Author: Frank Bertino for Higher Growth Search 

Joe Madigan is CEO of Higher Growth Search, a cannabis recruiting and consulting firm working with companies at all stages of development. In addition to helping cannabis employers hire strong candidates for roles across the organization, Higher Growth Search is committed to providing guidance and support to help clients grow their businesses.

In this article, Madigan answers a few questions about the complexities of running a cannabis operation in a highly regulated industry with evolving compliance and legal requirements.

Has compliance always been an issue in cannabis?

Early on, we saw organizations running out the gate getting business licenses, state licenses, local licenses – but then trying to figure out how they were going to pay people.

All of a sudden, their businesses were growing and rapidly expanding, and they wanted to expand with the market, but their compliance programs were really falling behind, specifically in payroll, healthcare, workplace safety, and the finance and accounting function. Any missteps in those areas can come at an extremely high cost.

How bad can fines and violations get?

In any of those areas, you’re talking litigation, you’re talking lawsuits, you’re talking class-action lawsuits, which can spiral really quickly if the company’s not on top of it. Operators are usually worried about seed to sale. They’re worried about distribution. They’re not necessarily worried about tracking whether or not John took his 15-minute meal break.

For example, if they have 50 Johns who didn’t take the 15-minute meal break (in California) and all of a sudden the 50 Johns get a good wage-and-hour attorney, well, that can very quickly turn into a good class-action lawsuit – which they can’t really afford.

What are the three main issues regarding compliance, and what do companies need to be aware of?

1. First is basic HR compliance. Does the company have an actual Human Resources Department? Are they compliant with employment laws? Are they following the standards of their license and the law as relates to the cannabis industry? Getting squared away with an HR expert who understands current local and federal requirements is critical for a growing company.
2. From our experience, cannabis organizations need to really focus on OSHA compliance (Occupational Safety and Health Administration). They need to look at how their facilities are set up. If they’ve invested a lot of money in their facilities, do they have a safety and risk manager on site? Are they prepared to assess and maintain a safe and compliant workplace? Cannabis organizations operate under maximum scrutiny and can’t afford mishaps related to worker safety.
3. It’s also critical for cannabis owners to build a strong finance and accounting team that comes with compliance expertise. Even if that team is one person, they should have demonstrated knowledge of the industry’s complex tax, reporting, and regulatory requirements. In cannabis, financial oversight is often an afterthought and the financial function is left to an inexperienced person. But those companies that invest in a highly qualified individual likely will be ahead in the end, as noncompliance, or even simple mistakes, can be extremely costly and legally risky.

How does Higher Growth Search help companies be compliant?

We not only help companies hire the right people, but we also guide them through various compliance processes so they understand what’s required. We help organizations with worksite risk and safety and with any of the compliance issues around filings and finance and accounting. We can do some of the more nuanced processes that are really going to keep clients safe, but that doesn’t guarantee the solutions are 100% risk free. Ultimately it’s up to each business to implement and stay on top of their programs.

I think the most important piece is that we got into this business to help cannabis organizations mature and grow. We’re always here to pull our resources together and help emerging and more established companies – and the industry as a whole – really fully blossom.

Need help tackling compliance or business growth issues at your organization? Contact the experts at Higher Growth Search today. We’re here to help.

Cannabis employers must meet numerous regulations across the organization, and making sure employees are properly classified doesn’t always rise to the top of the list. But employee classification is extremely important and affects how you pay your crew.  

Employers often ask our cannabis-focused recruiting and consulting firm Higher Growth Search whether they should classify employees as W-2 workers or independent contractors. And the reason is this:  

• If you have W-2 workers, you pay payroll and other taxes.  
• If you have independent contractors, you don’t pay all of those taxes. 

You can see the allure of classifying people as contractors. 

Important to know: Despite any classification agreement you have with someone who provides work for you, the courts, IRS, and state agencies have the final say as to whether you can designate the individual as an independent contractor.

The penalties of misclassifying W-2 employees as independent contractors, interns, or volunteers can include time-consuming legal action, IRS fees, and substantial fines that might derail your entire enterprise. 

​This Justworks article helps illuminate the issue: 

If the IRS suspects fraud or intentional misconduct, it can impose additional fines and penalties. For instance, the employer could be subjected to penalties that include 20% of all of the wages paid, plus 100% of the FICA taxes, both the employee’s and the employer’s share. 

Criminal penalties of up to $1,000 per misclassified worker and one year in prison can be imposed as well. In addition, the person responsible for withholding taxes could also be held personally liable for any uncollected tax. 

Who Is a W-2 Employee?  

W-2 employees are essentially your “in-house” team. These individuals work directly for the company, are salaried and listed on payroll, and are entitled to benefits like vacation time, health insurance, and a retirement plan. W-2 employees are granted specific legal protections not usually extended to independent contractors. As a W-2 employer, it’s your responsibility to withhold Social Security and Medicare taxes, provide all necessary tools and equipment, and pay payroll taxes.  

In short, a W-2 employee: 

• Works for the company. 
• Is upheld to the standards of the business. 
• Is required by law to at least make minimum wage as their rate of pay, which may vary per state laws. 

The employer of W-2 employees: 

• Is responsible for withholding Social Security and Medicare taxes. 
• Must pay employer payroll taxes. 
• Must provide all necessary tools and supplies. 
• Must reimburse employees for all business expenses incurred during employment. 

Who Is an Independent Contractor? 

As the name implies, independent contractors have, well, a good deal more independence. They bring specialized skills to the workplace without the company having to worry about payroll taxes, labor laws, or employment laws. They provide their own equipment and determine, through a contract agreement, how, when, and where they will provide their services.  

Employers have very little oversight of independent contractors and may only hold them accountable to the services listed on the contract. For tax purposes, independent contractors fill out an IRS Form 1099 MISC instead of a W-2, making them personally responsible for paying the applicable taxes on their income, rather than their employer. 

In short, an independent contractor: 

• Fills out a 1099 for tax purposes, not a W-2. 
• Takes on all tax liability (the employer/company is not responsible for withholding any payroll taxes). 
• Works for themself but provides services to a company on a contractual basis. 
• Signs an agreed-upon contract with the company (outlining the rate of pay, hours of work allotted to the client, defined length of the agreement, and the expectations of the services provided by the contractor). 
• Must provide their own tools and supplies necessary to perform their services. There are no reimbursements for these business expenses by the company unless established in the contract. 
• Is not eligible for employee benefits through a company and must take on all profit or loss risks without any liability to the employer. 

Learn Your Local (and National) Labor Laws 

Labor laws can vary state by state, but proper classification of employees and independent contractors is a universal concern for all cannabis businesses, no matter where they operate. We recommend studying the specific laws pertaining to your city, county, and state – and always erring on the side of caution.  

A good rule to remember is that city regulations supersede county regulations, and county regulations supersede state regulations. 

Staying current with cannabis regulations is essential, as local laws, ballot initiatives, and industry-wide rules change frequently. For example, ongoing discussion about employee classification will have a significant impact on California and the gig economy at large.  

IRS Publication 15-A Employer’s Supplemental Tax Guide, Page 6, provides more details. As always, it’s suggested that you consult with a tax or legal expert for clarification on your specific situation.  

Need help hiring full-time or senior-level candidates? Contact the direct hire and executive search experts at Higher Growth Search today. We’re here to help.