A federal appeals court recently issued a ruling that protections under the Fair Labor Standards Act (FLSA) apply to “all workers,” even if the business they are engaged in is illegal under federal law.

For companies involved in the marijuana industry in Colorado, the ruling from the 10th U.S. Circuit Court of Appeals in Denver is particularly significant and provides several larger lessons. First, marijuana employers cannot avoid paying overtime based solely on the fact that the business violates the Controlled Substances Act (CSA), which criminalizes the possession, manufacture, distribution, and sale of marijuana.

The court ruling extends beyond the FLSA however and serves as a reminder to marijuana companies that they must comply with federal laws that pertain to their business. The case Kenney v. Helix underscores the importance of making sure marijuana companies take steps to avoid running afoul of employment law issues, including discrimination and harassment in the workplace as well as immigration policy.

The court opinion comes a few months before a new rule from the U.S. Department of Labor (DOL) which increases the salary thresholds necessary for classification as an exempt executive, administrative, or professional employee, typically referred to as the “white collar exemptions.” Effective on January 1, 2020, the DOL is raising the minimum salary requirement from the current level of $455 to $684 per week, which is equivalent to $35,568 per year.

The DOL estimates that the final rule would make 1.3 million American workers newly eligible for overtime pay. “Marijuana companies have to pay attention when it comes to compliance with the FLSA, particularly the issue of paying overtime to nonexempt employees,” said employment law attorney Michelle B. Ferguson.

“In light of the new rule from the DOL, they are going to have to make some hard decisions about increasing salary or paying overtime in order to comply with the FLSA,” said regulatory attorney Tom Downey.

The DOL’s final rule is available at https://www.dol.gov/agencies/whd/overtime/2019/index.

Under the new final rule, employers will have to either make sure that exempt employees receive the new minimum salary or reclassify such exempt employees to nonexempt employees and pay them overtime wages (or have their work hours adjusted so they do not exceed the 40-hour work week). Nonexempt employees must be compensated at the rate of one and one-half times their regularly hourly rate of pay for all time worked in excess of 40 hours in a work week (or for those employers subject to the Colorado Minimum Wage Order, for hours worked beyond 12 hours in a day or 12 consecutive hours, whichever is greater). Marijuana businesses also need to ensure that they meet the recordkeeping, minimum wage requirements, and other directives specified by the FLSA for employers.

Marijuana companies that do not comply with the FLSA could find themselves in serious legal jeopardy. Consider a marijuana business that failed to track employees’ hours and pay overtime owed under the FLSA. The company was later sued by those employees for failure to pay overtime over a two-year period. Not only did the company owe back pay and liquidated damages to all those workers for that entire two-year period, but also had to pay the employees’ legal fees along with their own costs to defend the lawsuits.

FLSA Presumptions

In legal disputes involving FLSA compensation and overtime claims, courts make certain presumptions, including that:

  • the FLSA is construed liberally in favor of coverage
  • the employee is presumed to be nonexempt
  • exemptions are disfavored and narrowly construed
  • the burden is on the employer to show the exemption applies plainly and unmistakably

Those presumptions played out in the case before the 10th Circuit. The plaintiff, Robert Kenney, worked as a security guard for Helix TCS, Inc., which provides security services for businesses in Colorado’s marijuana industry. He sued for overtime pay, arguing that Helix misclassified the security guards as exempt employees even though they frequently performed nonexempt job duties. He further claimed Helix violated the FLSA by willfully failing to pay overtime and paying them a salary instead.

Helix countered that the FLSA does not apply to workers such as Mr. Kenney because Colorado’s recreational marijuana industry is in violation of the Controlled Substances Act. But, the court rejected that argument.

The importance of the 10th Circuit opinion cannot be overstated. Marijuana companies need to make sure they have the proper written policies in place and that executives, managers, and other relevant personnel are trained in those procedures. Experienced employment attorneys can review employee classification as well as recordkeeping practices for employee hours, overtime pay, meal periods and other breaks, and documentation needed to be proactive.

Immigration Policy Change

Beside protections provided by FLSA and Title VII, marijuana employers should be aware of U.S. immigration policies regarding employees who are not U.S. citizens. In April 2019, the U.S. Citizenship and Immigration Services issued policy guidance stating “that violation of federal controlled substance law, including for marijuana, remains a conditional bar to establishing good moral character for naturalization even where that conduct would not be an offense under state law. An applicant who is involved in certain marijuana related activities may lack good moral character if found to have violated federal law, even if such activity is not unlawful under applicable state or foreign laws.”

This means that a noncitizen or a green card holder who works for a marijuana company could lose the prospect of naturalization and even face deportation.

Marijuana Companies Face Vulnerability

At Ireland Stapleton, we examine four categories of vulnerability for marijuana industry companies:

Criminal – Marijuana remains an illegal Schedule 1 substance, but the policy of the federal government is to not enforce federal marijuana law for those in full compliance of their state marijuana laws

Regulatory/Licensing – A license may be disciplined or revoked for engaging directly or indirectly with federally illegal marijuana businesses, but the same policy of non-enforcement applies as with criminal assessments above. For example, no physician has lost a DEA license for ownership of, or employment by, a marijuana business in compliance with state law. No nonprofit has lost its 501(c)(3) status merely for accepting donations from federally illegal marijuana businesses.

Civil Lawsuits/Grants – A short-lived series of marijuana-based civil Racketeer Influenced and Corrupt Organizations (RICO) Act lawsuits a few years ago proved largely unsuccessful and have ceased. Grants may be denied or rescinded for engagement in the marijuana industry without due process. We have no statistics on whether or to what extent this has happened.

Reputational – While marijuana continues to gain broader acceptance, some entities and charities choose not to engage with marijuana businesses for reputational reasons.

Significant employment law issues can get overlooked by marijuana companies even though Colorado’s marijuana industry has become a mature industry. Statistics from the Colorado Department of Revenue show $1.3 billion in state revenue in 2019 for the first nine months of the year, and marijuana businesses have a lot at stake to adequately address all aspects of compliance. The bottom line is that although marijuana remains a controlled substance under the CSA, marijuana businesses in Colorado need to be fully aware of all the federal and state laws and regulations that apply to their enterprises. Ireland Stapleton can help marijuana companies – no matter their size or sophistication – create or update the framework and training policies needed to be in full compliance with all appropriate state and federal laws.

For more information on how this court opinion and final regulatory rule may impact your business directly, contact Director and Employment Law Practice Group Leader Michelle B. Ferguson at mferguson@irelandstapleton.com or 303.628.3658, or Director Tom Downey at 303.628.3639 or tdowney@irelandstapleton.com.

Michelle B. Ferguson is an employment law attorney at Ireland Stapleton Pryor & Pascoe and leads the firm’s employment law practice group. She focuses on finding ways to keep employers out of court by being proactive in identifying and solving employment issues before a claim is filed. Ms. Ferguson counsels employers and governmental entities on all matters of employment law and day-to-day personnel issues and represents her clients in all types of administrative claims and litigation before federal and state courts.

Tom Downey is a regulatory attorney at Ireland Stapleton Pryor & Pascoe. Prior to joining the Firm, he served as the Director of Denver’s Department of Excise and Licenses and served as an Assistant Attorney General under Attorney General Ken Salazar. In his practice, he represents corporate clients, including investors, creditors, developers, intellectual property holders, and others in and around licensed industries in the administrative, transactional and disciplinary processes related to liquor licensing, legalized marijuana, and other licenses governed by the State of Colorado.

What is written here is intended as general information and is not to be construed as legal advice. If legal advice is needed, you should consult an attorney.