently, it makes sense to protect your cannabusiness by way of reasonable non-compete provisions in states where such agreements are enforceable.

Do Your Homework and (Again) Consult Legal Counsel

The list of legal considerations mentioned here isn’t exhaustive, and the legal issues you may confront will vary depending on the type of cannabusiness you open and where it’s located, among other factors. Having said that, a common refrain: consult legal counsel experienced in cannabusiness matters before opening what will hopefully be a successful cannabusiness of your own.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.