Downsizing with decency: A legal guide to layoffs

Several major companies have recently cut back their workforces

Cannabis capital markets appear to be drying up. Headlines once dominated by successful capital raises and expensive strategic acquisitions are now consumed with reports of an apparent crash, involving dwindling stock prices, unrealistic revenue targets, deals falling apart and mass layoffs.

The California-based cannabis retail behemoth MedMen Enterprises Inc. (OTC:MMNFF) recently terminated its highly anticipated acquisition of PharmaCann (except for aspects of PharmaCann’s Illinois business) and further announced that it would lay off 190 workers amid a massive corporate restructuring that includes selling off “non-core” real estate assets and minority positions in various cannabis brands.

Eaze, the delivery technology platform that operates in California and Oregon, was once lauded for raising more than $100 million and projecting more than $1 billion in cannabis transaction values, but scaled back its projections by 50% last summer. The company later announced that it would terminate 20% of its staff and replace its CEO.

In November, California cultivator and distributor Flow Kana, previously celebrated for its successful $125 million financing, announced it would lay off 20% of its workforce.

And shortly after U.S.-based New Frontier Data’s acquisition of the Canadian publishing platform Civilized Worldwide, New Frontier announced in early December that it would “temporarily” lay off the online cannabis news site’s entire workforce and halt day-to-day operations.

Instituting a layoff and deciding who to terminate are steps employers typically loath to make. And downsizing often precipitates labor and employment disputes. Here are considerations that may help cannabis operators avoid legal exposure when downsizing.

– Before letting anyone go, management should consider cost-saving alternatives, such as an across-the-board salary reduction, reduced hours, reassignments or a voluntary resignation program. If there is no alternative, it is important to have a legitimate, non-discriminatory and well-documented business reason for each termination.

It is generally illegal under federal and some states’ laws to discriminate or make any adverse employment decision, including termination, on the basis of race, national origin, disability, genetic information or sex (including pregnancy, gender identity and sexual orientation). Implementing a “hiring freeze” first may signal a non-discriminatory purpose for a pending termination.

– Confer with counsel and know your duty to “WARN” of a pending layoff or plant closing. The federal government, through the Worker Adjustment and Retraining Notification Act, requires employers with 100 employees or more to provide at least 60 days advance notice of layoffs involving 50 or more employees (subject to certain exceptions for unforeseen business circumstances, faltering companies or natural disasters). Some states (including California, Illinois, New Jersey and New York) have their own WARN statutes.

– Review all pertinent documentation, including employment incentive plans (stock option agreements), employment contracts and collective bargaining agreements. Some of these documents may limit management’s ability to implement layoffs or specify layoff procedures. Others may contain provisions for final payments, including severance, acceleration of stock, commissions and unpaid vacation days.

– Protect company assets and intellectual property. Be sure to remind employees of their obligations to return company equipment and confidential information and of any obligations regarding non-competition or non-solicitation of clients, customers or other assets.

– If laying off any particular group of employees, create subjective criteria for selecting which groups and be sure that the responsible managers received training to avoid discrimination. Such criteria may include a particular department, location or redundant positions. Always document the reasoning underlying these selections and, once decisions are made, conduct a well-documented adverse-impact analysis to make sure that: (a) such decisions are consistent with layoff/termination goals; and (b) no individuals are disproportionately impacted.

– Evaluate the potential for retaliation claims. Does anyone being terminated have a pre-existing legal claim (such as unpaid bonuses, commissions or overtime), protected leave of absence (such as disability or pregnancy) or other complaint (discrimination, harassment, whistleblower)? With the likelihood of claims in mind, employers should consider offering severance (or additional severance, apart from that which was already agreed), in exchange for a release of all claims.

– Consider the impact on benefits plans. For instance, some health plans will terminate altogether when there is a significant employment loss that affects 20% or more of the participating employees.

The last thing any cannabis operator needs when terminating employees is a discrimination or breach of contract lawsuit or retaliation by a disgruntled former employee. A protective and equitable pre-emptive defense strategy is indispensable.

 

Lauren Rudick represents investors and startup organizations in all aspects of business and intellectual property law, specializing in cannabis, media and technology. Her law firm, Hiller, PC (www.hillerpc.com), is a boutique, full-service firm with a track record for success in various practice areas including cannabis law, land use and zoning, disability insurance law and business and corporate law.

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