News Type: Blogs

The legal use of cannabis-be it for medical or recreational purposes-is the rule, as opposed to the exception, throughout the U.S. And with cannabis in all its forms, including CBD, taking the country by storm, the sky’s the limit for companies entering or already operating within the legal marketplace.

Recent estimates suggest that the size of the global legal cannabis market will climb to $84 billion by 2028. This is a staggering number that spells opportunity for budding cannabusiness entrepreneurs in the U.S.

No doubt about it, with more and more states like New Mexico, New Jersey, New York and Virginia recently hopping on the legal cannabis bandwagon-and it looks to be just a matter of time before Connecticut turns green and fully legalizes weed-there’s certainly room for additional players in the legitimate cannabis space. But before any would-be cannabis operators open their doors for business, a broad range of legal issues must be considered.

Licensing

For those ready to jump into the legalized cannabis business, step one is obtaining the proper license. That may be easier said than done. With a patchwork of licensing laws that are ever-changing and dependent upon jurisdiction, the licensing application process can be complex, time intensive and expensive to say the least. To pave the way for a streamlined licensing journey and achieve the best results possible, it can be very helpful to align with experienced consultants and professional service providers.

It bears repeating, cannabis licensing requirements vary from state-to-state. In any event and no matter the location, those wanting to launch a cannabusiness can expect to be asked for at least some, if not all, of the following in conjunction with a license application:

• a non-refundable application fee;
• 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.

A word to the wise: to expedite the cannabis licensing process, these items should be prepared well in advance and as soon applicants become aware of their application mandates.

Corporate, Banking and Tax Concerns

Anyone dipping a toe or jumping head first into the legal cannabis industry will want to create a corporation or limited liability company as an umbrella for operations. Doing so will help limit personal liability and protect personal assets in the event debts or legal judgments are claimed against a cannabusiness.

In terms of entity selection and formation, legal counsel can provide guidance based upon state-specific and financial considerations (including those related to taxation). Whatever type of entity is chosen, a legal cannabis business must abide by all applicable formalities and operate within the parameters of any by-laws or operating agreements to ensure that stakeholders can avoid any potential personal exposure in the event of litigation.

Conflicts between federal and state laws should also be on the radar screen of every cannabis entrepreneur. Despite the legal status of cannabis throughout the country, the possession, cultivation and distribution of medical or recreational cannabis remains illegal under the federal Controlled Substances Act (CSA). Consequently, there are difficult banking and tax issues that every cannabusiness must face.

As of this writing, federal banking laws severely restrict access to financial services for companies selling cannabis-related products. Translation: banks can’t do business with cannabis companies, which is problematic for so many reasons, not least of which is that those in the sector must maintain large amounts of cash on hand for payment of expenses, including inventory and employee salaries. This unfortunate reality makes legal cannabis outfits the targets of crime.

The good news is that relief could be on the horizon. The SAFE Banking Act of 2021, which would provide a safe harbor for banking institutions providing services to cannabis clients, was passed in the U.S. House of Representatives and referred to committee. Whether the legislation passes in its current form is anyone’s guess, though our federal legislature does seem to be inching closer to relaxing existing cannabis restrictions.

Until the federal law changes, taxes will also continue to be an area of concern for cannabis operators. This is because the IRS currently doesn’t allow for the deduction of 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 cannabis). What this means is that without the ability to take advantage of the typical deductions and credits leveraged by other businesses, those in the cannabis biz must pay taxes on gross income.

Real Estate

A lease on commercial space will be in the cards for anyone opening a consumer-facing, retail-oriented cannabusiness, such as a dispensary. Those looking to lease space for their cannabis operations should consider these key lease provisions:

• 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-related use 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 commercial lease related to cannabis 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.

Insurance

Anyone starting a cannabusiness should engage an insurance agent or broker with specific cannabis industry experience who can obtain all necessary coverages. When procuring insurance policies, applicants must be honest, transparent and forthcoming about their operations. Misrepresenting the nature of a cannabis company to an insurance producer or omitting material facts can set an insured up for rejection of claims and fraudulent procurement issues.

Employment 

Management in the legal cannabis industry is subject to the same employment-related issues facing counterparts in other businesses. These include wage and hour, benefits and compensation, equal pay, employee hiring, and discipline and termination issues, along with privacy, disability, and harassment and discrimination concerns. Regarding the latter, comprehensive anti-harassment and anti-discrimination policies should be drafted and consistently enforced.

Another major employment law issue facing business owners today is marijuana use in the workplace. It’s rather ironic given the nature of a cannabusiness, but cannabis operators must decide whether to allow (or if they’re obligated to allow by way of workplace accommodations) the use of medical or recreational marijuana on the job. Clear policies on this topic are crucial.

With Opportunity Come Potential Pitfalls

Without question, the legal cannabis industry is still in its relative infancy and poised for exponential growth. And while this may translate to real upside for those wading into the legalized cannabis waters, the associated legal issues (this article presents just a sampling of them) are significant and shouldn’t be ignored.

This post has been adapted from a piece written by Bryan Johnson and previously published in Cannabis Business Executive titled, “5 Key Considerations When Starting Your Cannabusiness.”

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.

An appellate court in California has just issued a ruling related to wage and hour law that should be of interest (and a relief) to all employees in the state.

By way of background, Labor Code § 226 sets forth nine categories of information that must be included in wage statements. With that being said, it was broadly held last week in General Atomics v. Superior Court that an employer will not be in violation of section 226 when its wage statements allow employees to readily determine whether their wages were correctly calculated.

In the case, Tracy Green sued her employer, General Atomics, based on its alleged failure to provide accurate, itemized wage statements showing “all applicable hourly rates in effect during the pay period and the corresponding number of hours worked at each hourly rate by the employee,” as is required by the Labor Code. More specifically, Green’s two causes of action (a putative class action and a representative action under the Labor Code Private Attorneys General Act) contended that General Atomics violated section 226, by providing wage statements that did not identify the correct rate of pay for overtime wages. Getting into the weeds, Green maintained that the correct rate was 1.5 times (1.5x) the regular rate of pay, and the wage statements provided by General Atomics showed only 0.5 times (0.5x) the regular rate.

The lower court agreed with Green’s position, though that was not the case on appeal. The higher court made clear that showing the 1.5x overtime rate would be impractical or cause confusion when an employee (like Green) earns multiple standard hourly rates during a single pay period. Consequently, it was decided on appeal that General Atomics’ wage statements complied with the Labor Code because they showed the total hours worked, with their standard rate or rates, and the overtime hours worked, with their additional premium rate.

As otherwise stated, the appellate court found that while other formats may also be acceptable, given the complexities of determining overtime compensation in various contexts, the format adopted by General Atomics adequately conveyed the information required by statute. And with that, the takeaway for employers is simply this: courts will not be dogmatic about Labor Code rules and will not find section 226 violations where pay stubs provide the information necessary for employees to check the accuracy of wages paid.

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.

Federal labor law is in the crosshairs of the U.S. Congress. In recent days, the House of Representatives passed the Protecting the Right to Organize (PRO) Act (H.R. 842), which, among other things, would (1) prohibit employers from retaliating against employee unionization efforts, (2) protect workers’ right to strike, and (3) override state “right to work” laws that allow employees to opt out of paying dues in unionized workplaces.

This overhaul to the National Labor Relations Act is a priority for organized labor, which seeks to bolster the federal law currently in place that guarantees private-sector employees the right to unionize, engage in collective bargaining, and take collective action such as strikes.

The bill made its way through the House essentially along party lines-the vote was 225-206. That being said, labor groups should not celebrate too early, as passage by the Senate appears to be a longshot.

This is the case despite the current realities of workers nationwide: (1) those seeking safer working conditions in the shadow of the COVID-19 pandemic and (2) the victims of economic inequality that is undermining the middle class. For their part, management argues that the legislation would eliminate jobs.

The Finer Points

Should the PRO Act win approval in the Senate and become law, employers would no longer be permitted to hold “captive audience” meetings, during which anti-union messages are conveyed. Likewise, under the PRO Act, the National Labor Relations Board could levy fines against companies that engage in unfair labor practices. The NLRB could also mandate arbitration when unionized workers are unable to reach agreement on their contracts with employers.

There is more. The bill would reverse current practice by authorizing employees to hold offsite union elections by way of mail or electronic ballots. In addition, the PRO Act speaks to employee classification issues by adopting the test to determine workers’ employment status now used in California (AB 5). This would be a fly in the ointment particularly for app-based companies like Uber, Lyft and Doordash to the extent it would make it easier for workers to demonstrate they are employees under federal labor law. And while on the topic of gig workers, the PRO Act would authorize them to organize unions and protest retaliation under the NLRA.

Voices From the Senate

Senate Republicans have gone on record suggesting that the proposed law would be harmful to business to the extent it would serve to make unions bigger and reduce individual freedoms. Consequently, given that 60 votes are required to bring the bill to a vote in that chamber, passage of the PRO Act is unlikely. Still, the Biden administration enthusiastically backs the legislation, and Michelman & Robinson, LLP will continue to monitor its progress.

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.

On the surface, a case just decided by the U.S. Court of Appeal for the 9^th Circuit looks to be one primarily of interest to those in the aviation space. In Bernstein v. Virgin America Inc., a Ninth Circuit panel ruled on February 23 that California wage and hour laws pertaining to meal and rest breaks are not preempted by federal law; namely, the Federal Aviation Act.

But beyond that determination, which was a win for the flight attendants who initiated the litigation, is an additional ruling that represents a huge victory for the defense bar and should be of interest to all employers, not just airlines. Specifically, the court in Bernstein decided that heightened penalties for “subsequent violations” under California’s Private Attorney General Act (PAGA) cannot be imposed until the Labor Commissioner or a court notifies the employer in question of the Labor Code violation(s) at issue.

The net effect of the decision in Bernstein: California employers defending PAGA claims now have clarification regarding “subsequent [Labor Code] violations” and whether they will give rise to increased legal exposure.

Why Does All of This Matter?

Pursuant to PAGA, default civil penalties are $100 “for each aggrieved employee per pay period for the initial violation,” and $200 per aggrieved employer, per pay period, per “each subsequent violation.”

The problem was that before Bernstein, courts had not clearly identified when a “subsequent violation” of wage and hour law occurs. Prior case law (Amaral v. Cintas Corp.) simply held that such a violation did not trigger until an employer learned that its conduct violated the Labor Code.

But this left a fair amount of wiggle room for aggrieved employees, who could point to any given PAGA notice, prior employee complaints and lawsuits, internal or third-party payroll audits, employer retention of third-party human resource agencies, or other evidence to demonstrate that their employers acted willfully or had knowledge of ongoing Labor Code violations that justified the $200 “subsequent” penalty rate. But now, after Bernstein, employers cannot be subject to such heightened exposure until they hear from the Labor Commissioner or a court about the occurrence of a wage and hour violation.

What Employers Need to Know in the Aftermath of Bernstein

First and foremost, Bernstein is very favorable to management because it prevents employees from arguing that heightened civil penalties under PAGA should apply after the first California Labor Code violation within the statute of limitations, and after an employer has received a PAGA notice letter or an employee’s civil complaint.

Next, employers should remember that in the event of an unsuccessful appeal of (1) a trial court decision related to a wage and hour claim or (2) a Labor Commissioner citation, they will be subject to heightened penalties that have accrued during the appeal process.

Finally, it must be understood that Bernstein only addressed civil penalties. It remains unclear whether the ruling will also apply to claims for heightened statutory penalties for wage statement violations and the like.

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.

The California Department of Insurance has invited the public to participate in a pre-notice discussion regarding a contemplated addition to the California Code of Regulations (“CCR”) dealing with mitigation in rating plans and wildfire risk models. The web-based virtual event will be held on March 30, 2021 at 1:00 pm (PST).

The Proposed Regulation

The regulation open to public comment touches upon all of the following:

1. Incentivizing individual and community mitigation efforts by requiring consideration of property- and community-level mitigation against wildfire risk;
2. Reducing the risk of loss posed by wildfires;
3. Improving accuracy in the classification of wildfire risk and the resulting rates and premiums;
4. Increasing transparency in, and consumer awareness of, insurers’ rating and/or scoring of wildfire risk;
5. Enhancing consumer protection by establishing a consumer appeals process;
6. Reducing unfair discrimination by enhancing consistency in insurers’ wildfire rating practices and/or risk scoring practices; and
7. Potentially improving availability and affordability of property-casualty insurance for communities and properties where wildfire mitigation measures have been implemented.

Participants in the pre-notice discussion will be asked to offer their specific questions about-and potential alternatives to-the proposed regulation.

A Deeper Dive

If adopted, the proposed regulation would require insurers to implement rates based on a compliant rating plan or wildfire risk model, defined as “any computer-based, map-based, or other measurement or simulation tool used by an insurer to segment rates, create a rate differential, or determine the premium discount or surcharge for residential or commercial structures.” Of note, any insurer looking to modify its rates would have to provide its wildlife risk model along with a new rate application to be filed no later than January 1, 2023.

At its core, the proposed regulation seeks to prohibit an insurer from using a rating plan or wildfire risk model that does not consider and take into account certain mandatory factors, including (1) community-level mitigation efforts and (2) property-level mitigation efforts undertaken with respect to an individual property being assessed for risk. Optional wildfire-related factors that insurers can weigh when developing rating plans or risk models are fuel, slope, access, distance to other high-risk areas, aspect, structure characteristics and wind.

Should the proposed regulation ultimately take effect, carriers will have to be mindful of several details and mandates related to their initial rate change applications, including the incorporation of wildfire loss data and the provision of specific wildfire risk model scores. Of course, these are items that the insurance regulatory professionals at Michelman & Robinson, LLP can assist with.

In the meantime, the full text of the proposed regulation can be found here, and M&R reminds anyone interested that the pre-notice discussion (which we will monitor and report on) is not a formal public hearing; as such, public comments will not be included in any rulemaking record.

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.

When is a 30-minute lunch break a 30-minute lunch break?

Certain employers have made it a practice of rounding time-up or down, typically in five- to 15-minute increments-in lieu of recording the actual time that employees spend working or for meal breaks. Until now, California law has generally permitted rounding time, provided certain criteria are met. For instance, an employer’s rounding policy must be fair and neutral on its face and cannot systematically undercompensate employees over a period of time.

While rounding time is still permitted at the start and end of a shift (though this is not without its own challenges), the California Supreme Court has just ruled that rounding time for meal breaks is unlawful.

In a class action case called Donohue v. AMN Services, the high court determined that state law imposes “precise time requirements” for meal breaks, and shaving off (or even adding) a few minutes here or there is contrary to the “precision” required by statute. Translation: employers must accurately track employee meal breaks to ensure that they are being given the full 30 minutes California law allots to them.

In the aftermath of this decision, employers may need to change their timekeeping practices, as “even minor infringements on meal period requirements” are disallowed and can subject an offending employer to significant damages. Employers must also understand that even where rounding time may be permitted at the start and end of an employee’s shift, this is an area of wage and hour law that remains heavily litigated, by way of class and representative actions.

Should you have any questions about wage and hour issues such as rounding time or other employment-related matters, the employment lawyers at Michelman & Robinson, LLP are here to help.

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.