California is one of the trickiest states in the U.S. for employers, and especially for cannabis employers. The numerous, byzantine requirements here simply don’t exist in many other states. Classifying California cannabis workers is one of the biggest challenges for local industry.

Cannabis companies often think they can get around employment law requirements by calling workers “contractors” who are not entitled to the same rights and benefits. This has always been a tough sell here, and has gotten materially harder since California’s licensed cannabis regime came into full force.

In this series, we’ll explore many of the pitfalls cannabis businesses face when classifying California cannabis workers. In this first post, I want to look at the difference between employees and contractors and identify the basics for telling them apart.

Are California cannabis workers employees or independent contractors?

Over the years, our California cannabis lawyers have seen a ton of cannabis businesses assume that if they call a California cannabis worker an independent contractor, the worker magically is one. Whether this is a good idea (it’s not) is beside the point – classifying someone as an employee is very expensive! For example, according to the Department of Industrial Relations:

California’s wage and hour laws (e.g., minimum wage, overtime, meal periods and rest breaks, etc.), workplace safety laws, and retaliation laws protect employees, but not independent contractors. Additionally, employees can go to state agencies such as the Labor Commissioner’s Office to seek enforcement of these laws, whereas independent contractors must resolve their disputes or enforce their rights under their contracts through other means.

Obviously then, the difference between being an employee and contractor is significant for California cannabis businesses, many of which are startups. But unfortunately, California has long presumed that persons providing services for another are employees unless designated as an independent contractor. This designation involves more than simply calling an agreement an “independent contractor agreement” instead of an “employment agreement.”

Simply classifying someone as a contractor to get around California’s long-standing presumption just won’t work. That’s because the two legal terms have distinct legal meanings.

  • An independent contractor is “any person who renders service for a specified recompense for a specified result, under the control of his principal as to the result of his work only and not as to the means by which such result is accomplished.”
  • An employee is a “person in the service of an employer under any appointment or contract of hire or apprenticeship, express or implied, oral or written, whether lawfully or unlawfully employed . . . .”

The big difference is whether the business has control not only over what the person does, but how they do it. Sometimes this can be a very close call and ultimately will be up to a judge, jury, or arbitrator to decide if things go south. But businesses that roll the dice can be risking some pretty substantial penalties.

Misclassification claims by California cannabis workers can be extreme

Some of the most common types of employment claims in California are based on and arise from employee misclassification. In these cases, workers with independent contractor agreements claim they were misclassified and are really employees. They seek compensation for all of the things they would have gotten (see above, for example) if they were properly classified. There can be penalties for each violation of between $5,000 and $25,000.

These kinds of claims are notoriously difficult for employers to shake and are very costly to defend, especially for uninsured businesses (and many cannabis businesses are still uninsured or underinsured, as our cannabis insurance lawyers will tell you). Moreover, misclassification cases can lead to high damages, penalties and reputational problems within the industry. What cannabis company wants to be on the cover page of every publication as the outfit that misclassified its cannabis workers?

Moreover, many cannabis startups rely on contractor labor that tends to be cheaper that hiring an employee workforce. These companies will be in for a rude awakening when lawsuits for wrongful misclassification emerge. And to make matters worse, the state attorney general can get involved. That’s why California cannabis businesses should seriously consider whether engaging a “contractor” is really worth the potential headache.

California goes back to the drawing board for classifying California workers

Prior to a few years ago, when courts were asked to evaluate whether a relationship was an employment or contractor relationship, they used the so-called Borello Test (I’ll write about that one later). That test involved analyzing a dozen or so factors to determine whether the contractor truly had the freedom to control how they performed their work. The Borello analysis was difficult and depended on hyper-specific facts that clever plaintiff lawyers would try to spin into liability.

In 2018, the California Supreme Court decided a case called Dynamex Operations West, Inc. v. Superior Court. In that case, the court created what’s now known as the so-called ABC Test to determine whether someone is an employee. That test was codified into state law via Assembly Bill 5 (AB-5) in 2019. The ABC Test allows a court to determine that a person is a contractor if that:

(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

(B) The person performs work that is outside the usual course of the hiring entity’s business.

(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

AB-5 puts the onus on the hiring entity to prove that all three of those elements are met. If all three elements are not met, then the hiring entity can face liability for misclassification, among other things. While the ABC Test is much shorter on paper than the Borello Test, it is very clear that many, if not most, of the contractor relationships in California should be classified as employment relationships.

Dynamex and AB-5 faced understandable backlash both from businesses and individuals. Individuals were concerned that they would be unable to enter into normal contracting relationships with businesses who would fear misclassification cases and simply decide not to engage outside contractors. These fears led to subsequent legislation and numerous exceptions to AB-5.

I will look at some of these exceptions in later posts and how they can affect California cannabis contractor agreements. In the meantime, stay tuned to the Canna Law Blog for more cannabis employment law updates.