Running a Cannabis business in California can be tricky! Particularly so when it comes to wage & hour and employee classifications.
Although employees in cannabis cultivation may be working in a defined agricultural occupation for an agricultural employer, the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”) specifically states that those employees are subject to IWC Wage Order 4, not IWC Wage Order 14. Because of this, employees working in cannabis positions are entitled to pay which differs from agricultural employees. Employees who fall under this bracket include cannabis distributors, transporters, and dispensaries, managers, plant caretakers, budtenders, security guards, salespersons, and delivery persons (California Business & Professions Code).
Cannabis Employee vs Contractor
When evaluating if a worker can be categorized as an employee or independent contractor, the organization must use the ABC test. Under this test, the contractor must meet all three of the following conditions:
- The worker must be free from control and determine when they perform their work;
- The worker must perform work outside the work of the usual course of the company’s business; and
- The worker must be in an independently established business that encompasses what services they are performing for your company.
For example, if your organization is running a retail cannabis store and hires a cashier, they would be doing a job that is a part of the normal course of the hiring company’s business. They would not qualify as an independent contractor. However, if the organization decides to hire an HR consultant, they would be allowed to work as a contractor because they are out of the normal course of business, free of control, and have other clients for whom they perform these services. Once it has been established that the worker will be classified an independent contractor, it is important for the organization to have something in writing that establishes the relationship (SHRM).
It is important to note, workers are considered employees unless proven otherwise. Under California law, workers may be considered employees and have protections even if they are determined not to be employees under federal law as the tests used to determine employee status under California law differ from the tests used under federal law (Labor and Workforce Development Agency).
Penalties of Misclassifying an Employee as a 1099
There are several penalties an employer may face for wage violations associated with worker misclassification as an independent contractor. This may include the collection of unpaid wages, meal penalty premiums, back taxes, additional penalties for failing to deduct and withhold taxes for misclassified employees, civil lawsuits, and punitive damages from lawsuits for unpaid wages and taxes. Going a step further, there are civil penalties for an organization which willfully misclassifies their employees. Labor Code section 226.8 prohibits the willful misclassification of individuals as independent contractors with penalties of between $5,000 and $25,000 per violation (Department of Labor). Moreover, once a business is caught misclassifying an employee or employees, they’re known as a potential repeat offender. That offense raises a red flag for the Department of Labor and OSHA which leads both organizations to target that business (OSHA).
Salary Exempt and Non-exempt Cannabis Employees
For cannabis workers to qualify as exempt employees in the state of California they must meet a duties test and meet the salary minimum requirement. An employee must meet exempt duties more than 50 percent of their work and earn a monthly salary at least 2 times the minimum wage, or higher (calculated as [minimum wage x 2] x 2,080 hours). The employees are also required to exhibit independent judgment and discretion within their roles (CA Department of Industrial Relations).
Effective January 1, 2022, the minimum salary threshold for these exemptions are:
- Employers with 1-25 employees: $58,240 per year.
- Employers with 26 or more employees: $62,400 per year.
Employees must meet each of the qualifications, including wage, independent judgment, and any additional federal standards. A non-exempt employee must be paid their wages on an hourly basis, and they qualify for overtime because they do not meet the overtime exemption.
Misclassifying as Salary Exempt Instead of Hourly
When an employer misclassifies an employee as salary exempt instead of hourly, they are held liable for all unpaid wages going back as far as four years prior to the most recent date of the claim. This includes overtime worked by the employee and all missed break and meal periods the employee accrued.
According to the Division of Labor Standards Enforcement (DLSE), California’s nonexempt workers are entitled to a 10-minute paid rest break for every four hours worked. Additionally, employees must also receive a 30-minute unpaid meal break if the employee has worked 5 hours or more. Employers must also provide a second meal break of no fewer than 30 minutes if the employee works for more than 10 hours and must be provided no later than the end of the employee’s 10th hour of work. If it so happens that an employee has not received a compliant break, or it is found that the employer has tampered with their time sheet, the employee is then entitled to one hour of pay for each day a rest-period rule was violated and one hour of pay for each day a meal-period rule wasn’t followed. That means workers can receive up to two hours of premium pay per day (Wage and Hour Division).
To show just how costly wage and hour claims can get for an employer, here is an example:
An employer with 10 employees earning $20 an hour over three years could be subject to a $156,000 liability if it failed to provide those employees with statutorily required rest periods due to misclassification (calculated by $200 a day x 5 days a week x 156 weeks). If both meal and rest periods were never provided, each employee may recover two hours of premium pay per day that a violation was found to have occurred, further increasing the potential liability for the employer.
The penalty premiums for each violation differ and are described below:
- Meal period violation:
- Premium wage- one additional hour of employee’s regular pay
- Rest period violation:
- Premium wage- one additional hour of employee’s regular pay
- Overtime Violation:
- Overtime rate- 1 ½ times regular rate: interest, employee’s attorney fees and costs
- Minimum Wage Violation:
- Wages owed, interest, employee’s attorney’s fees and costs, liquidated damages
Timeline for unpaid wages claims in California:
The statute of limitations timeline for each type of claim is listed below:
- One year for penalties relating to bounced checks or failure to provide access to, or a copy of, employee payroll records
- Two years for a verbal promise to pay wages in excess of minimum wage
- Three years for claims related to minimum wage, overtime pay, rest and meal breaks, sick leave, illegal deductions from paychecks, or unpaid reimbursement for business expenses
- Four years for a written contract for work
If you have any questions regarding wage and hour classification, please feel free to reach out.