October 7, 2019Client Alert

Cannabis Industry Employers must Comply with The FLSA

The Tenth Circuit Court of Appeals recently held employers in the cannabis industry are subject to the Fair Labor Standards Act (FLSA) even though their businesses are deemed illegal by the federal Controlled Substance Act (CSA). Therefore, the plaintiff could pursue overtime claims against his employer on behalf of himself and a class of similarly situated security guards. The Tenth Circuit covers Colorado, Kansas, New Mexico, Oklahoma, Utah, and Wyoming. But given the strength of the decision’s reasoning, employers in other circuits should heed the Tenth Circuit’s decision as guidance.

Let’s start with a short primer on the FLSA. The FLSA establishes minimum wage, overtime pay, recordkeeping, and youth employment standards affecting employees in the private sector and in Federal, State, and local governments. For example, it requires employers to pay non-exempt employees a minimum wage of $7.25 per hour and overtime at a rate of 1.5x the regular rate for hours worked in excess of 40 in a workweek unless. The law contains numerous exemptions, the most common being the professional, administrative, and executive exemptions. The law covers (1) enterprises with two or more employees that engage in interstate commerce and have an annual dollar volume of sales of business done of at least $500,000, (2) specific types of enterprises regardless of sales volume, and (3) individuals whose work affects interstate commerce. As such, only small, purely local businesses are outside the FLSA’s reach.

Now back to the case. The plaintiff’s employer provides security services for Colorado’s state-sanctioned cannabis industry. The plaintiff’s complaint alleges his employer misclassified his position as exempt, and thus failed to pay him overtime. The employer moved to dismiss the complaint, arguing the FLSA does not apply to cannabis workers because Colorado’s recreational marijuana industry violates the CSA.

The court flatly rejected this argument, citing longstanding precedent that employers are not excused from complying with federal law just because their business happens to be illegal under federal law—even Al Capone had to pay taxes. The court also rejected the employer’s argument that the CSA impliedly preempted the FLSA, noting one purpose of the FLSA is to “promote the health, efficiency, and general well-being of workers and to prevent unfair competition.” According to the court, application of the FLSA in federally prohibited industries evens the playing field between legal and illegal enterprises and benefits all workers.

Although the court held cannabis employers are not categorically excluded from complying with the FLSA, it did not address whether cannabis businesses are excused from complying with the Act if solely intrastate in nature. However, the fact that a state’s cannabis industry is authorized only within state lines may not be enough to render the FLSA inapplicable. “Affects interstate commerce” is broader than shipping product across state lines. For example, individual coverage extends to employees who call out of state, process out-of-state credit cards, and unload or purchase supplies from out of state. Whether the FLSA applies is fact-specific and will vary on a case-by-case basis. Regardless of its application, most states, including Colorado, and some local governments have their own wage and hour laws. Some provide the same or better protections. Employers must take care to comply with these laws as well.

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