10th Circ. Cannabis Ruling Follows Federal Regulation Trend

This article was originally published in Law360 on September 24, 2019.

Cannabis companies must follow federal wage and hour law, according to the U.S. Court of Appeals for the 10th Circuit. In Kenney v. Helix TCS,¹ the court ruled that the federal Fair Labor Standards Act applies to workers employed by a business whose operations simultaneously violate the federal Controlled Substances Act. Yes, a business that is illegal under federal law must pay its workers consistently with federal law.

The result sounds surprising, but, it is somewhat predicable given the FLSA’s purpose of protecting workers. More broadly, it serves as a reminder that businesses in the cannabis industry generally face at least the same legal risks as those not in the industry.

Here are a few key takeaways in reading between the lines of the 10th Circuit’s ruling in Kenney v. Helix TCS that cannabis employers are not excused from federal wage and hour law because of their other federal violations.

A Straightforward Approach Applying Federal Law to Cannabis

While the CSA outlaws cannabis business activities, the 10th Circuit’s decision that the FLSA applies is in line with a trend of growing federal regulation.

The Kenney case is a collective action brought by cannabis company security guards in Colorado alleging that they were misclassified as exempt and not paid overtime. The employer argued that the FLSA did not cover its employees, because the employees were engaged in work with cannabis, which is classified as an illegal substance in violation of the CSA. More simply, the employer claimed that because it was illegal under federal law to begin with, it did not have to pay its employees overtime consistent with federal law. The Colorado district court and the three-judge panel of 10th Circuit disagreed, finding that the FLSA does apply.

The 10th Circuit looked to “marijuana’s history as a legal industry” in emphasizing that before the “enactment of the CSA in 1970, the FLSA unquestionably” covered marijuana workers. “Congress has actually amended the FLSA many times since the enactment of the CSA without excluding employees working in the marijuana industry, despite specifically exempting other categories of workers.”

The 10th Circuit applied the FLSA after determining that the “plain reading and the overall purposes ... does not require disavowal of the CSA.” It found that applying wage law to illegal businesses furthers the purpose of both statutes by not exempting illicit markets from compliance costs imposed on lawful businesses.

In applying this straightforward analytical framework, the 10th Circuit cited to FLSA coverage in other contexts illegal under federal law: workers in an “illegal gambling operation” in violation federal anti-gambling statutes; and regardless of a worker’s immigration status under the Immigration Reform and Control Act of 1986.

On the flip side, the 10th Circuit analogized the employer’s argument that the FLSA should not apply to a “legal theory as flawed today as it was in 1931 when jurors convicted Al Capone of failing to pay taxes on illicit income.”

The Continuing Extension of Federal Regulation to Cannabis Activities

The analytical framework that the 10th Circuit used may extend to other disputes concerning whether and to what extent federal law that predates the CSA applies to the cannabis industry.

Many areas of federal law already extend to the cannabis industry.

Bankruptcy

In May 2019, the U.S. Court of Appeals for the 9th Circuit held in Garvin v. Cook Investments NW² that a landlord receiving rent from someone involved in the state-legal cannabis industry was able to confirm a plan of reorganization under Chapter 11 of the federal Bankruptcy Code, because receiving rent from a cannabis business does not violate the Bankruptcy Code’s prohibition on plans proposed “by any means forbidden by law.”

Trademark

The United States Patent and Trademark Office had long refused to issue registrations for trademarks used in connection with cannabis and cannabis-related goods and services because of illegality under federal law. However, the 2018 federal Farm Bill reclassified some “cannabis-derived” substances (e.g., hemp and derivatives of hemp including CBD) to remove them from the list of controlled substances, therefore making them lawful under the CSA. As a result, in May 2019, the USPTO revised how trademark applications for goods and services related to these declassified substances are reviewed, and will now register marks for these goods and services.

Patent

New plant varieties are subject to protection under the Plant Variety Protection Act. In addition, the USPTO can provide additional protection viaplant patents under the Plant Patent Act or utility patents under the Patent Act. And, the FDA approved Epidiolex in June 2019, a drug that contains a cannabis-derived active ingredient, potentially paving the way for more medical development and patents.

Tax

The 10th Circuit in Alpenglow Botanicals LLC v. United States of America³ weighed in on federal tax law applicability to cannabis businesses, in holding that a criminal conviction is not a prerequisite for the IRS to apply Internal Revenue Code Section 280E’s prohibition on deductions for businesses violating the CSA by trafficking in control substances.

Impacts and Takeaways of the FLSA Protecting Cannabis Employees

The Kenney decision may have several immediate and long-term impacts.

Without a doubt, federal courts across the country may look to the Kenney decision as a federal court of appeal adding to the trend of extending federal law to the cannabis industry in ways that coexist with the CSA.

For instance, Title VII — the federal law that protects employees against discrimination and harassment — may be next to apply to employees of legal cannabis businesses, to the extent it coexists with the CSA. The trend towards federal regulation may be used in a variety of procedural and substantive ways in federal court litigation across the county to undercut arguments hinging on a violation of the CSA.

More regulation inherently brings more legal risk. Compliance with the FLSA is no different. Absent review by the U.S. Supreme Court, employers engaged in state-licensed cannabis activities in the 10th Circuit states that have legalized medical and/or recreational cannabis — e.g., Colorado, New Mexico, Oklahoma, and Utah — must comply with the FLSA. Employers outside the 10th Circuit should also comply.

The FLSA⁴ regulates more than just overtime; it also regulates minimum wage, hours worked, recordkeeping and employment of children. It also prohibits an employer from retaliating against an employee for complaining about any of these requirements. The Department of Labor may become more active on the enforcement front as well.

The FLSA does not preempt state wage and hour law. This limits the impact of the Kenney ruling on employees of cannabis businesses in states like California, New York, Massachusetts, Washington and Oregon, where the state wage and hour protections are more employee-friendly.

The most lasting impact of the Kenney ruling may be on the legal cannabis industry itself. The 10th Circuit echoed this in finding that applying the FLSA prevents the “unlawful businesses from procuring an unfair advantage over all other legitimate employers who are required to comply with federal overtime laws.”

The bottom line is that, ultimately, regulation levels the playing field, by incentivizing all in the legal cannabis industry to comply with a common minimum standard, in this case, set by the FLSA.

FOOTNOTES

1 Kenney v. Helix TCS

2 Garvin v. Cook Investments NW

3 Alpenglow Botanicals LLC v. United States of America

4 https://www.dol.gov/whd/flsa/

This advisory is a publication of Davis Wright Tremaine LLP. Our purpose in publishing this advisory is to inform our clients and friends of recent legal developments. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations. Manufacturing, cultivation, distribution and possession of cannabis remains illegal under federal law and under certain state laws, and is strictly regulated in those states which have legalized medical or recreational cannabis.