We are offering the following observations so that HR managers in the cannabis field can better understand some of the rules that govern wage and hour requirements here in California. These rules are important because failure to follow them can expose employers (the operating cannabis companies) and sometimes their executives to significant civil fines and penalties and, in the case of egregious misconduct, criminal prosecution. Really, it should come as no surprise that California takes very seriously the payment of wages to workers.
Minimum Wage and Legal Overtime Compensation Considerations
What may come as a surprise is that, as a general matter, California law does not allow employers and their adult workers, no matter how sophisticated they may be, to voluntarily enter into arrangements that “opt out of” or “relax” one or more of the State’s wage and hour laws. Consider California Labor Code section 1194, which provides:
Notwithstanding any agreement to work for a lesser wage, any employee receiving less than the legal minimum wage or the legal overtime compensation applicable to the employee is entitled to recover in a civil action the unpaid balance of the full amount of this minimum wage or overtime compensation, including interest thereon, reasonable attorney’s fees, and costs of suit.
Accordingly, it is generally not appropriate for a newly established business to pay its newly hired executives less than a certain minimum wage, even if they are characterized as “founders.” Paying a VP of Sales, for example, just $1 a year would be a violation of the State’s wage and hour laws no matter how many shares of stock he receives. We find that sometimes HR managers misunderstand a worker’s characterization as an “executive,” “professional,” or “overtime exempt” employee as giving the company permission to pay the worker entirely in stock. The truth of the matter is that even these employees are generally entitled to a minimum wage (e.g., a base level salary) under California’s wage and hour laws, just not overtime. Under most circumstances, executives, professionals and administrators must be paid “a monthly salary equivalent to no less than two (2) times the state minimum wage for full-time employment [, i.e., a 40 hour-work week].” This comes to a mandatory annual salary of more than $45,000 a year.
Another common mistake we see involves cannabis cultivation and overtime pay. From time to time, cultivators will insist that their workers work significant hours during harvest without overtime pay (or any pay), while promising to pay the workers their wages when and if the crop is sold. As a general matter, employees are entitled to overtime pay if they work more than 8 hours in any given workday or more than 40 hours in any given workweek. Sometimes employers and their workers can agree upon “alternative workweek” arrangements so that workers can periodically work more than 8 hours in a day without overtime pay. But these arrangements can be hard to put in place and there are strict procedures that must be followed in order to do so. Similarly, employees are usually entitled to at least a 30 minute meal break after working 5 hours. And employers have very few options for delaying and/or withholding wages. We are not aware of any clear right to withhold wages from crop workers until the crop is sold, for example.
The “ABC Test” & Treating Workers as Independent Contractors
A final common mistake worth noting is that, under current California law, it is very hard to treat workers as independent contractors. A case by the California Supreme Court decided earlier this year called Dynamex essentially stands from the proposition that the only people a company can properly treat as independent contractors for wage and hour purposes are those that satisfy what is called the “ABC test.” See Dynamex Operations W. v. Superior Court (2018) 4 Cal.5th 903. As the Supreme Court explained:
Under this test, a worker is properly considered an independent contractor to whom a wage order does not apply only if the hiring entity establishes: (A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
Id. at 916-17. Put another way, a cannabis manufacturer cannot treat its assembly line workers as independent contractors. A cannabis distributor cannot treat its drivers as independent contractors. And a cannabis cultivator cannot treat its master growers as independent contractors. Employers must treat all workers engaged in their principal business activities as employees, at least for purposes of wage and hour laws. Under this ABC test, very few workers operate in the gray zone. Some examples of those that do, and therefore might be properly characterized as independent contracts as long as the satisfy the other two tests articulated in Dynamex, may include accounting clerks brought in to help a company with its financial reports or invoices, marketing advisors engaged to help with an advertising campaign, and lawyers brought in to help with regulatory compliance. But naturally, these sorts of issues tend to depend greatly on the specific facts and circumstances of the working relationship and the persons involved; HR managers are encouraged to consult with their employment counsel when classifying workers as independent contractors.
Which California Wage Orders Apply to Cannabis Businesses?
To decide what wage and hour requirements matter to a particular cannabis business, HR managers are encouraged to refer to the Wage Orders issued by California’s Industrial Welfare Commission (the “IWC”). The IWC has issued 18 wage orders that set forth requirements for minimum wage, overtime and rest breaks from work.
Sometimes deciding whether a particular Wage Order applies can be complicated. For example, the central nuanced question in Bains v. Department of Industrial Relations (2016) 244 Cal.App.4th 1120 was whether workers who dried prunes should be covered under Wage Order #13 (preparing agricultural products) or Wage Order #14 (agricultural occupations).
But in rough cut, while we are unaware of any cannabis-specific wage order cases, all Wage Orders are intended to be clear and simple enough for managers to follow. Our suspicion is that “operational” workers at cannabis companies will mostly fall under Wage Order #1 (Manufacturing Industry), Wage Order #8 (Mercantile Industry), Wage Order #8 (Industries Handling Products After Harvest), Wage Order #9 (Transportation Industry), Wage Order #13 (Industries Preparing Agricultural Products for Market, on the Farm), and Wage Order #14 (Agricultural Occupations), while office workers at cannabis companies will mostly fall under Wage Order #4 (Professional, Technical, Clerical, Mechanical and Similar Occupation). Because California law has been designed to protect all employees, if a particular employee seems to fall outside one of these wage orders, then he or she is probably covered under Wage Order #17 (Miscellaneous Employees).
It would be well beyond the scope of this blog to try to summarize the provisions of these wage orders, or attempt to compare and contrast them. And in addition, wage and hour claims are always highly fact dependent. However, it is the case that all of the wage orders provide for:
- a base minimum wage that employers are not allowed to drop below even with the employee’s permission;
- requirements for mandatory break times (lunch breaks, etc.); and
- overtime requirements for enhanced compensation for hourly employees who work over a certain number of hours in a day or over a certain number of hours in a week.
Perhaps surprisingly, wage orders also often contain provisions for mandatory seating, temperature regulation within the workplace, required postings, and restrictions on charging employees for lost, broken or damaged company property, among other things.
If you are a cannabis company executive with HR responsibilities, we encourage you to read the applicable wage orders and raise any questions or concerns by contacting your employment counsel at Rogoway Law Group.