WHAT IS AN NDA?

An NDA is a contract in which the person receiving the sensitive information (“Receiving Party”), usually a business partners, an employee, or a customer, agrees not to share that information with any other party without the prior written approval of the owner of this information (“Disclosing Party”).

Most states, including Oregon, have adopted a version of the Uniform Trade Secrets Act (“UTSA”). Under Oregon law, a trade secret is defined as

information, including a drawing, cost data, customer list, formula, pattern, compilation, program, device, method, technique or process that:
(a) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and
(b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

This means that to be legally protected, business information must be valuable and its owner must take reasonable steps to keep it secret. For example, informing new employees that confidential information will be shared in the course of their employment, specifically when requiring them to execute an NDA, should prove that reasonable efforts were made.

In addition, NDAs are enforceable provided they are “fair,” meaning the NDA is not overly restrictive or unduly burdensome on the Receiving Party.

WHAT PROVISIONS SHOULD BE IN AN NDA?

Whether an NDA is needed for business or employment purposes, an effective NDA should include the following provisions:

1. A clear definition of the confidential information that will be shared with the Receiving Party during the term of the agreement. Depending on the state law that governs the NDA, an overly broad definition could expose the Disclosing Party to legal actions and render the NDA unenforceable.
2. The reasons for which the sensitive information is shared with the Receiving Party.
3. Terms under which the sensitive information may be disclosed. Generally, confidential information may be disclosed to a third-party on a need-to-know basis, such as when required by law.
4. The consequences for disclosing the confidential information, which usually include large monetary fines and a court order preventing the breaching party from continuing to disclose the protected confidential information.
5. The length of time during which the Receiving Party must retain the information confidential. Ideally, the Receiving Party will be required to maintain the confidential information secret after their employment agreement terminates.

NDAs are a relatively inexpensive investment for companies given the protection they afford over valuable business information. Accordingly, any business, particularly those engaged in growing markets like Hemp-CBD, should consult with experienced business attorneys to help them prepare sound NDAs.

1. If the other side breaches this cannabis contract and we sue them, will they just claim that the contract is federally illegal to get off the hook, and if so, will the judge agree?
2. Does federal law apply to our cannabis business?

The answer to the first question is admittedly pretty tough. Our cannabis attorneys see parties put all kinds of things in contracts to try to avoid this problem—from acknowledgements of federal illegality, to waivers of the right to bring a case in federal court, to outright waivers of the illegality defense. Whether any clauses could make a difference in litigation is not clear, and depending on the jurisdiction, a court could theoretically agree that the contract is illegal and can’t be enforced, though we believe that’s unlikely to happen in any state court in a state with a commercial cannabis licensing system. After all, one would hope that a judge wouldn’t sympathize with a party who signed a contract, breached it, and then claimed the whole thing was illegal.

The answer to the second question is much easier: federal law almost certainly applies. A good rule is that if the federal government says that a business has to do something, they have to do it. On the other hand, when federal laws offer protections or benefits to normal businesses, those often don’t apply to cannabis companies (such as bankruptcy protection or certain tax deductions). Here are a series of examples:

• The Controlled Substances Act: Even though the federal government hasn’t really enforced the CSA against state-lawful operators in a few years, it actively enforces it against allegedly unlicensed operators. Theoretically, nothing is stopping the federal government from bringing charges against every licensed dispensary in the United States (with the exception of strictly medical operators as protected by the Rohrbacher Blumenauer amendment, as extended from time to time). In reality, it doesn’t look like the federal government will abandon its current policy of non-enforcement any time soon.
• Federal Trademark Laws: Thinking of using an established company’s trademarks on cannabis goods? Well, they might haul you into court under the federal trademark laws. A federal trademark registration offers the holder the right to seek certain remedies against unlawful users of that trademark (the “infringer”), regardless of whether the infringer was selling a legal or illegal good. Even businesses without federal trademark registrations can bring trademark actions against infringers.
• Federal Trade Secret Laws: If a cannabis company improperly acquires information, data, methods, or any other kind of secret from any other company, the cannabis company could be sued under the federal Defend Trade Secrets Act.
• Federal Environmental Laws: Cannabis companies that don’t comply with federal environmental laws risk being penalized or even criminally indicted.
• Federal Tax Laws: Yes, cannabis companies need to pay federal taxes, but unfortunately, thanks to Internal Revenue Code section 280E, they cannot take regular business deductions, so they end up paying taxes on their gross receipts less their allowed cost of goods sold.
• Federal Employment Laws: Thanks to the Tenth Circuit Court of Appeals (a federal appellate court based in Denver that is one step below the U.S. Supreme Court), we can now add compliance with the Fair Labor Standards Act (“FLSA”) to this list.

The case at issue is Kenney v. Helix TCS, Inc., which we’ve been following for about a year. As we explained previously:

Helix TCS, INC. (“Helix”) provides security services to cannabis businesses. Kenney, an employee of Helix, was classified as an exempt employee, meaning Helix did not pay him overtime pursuant to the requirements of the FLSA. Kenney brought suit against Helix claiming he was misclassified as exempt and should have been paid overtime.

Helix moved to dismiss the case, arguing that Kenney was not entitled to the protections of the FLSA because cannabis was entirely forbidden under the CSA. The district court denied the motion to dismiss but certified the ruling for immediate appeal to the Tenth Circuit Court of Appeals.

On Appeal, Helix contends that its employees are not entitled to the protections of the FLSA. Helix’s main argument is that all participants in state recreational marijuana industries assume the risk that their activities will subject them to federal criminal sanctions and therefore they are not entitled to benefits under federal law, and cannot expect federal court to aid their conduct. Essentially Helix is arguing that the federal government would be assisting employees in drug trafficking if they afforded the employees the protections of the FLSA.

On September 20, 2019, a three-judge panel of the Tenth Circuit issued a concise, 12-page opinion unanimously disagreeing with Helix and holding conclusively that the FLSA does apply to cannabis businesses. In one part of the Kenney opinion, the court noted that “case law has repeatedly confirmed that employers are not excused from complying with federal laws just because their business practices are federally prohibited.” After reviewing this law, the court held that “the FLSA is focused on regulating the activity of businesses, in part on behalf of the individual workers’ well-being, rather than regulating the legality of individual workers’ activities.” In conclusion, the court held that the FLSA does apply to cannabis companies and allowed the case to proceed.

There is an important note in the wake of the Kenney case: the case is only “binding” on jurisdictions within the Tenth Circuit, which are the District of Colorado, District of Kansas, District of New Mexico, Eastern District of Oklahoma, Northern District of Oklahoma, Western District of Oklahoma, District of Utah, and District of Wyoming. The decision will just be “persuasive” authority for federal courts elsewhere in the U.S., which means that they don’t necessarily need to be adhered to. Even though Kenney won’t be binding on federal courts outside the Tenth Circuit, we don’t see many courts departing from the Kenney rule.

You may be asking why this case is relevant to the illegality defense. The answer is simple—the court’s reasoning is broad enough to apply outside of the context of the FLSA. In other words, courts across the country could either cite the case persuasively outside the FLSA context, or just come to different conclusions based on the same reasoning. Even if federal legality doesn’t happen soon, we expect that the federal illegality defense will continue to weaken substantially over the next few years.

Just last month Washington enacted a new law that radically changes the landscape for non-compete agreements. The bill was signed into law by Governer Jay Inslee on May 8 and takes effect as of January 1, 2020.

Before getting into the substance of the new law, let’s address why you might want to make use of NCAs in your cannabis business. There are several reasons:

• Your employees have access to confidential, proprietary, or trade secret information. An enforceable NCA can prevent former employees from using such information in their next venture. (See here for a discussion on the use of cannabis non-disclosure agreements, here for a discussion on cannabis trade secrets, here for discussion on cannabis patents, and here for a discussion about cannabis trademarks).
• You may sell your company at some point in the future. Enforceable NCAs may enhance the value of your company by protecting key customer relationships. NCAs do this by preventing employees from leaving the company upon its sale and taking those customers and business relationships with them to a new venture.
• Your willingness to share company secrets and protect your investment in training. Training employees is expensive, so is the possibility that an employee may leave having learned key processes or information that they can use in a new venture. An enforceable NCA can mitigate this expense and risk and may enhance your willingness to share information with key employees leading to additional innovation or productivity.
• You set expectations for employees and the consequences for future litigation. Employees subject to an enforceable NCA are less likely to believe they can simply jump ship to a new company that competes in your industry. This is especially true where the NCA provides for injunctive relief and liquidated damages.
• You put competitors on notice. Competitors are less likely to hire a person subject to an NCA and must be careful not to interfere with the NCE less they find themselves in court on a claim of tortious interference with contract.

With that, lets take a look at the highlights of Washington’s new law, and its severe restrictions on the use of NCAs:

• The law defines a non-compete agreement as any written or oral agreement that prohibits an employee or independent contractor from “engaging in a lawful profession, trade, or business of any kind”;
• The law creates a rebuttable presumption that any NCA longer than 18 months is unreasonable and unenforceable. A party seeking a longer NCA must prove by clear and convincing evidence that a duration longer than 18 months is necessary to protect the party’s business or goodwill.
• It renders void and unenforceable an NCA against employees who earn less than $100,000 per year or $250,000 per year in the case of an independent contractor. (Seattle’s tech giants lobbied for this threshold as it would not apply to many of their employees).
• The employer must disclose the terms of the NCA in writing “no later” than the time of the acceptance of the offer of employment. So disclose the NCA when making the offer of employment, or earlier. If the agreement is entered into later, it must be supported by independent consideration.
• For employees who are terminated by a layoff, an NCA is not enforceable unless the employee is compensated for the period of enforcement minus compensation otherwise earned by the employee during the period of enforcement. These amounts are subject to an annual inflation adjustment.
• By definition, an NCA does not include (1) a nonsolicitation agreement with respect to employees or customers of the employer; (2) a confidentiality agreement; (3) a covenant prohibiting use or disclosure of trade secrets or inventions; (4) a covenant entered into by a person purchasing or selling the goodwill of a business or otherwise acquiring or disposing of an ownership interest; or (5) a covenant entered into by a franchisee when the franchise sale complies with applicable Washington law.
• Persons who believe they are subject to an NCA in violation of the new statute may bring a cause of action (or the Attorney General may). If a violation is found, the violator must pay the higher of actual damages or a statutory penalty of $5,000 plus attorney’s fees and related costs and expenses.

The law becomes effective as of January 1, 2020. But by its terms, it applies to all proceedings commenced on or after January 1, 2020, regardless of when the cause of action arose. This means that, to some extent, the law applies retroactively.

The retroactivity provision of the law is important. It means that cannabis employers who attempt to enforce an existing NCA that does not comply with the new law may be subject to penalties. Although this provision may be subject to certain constitutional challenges concerning the impairment of contracts, cannabis businesses should strongly consider revising any existing NCAs to comply with the new law, including complying with the provisions concerning new consideration.

Does all this mean that you shouldn’t bother with an NCA in the Washington? No, an NCA can remain a useful tool in the right situation. But it does mean that you need to be careful in drafting NCAs to ensure that your NCA complies with the new law. Otherwise you may find yourself paying statutory fines and plaintiff’s attorney’s fees.

I recently wrote about a case in the Tenth Circuit, Kenney v. Helix TCS, Inc., where the Court of Appeals is asked to decide if the Federal Labor Standards act (FLSA) provides wage and hour protection to employees of cannabis businesses. That case hasn’t seen much movement since I wrote about it, but its decision could have a significant impact on a case recently filed in Federal District Court in Oregon.

Michael Garity has filed a state and FLSA wage and hour claim against his former employer, WRD Investments LLC (“WRD Investments”). According to the complaint, Mr. Garity was hired by WRD Investments to provide expertise and labor in support of WRD Investments’ marijuana grow near Junction City, Oregon.

Mr. Garity alleges he was a “non-exempt” employee for WRD Investments. His status as a non-exempt employee would have required WRD Investments to pay Mr. Garity at least minimum wage for all hours worked and overtime rates for all hours worked over 40 hours per week. In the complaint, Mr. Garity alleges that between March 2016 through May 2017 he may have worked approximately 2500 hours without any compensation. He further alleges that he frequently worked over 40 hours per week without overtime pay.

Mr. Garity’s complaints do not stop there. Mr. Garity also alleges that WRD Investments failed to provide him with itemized statement of pay and failed to establishe regular pay days in violation of Oregon laws. The Complaint also states Mr. Garity incurred expenses on behalf of WRD Investments such as using his personal vehicle to conduct WRD Investment business without reimbursement from WRD Investments.

Mr. Garity’s complaint requests actual damages for unpaid minimum wage and overtime compensation plus an equal amount as liquidated damages and reimbursement for business related expenses, penalty wages under Oregon wage and hour laws, and attorney fees and costs. Mr. Garity’s complaint does not lay out a number, but based on my calculations WRD Investments could be on the hook for around $40,000 related to the FLSA claims alone. Should this matter proceed far into litigation, WRD Investments could also be on the hook for attorney fees which could eventually surpass the $40,000 number.

The Kenney case mentioned at the beginning of this post may have significant impact on Mr. Garity’s claims. Mr. Garity’s case is filed in a Ninth Circuit district court and nothing binds a Ninth Circuit court to follow a decision from the Tenth Circuit. However, the Ninth Circuit district court could be persuaded by the Tenth Circuit Court of Appeals decision and decide to follow its precedent. Alternatively, it could choose to ignore the precedent and decide to create its own path. Either way, it will be very interesting to see the legal arguments that are made in Mr. Garity’s case regarding whether the FLSA protects marijuana employees.

Regardless, a good lesson can be gleaned from Mr. Garity’s complaint. First, be sure you are properly classifying your employees as exempt or non-exempt. Second, and perhaps even more importantly, ensure that you are properly paying your employees. If you are ever concerned you are in violation of wage and hour laws, its always a good idea to have a cannabis employment law attorney review your payment procedures. It may cost some money up front but will likely save you much, much more in the long run.

Back in 2017, the Oregon Senator Floyd Prozanski introduced Senate Bill 301. The bill would have protected employee off-work marijuana use—meaning employers could not terminate an employee for using marijuana outside of working hours, so long as it did not lead to on-the-job impairment. The bill faced opposition from industry groups related to worksite safety and federal law. Accordingly, the bill was amended to protect only off-work use by medical marijuana card holders, but this was still not enough to secure passage.

Never one to be stopped by a little failure, Senator Prozanski is back at it and has proposed a new bill, Legislative Concept 2152. The proposed bill is short and sweet. The relevant portion simply states:

It is an unlawful employment practice for any employer to require, as a condition of employment, that an employee or prospective employee refrain from using a substance that is lawful to use under the laws of this state during nonworking hours except when the restriction relates to a bona fide occupational qualification or the performance of work while impaired.”

However, it seems Senator Prozanski may not have learned any lessons from the 2017 session. The proposed bill does little to address industry concerns related to federal government contractors. Businesses that contract with or receive grants from the federal government are required to comply with the federal Drug-Free Workplace Act. As long as “marijuana” remains a federally controlled substance, these businesses must ensure their employees are drug-free to continue to contract with or receive grants from the federal government. If the Oregon employer does not comply with the federal Drug-Free Workplace Act, they cannot receive the contract or grant. However, if they terminate an employee for off-work marijuana use they would violate the proposed legislation.

Proponents of the proposed bill have stated the bill would not allow employees to use marijuana if a collective bargaining agreement prohibited it. However, a quick glance at the bill demonstrates that it does not clearly address that issue, and seems to continue to ignore the Drug-Free Workplace Act requirements altogether.

Many other states have managed to pass laws that protect employees’ off-work use of marijuana. A careful review of other state laws demonstrates that they specifically address the federal concerns. For example, Arizona’s statute protecting off-work medical marijuana use provides:

Unless a failure to do so would cause an employer to lose a monetary or licensing related benefit under federal law or regulations, an employer may not discriminate against a person in hiring, termination, or imposing any term or condition of employment…based upon…the person’s status as a card holder.”

Legislative concepts are a “draft of an idea for legislation.”  Perhaps there is still time for Senator Prozanski to draft a robust bill that addresses the concerns of businesses that rely on federal contracts and grants, and perhaps 2019 truly will become the year employee off-work use of marijuana is protected in Oregon. Stay tuned.

In MedMen’s case, two former employees, Chelsea Medlock and Anthony Torres, allege that MedMen failed to pay them for all hours worked, failed to pay overtime wages, failed to provide mandatory meal and rest breaks, and failed to keep accurate records of employees hours worked. Medlock and Torres worsened the blow by bringing the lawsuit as a class action on behalf of all MedMen employees (current and former) from the last four years. If the class is “certified” by the Superior Court of the State of California, where it was filed, the class of plaintiffs could include thousands of employees.

Specifically, Medlock and Torres allege MedMen required them to perform work “off-the-clock” for which they received no pay. Medlock and Torres are seeking minimum wage, liquidated damages, interest and attorney fees for the unpaid time. Although Medlock and Torres have not made specific allegations in the complaint, Starbucks was recently ordered to pay an employee $102.67 for the time the employee spent locking up the store and setting alarms, without compensation. While this amount may seem small, if Medlock and Torres get their class certified, MedMen could be paying out a similar amount or something much greater, to thousands of employees.

Medlock and Torres also allege in their lawsuit that MedMen failed to pay employees required overtime wages. In California, employers must pay overtime rates to non-exempt employees who work in excess of eight hours per day. Medlock and Torres also allege they either were not provided the required meal and rest periods, or were not paid for the meal periods they had to work during. Medlock and Torres have not identified specific dates these alleged violations occurred, but if done over a significant period of time, the back wages and penalities owed will add up quickly.

In addition to their claims relating to their wages, the plaintiffs allege they were not provided accurate wage and hour statements as required by the California Labor Code and failed to provide accurate payroll records. Failure to provide accurate wage and hour statements can result in a penalty of up to $4,000 per employee.

Finally, Medlock and Torres allege that MedMen failed to timely issue final paychecks. Failure to issue final paychecks can result in penalty wages of up to thirty days of pay at the employee regular rate of pay.

In short, Medlock and Torres’s claims are numerous and serious. If they have merit, MedMen will have to pay pack wages and may be hit with treble damages, attorney fees, and interest. Of more important, if the class is certified, MedMen will have to pay those types of damages to potentially every employee they employed in California over the last four years.

Cannabis companies are growing. With growing businesses come more employees. More employees means a higher chance of litigation. For these reasons, if you are ever unsure whether your employment practices are compliant with state and federal law, it is best to have a cannabis employment attorney evaluate and provide advice. You may be able to stave off litigation, or, if you are hit with a lawsuit, you’ll have procedures in place to adequately fight it before it gets too far.

If you are an OLCC licensed cannabis business with employees, Harris Bricken employment lawyer Megan Vaniman will present a free webinar tomorrow, December 12, 2018 at 12pm PST to help you better understand these issues. Throughout the presentation, Megan will discuss how to navigate employment law for cannabis businesses, and provide you with tips and tricks to ensure compliance. Topics Include:

• What to consider when hiring
• Oregon’s sick leave requirements
• Oregon and Portland’s “ban-the-box” ordinance
• Final pay checks
• Independent Contractor vs Employee designation

Moderated by Harris Bricken cannabis attorney Vince Sliwoski, Megan will also address audience questions throughout the presentation. Please register by clicking here. For any additional questions regarding the webinar, please contact firm@harrisbricken.com. We hope you can join us!

In 2010, while already employed by Charter Communications, LLC, Lance Carlson was issued a medical marijuana card under Montana Medical Marijuana Act to treat chronic low back and stomach pain. The medical marijuana card allowed Mr. Carlson to legally use marijuana to treat the conditions. In 2016, Mr. Carlson was involved in a work-related motor-vehicle accident. A urinalysis that followed the accident tested positive for THC. Mr. Carlson was promptly terminated as a result of the drug test.

Mr. Carlson initially brought suit against his former employer in Montana state court, alleging the former employer had wrongfully terminated him in violation of the Discrimination Under the Montana Human Rights Act— specifically, that his employer had discriminated against him because of a disability. The case was removed to Federal District Court. Charter Communications quickly moved for a motion to dismiss arguing that the Montana Marijuana Act allowed them to terminate Mr. Carlson for his medical marijuana use. Mr. Carlson appealed the decision to the Ninth Circuit.

The Ninth Circuit, in an unpublished opinion, upheld the district court’s dismissal. The Ninth Circuit specifically relied on the carve-out of Montana’s medical marijuana act that states employers are allowed to prohibit employees from using marijuana. Mr. Carlson challenged that exact regulation as unconstitutional. However, the Ninth Circuit determined it was constitutional because it was “rationally related to Montana’s legitimate state interest in providing careful regulation of access to an otherwise illegal substance for the limited use by persons for whom there is little or no other effective alternative…”

Given the general trend for acceptance of marijuana, the Ninth Circuit decision is disappointing, even though it is unpublished and therefore sets no legal precedent. However, the problem does not generally lie with the Ninth Circuit, but instead with Montana’s state law. Now is the time to lobby Montana officials to have the Montana Medical Marijuana Act revised to protect employee’s off-work medical marijuana use.

Montana is not alone in allowing employers to terminate employee for their legal off-work use of marijuana. Oregon, similarly, has a statute that does not require employers to accommodate employees’ off-work use of medical marijuana. Way back in 2010, the Oregon Supreme Court ruled that the statute prohibiting disability discrimination in employment does not protect medical marijuana users. Washington’s laws do not require employers to accommodate employee’s medical marijuana use either. Colorado, another state on the forefront of adult use legalization, still allows employers to terminate employees for medical marijuana use, too.

While Oregon and California have struggled to pass legislation protecting employee’s off-work medical marijuana use, other states have managed. These laws typically create a carve-out for employers who contract with the federal government and therefore are required to have a drug-free workplace. Federal legislators also have recently introduced legislation  to protect off-work marijuana use. Currently the bipartisan bill is stalled in the Oversight and Government Reform Committee.

I suspect eventually the states discussed in this blog post will catch up with the changing of the times, but until then, be aware that many states allow employers to terminate employees for their legal use of marijuana—medical or otherwise.

Editor’s Note: This blog post first ran on December 6. We are re-publishing it here because a platform glitch erased the initial publication.

Many cannabis companies may try another route to protect their confidential business information and get employees to stick around through “non-solicitation agreements.” Non-solicitation agreements are not as restrictive as non-competition agreements and generally are not prohibited by California law. Non-solicitation agreements typically prohibit employees from taking any actions that will cause any employee, customer, or vendor of the employer to change its relationship with the employer. California courts will carefully scrutinize non-solicitation agreements to ensure they are not overly broad and therefore crossing the line from non-solicitation into non-competition. A recent case from the California Court of Appeals demonstrates that the courts are continuing this tradition and carefully examining non-solicitation agreements and only enforcing them if they are true non-solicitation agreements.

In AMN Healthcare Inc v. Aya Healthcare Services Inc, AMN Healthcare required employees to sign a non-solicitation agreement preventing them from soliciting other employees of AMN Healthcare, to leave the service of AMN Healthcare. AMN Healthcare required a recruiter it hired to sign the non-solicitation agreement. The recruiter then went to work for Aya Healthcare, which practiced in the same field as AMN Healthcare. The recruiter, pursuant to the non-solicitation agreement was not allowed to recruit employees from AMN Healthcare. Litigation ensued.

The Court of Appeals determined the broad language of AMN Healthcare’s non-solicitation agreement violated California’s Business and Professions code because it restricted the employee’s ability to freely engage in a lawful profession or trade. Specifically, the recruiter could not freely recruit from AMN Healthcare, her exact professional requirements. While the Court of Appeals decision turned on the recruiter’s specific issue, the Court went further and noted AMN Healthcare primarily employed travel nurses for a period of 13 weeks or less. The AMN Healthcare non-solicitation agreement was to be in effect for at least one year following the end of the employment relationship. The Court found this to be overly restrictive given that most of the nurses were employed for such a short period. Overall, the court determined the non-solicitation agreements ANM Healthcare required employees to sign were unenforceable.

What does this mean for your cannabis company? Non-solicitation agreements can be useful tools to help protect confidential information and protect employees from jumping ship. However, they need to be carefully crafted to be enforceable. There is little point in requiring employees to sign an unenforceable non-solicitation agreement. More importantly, non-solicitation agreements need to be carefully drafted to ensure they are not actually non-competition agreements that could violate the Business and Professions Code, and subject your cannabis company to criminal sanctions. If you are interested in a non-solicitation agreement, it is always best to consult a cannabis employment attorney to draft a strong one that will protect your interests.

As we all know, cannabis remains a federally controlled substance, and therefore illegal at the federal level. However, most states have some form of legalization. I have always advised my cannabis business clients to comply with both state and federal laws when it comes to employment laws. It seems to be the safest bet to ensure cannabis companies are not sued by employees for violating federal laws, and it seems to be the smart move in terms of keeps the feds out of their state legalized cannabis businesses.

Recently, a lawsuit arose in the Tenth Circuit challenging whether the Federal Labor Standards Act (FLSA) was meant to provide wage and hour protection to employees of cannabis businesses. In Kenney v. Helix TCS, Inc., the Tenth Circuit will decide whether the FLSA applies to such businesses. The FLSA sets federal wage and hour requirements and sets the standards for when employers must pay employees overtime wages.

In the litigation at issue, Helix TCS, INC. (“Helix”) provides security services to cannabis businesses. Kenney, an employee of Helix, was classified as an exempt employee, meaning Helix did not pay him overtime pursuant to the requirements of the FLSA. Kenney brought suit against Helix claiming he was misclassified as exempt and should have been paid overtime.

Helix moved to dismiss the case, arguing that Kenney was not entitled to the protections of the FLSA because cannabis was entirely forbidden under the CSA. The district court denied the motion to dismiss but certified the ruling for immediate appeal to the Tenth Circuit Court of Appeals.

On Appeal, Helix contends that its employees are not entitled to the protections of the FLSA. Helix’s main argument is that all participants in state recreational marijuana industries assume the risk that their activities will subject them to federal criminal sanctions and therefore they are not entitled to benefits under federal law, and cannot expect federal court to aid their conduct. Essentially Helix is arguing that the federal government would be assisting employees in drug trafficking if they afforded the employees the protections of the FLSA.

It remains to be seen whether the Tenth Circuit will buy Helix’s argument (and whether any of Helix’s remaining employees will want to stick around, for that matter). Helix clearly has the means to fight Kenney’s allegations. Perhaps Helix’s costs will increase substantially if they must pay all security guards overtime and litigation makes sense for them. However, litigation is extremely expensive, and Helix will have to balance those two issues as it proceeds.

In the meantime, best practices are to ensure your cannabis business is paying employees correctly under both state and federal wage and hour laws. If you pay your employees what they deserve, that alone may save you from a lawsuit. That sounds much better than fighting a wage and hour claim through the federal court of appeals.