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Misclassifying Employees in Your Cannabis Business

August 04, 2020

The Cannabis industry continues to expand and grow throughout California; according to the 2020 Leafly Jobs Report, “legal cannabis supports 243,700 full-time-equivalent jobs as of early 2020.” It is important for business owners to maintain compliance with and stay abreast of changes in California’s ever-growing compliance. One way that businesses can stay in compliance is in how they classify their employees. Many companies misclassify their employees as contractors, when they should be employees, or misclassify their employees as salaried, when they should be hourly. The following will help you to understand how to properly classify your employees and run your business with reduced risk of lawsuits.

What is the difference between exempt and non-exempt?

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. An exempt employee meets the overtime exemption and is paid an annual salary. It is important to know what qualifies as an exemption from overtime under California’s employment laws:

  • Executive Exemption: this exemption is generally tied to managers and executives, but the managers must meet the other requirements for exemption.
  • Administrative Exemption: this exemption is for employees who do administrative work; it does not apply to all administrators, they also need to fall under the other exemptions, so some will be classified non-exempt.
  • Professional Employee Exemption: workers in recognized professions such as accounting, dentistry, law, medicine, teaching, and others maybe qualify for exemption.
  • Computer Professional Exemption: systems analysts testing or modifying computer systems.
  • Salesperson Exemption: Outside salespersons who spend more than half of their employment hours away from the place of business selling items or services.
  • Artist Exemption: those engaged in art involving science, invention, imagination, or talent.

In addition to the exemptions, it is necessary for employees to earn a monthly salary at least 2 times the minimum wage, or higher. The employees must exhibit independent judgment and discretion in their roles. Many employees think that if they engaged in outside sales, they automatically qualify to be salaried employees. Employees must meet all of the appropriate qualifications, including wage, independent judgment, and any additional federal standards, although California employment laws generally surpass the federal standards.

What is the difference between an employee and a contractor?

When evaluating whether an employee can be categorized as an employee or independent contractor, you will want to 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 you are running a retail cannabis store and hire 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 store or company were to hire an HR consultant or an accountant, 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. When it is established that the worker will be an independent contractor, it is necessary for the company to have something in writing establishing the relationship between the business entity and the contractor.

What are the concerns of misclassification?

In cases of employee misclassification, there is the possibility that your company could be held liable for back pay, legal fees, and other penalties. When employees are misclassified, there is also risk of a wage and hour lawsuit for unpaid lunch breaks or overtime hours (wage theft litigation). Employees should be provided an employee manual, so they understand how they are being paid and what actions or behaviors would qualify them for termination. It is extremely important to consider how to classify your employees. If you need additional support, review the Employment Determination Guide put out by California’s Employment Development Department, and the chart of Exemptions from the Overtime Laws put out by California’s Department of Industrial Relations.

If you have additional questions about worker classification and your company, reach out to the experts at LEAPROS at 714-351-2118 or email them at cgonzalez-hicks@leapros.com. They will ensure compliance and help you avoid costly lawsuits and disputes with your employees.

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LEAPROS Human Resources Consulting Solutions is designed to be your go-to Human Resources Advisor. They strive to provide effective and real-world resolutions for businesses of all sizes and industries from startups to Fortune 1000 companies. They offer human resources packages for companies that need ongoing support, a la carte services for clients who need assistance on an as needed basis, and a PEO service for those who want a hands-off approach to Human Resources and Payroll. When utilized, their Human Resources policies can assist your company in preventing issues, avoiding lawsuits and creating an environment of effective human capital. Visit www.leapros.com to learn more.

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