Wage compliance

Colorado and Minnesota have stepped up penalties for employers violating wage-and-hour laws

Cannabis business owners have a lot to wrap their minds around. There are local regulations and guidelines regarding the cultivation and sale of marijuana; there’s the omnipresent shadow of the federal government; there are concerns about where to keep your money and how to pay your bills; and then there are marketing, branding, product sourcing, hiring, onboarding and team management issues to take up any “free time” you ever dreamed you might have when things “slowed down. So if you haven’t taken the time to make sure that your business is following the letter of the law when it comes to employment regulations and wage compliance, I don’t blame you.

But enforcement for employment laws has increased steadily for the past decade and, at least when it comes to employers in Colorado and Minnesota, the penalties for violating those laws are about to get a whole lot steeper.


Criminalizing wage violations

Wage-and-hour violations have been treated as “unclassified misdemeanors” since the Fair Labor Standards Act (FLSA) was passed in 1938, but Colorado Governor Jared Polis in May signed a bill categorizing such violations as “wage theft” — a criminal offense that can be treated as a felony and can even result in jail time. Less than two weeks later, Minnesota Governor Tim Walz signed a similar bill into law.

Beginning January 1, 2020, not only will Colorado employers be responsible for back wages, taxes, fines, fees, penalties and legal fees for both parties in wage violation cases ruled in favor of the plaintiff, but they’ll also have criminal records and potential incarceration to deal with. The same can be said of employers in Minnesota, whose law took effect August 1, 2019.

Although these are the first states to pass laws criminalizing wage violations, previous trends in employment law suggest that they may be just the first wage-and-hour dominos to fall, with other states likely to follow their lead in the near future (we’re looking at you, California).

But what does it mean to be wage-and-hour compliant? And how do you know if your cannabis business is at risk of an audit by one of the agencies that enforces wage-and-hour laws?


What Is Wage Compliance?

Being wage-and-hour compliant amounts to keeping in line with federal, state and local employment laws when paying your employees. At the federal level, this essentially amounts to making sure that your employees are classified correctly (independent contractor, exempt employee or non-exempt employee), that they are being paid at least minimum wage for their work, that they are being paid overtime when appropriate and that those overtime payments are being made correctly (the FLSA also has stipulations about child labor, but these won’t affect you as long as you aren’t hiring children to work at your cannabis business). Each state also has its own set of employment laws that local employers must follow, as do a number of cities and counties across the nation.

No government agency is going to watch over your shoulder to help you stay compliant, nor is there any sort of regular process you can undergo to ensure that you remain in compliance outside of performing regular self-audits. The Department of Labor and IRS will conduct the occasional random audit of a business, but that’s not something you can lean on to help your business get its wage act together — if you’re out of compliance when that happens, the result will not be in your favor.

Aside from random audits, wage-and-hour issues are usually brought to the attention of the Department of Labor or IRS when an employee files a complaint against your business saying they are owed back wages. Historically, about 1 in 10 businesses will face a wage-and-hour claim at some point, with the average settlement weighing in at about $7,000 per claimant. And the only way to come out of a wage case without a hefty financial burden is to ensure that your wage practices are squeaky clean from the start.


Common Mistakes

The vast majority of wage-and-hour violations occur because owners are working with incomplete or inaccurate information when it comes to employment law — not because they are actively trying to fool the government (or their own employees).

For instance, many business owners operate under the assumption that paying an employee on a salary basis automatically makes them exempt from overtime payments (it doesn’t), or that managers automatically fall under the “administrative” category of exempt employees (most don’t). In fact, exemption from the FLSA only applies to individuals that are paid a certain amount on salary (currently $455 per week or $23,660 per year federally) or on a fee or commission basis, AND who meet the specific exemption criteria outlined under the FLSA.

A misunderstanding of what qualifies a worker as an independent contractor rather than an employee also leads to numerous wage-and-hour claims each year. Generally, if an employee is performing tasks that are a standard part of the work your business does regularly (such as sales and customer service for dispensaries, tending to plants for growers, etc.) or that contributes directly to your business’ bottom line, that person is an employee, not an independent contractor.

Often, a failure to pay overtime properly will lead to a wage-and-hour claim by an employee or former employee. Overtime payments are required under the law when any non-exempt employee works more than 40 hours in a given workweek (or more than eight hours in a given day in California).

Still, some business owners mistakenly operate on the assumption that having a policy in their employee handbook stating that “unapproved overtime will not be paid” can prevent them from having to pay overtime, though this is not true.

In fact, even if your employees ask to be denied overtime payments, you are still legally obligated to pay them overtime when they exceed that legal benchmark of hours worked. Automatically clocking employees out before they finish their work, clocking them out for breaks whether or not they actually took the break or preventing employees from clocking in early can also cause employers to fall out of wage-and-hour compliance.


Staying Compliant

For starters, don’t call the Department of Labor or state enforcement agencies to express that you’re concerned about the state of your compliance. That’s one sure-fire way to send up a red flag indicating that your business should be added to the audit list.

The trick to making sure that your business stays on the right side of employment laws is to work with the right experts.

Although your payroll company may purport to offer sound human resources advice, most payroll companies explicitly state in their contracts that they are not responsible for the HR decisions made by your business. Further, courts have upheld that employers themselves are responsible for wage-and-hour compliance and that liability cannot be passed on to a third party.

The same can be said for some attorneys. If your attorney specializes in anything other than employment law, or their employment law specialty applies to any locality other than the one in which your business resides, it is generally not a good idea to accept their statements as the final word on the state of your business’ legal compliance.

Rather, the best thing to do is to work with an HR expert or employment attorney who specializes in the cannabis industry to evaluate the policies in your employee handbook to ensure that they are legally compliant and to verify that you have been executing those policies legally and consistently.

Most employers seem to have some sort of wage-and-hour issue on the books before they begin working with an HR expert to correct them, so a proactive approach to compliance is going to be your best bet.

A reactive approach to wage-and-hour compliance is akin to waiting for a lawsuit — or if you live in Colorado or Minnesota, a criminal charge to land in your lap.


Paul Edwards is the CEO and co-founder of CEDR HR Solutions, a leading provider of on-demand HR support for health care and wellness practices of all sizes and specialties across the United States. He is also the author of HR Base Camp, a blog and podcast channel, and has more than 25 years of experience as a manager and business owner. He specializes in training owners and managers to successfully handle employee issues and safely navigate the complex and ever-changing employment law landscape through his company’s customized employee handbooks and support center.

For more information on employee classification and wage compliance, check out CEDR’s free guide at cedrsolutions.com/healthcare/wage-compliance-guide.


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