California marijuana packaging and labeling
What are the packaging and labeling requirements for new marijuana products?

California is just starting to get its cannabis packaging and labeling regulations right under MAUCRSA. The state has a mandated transition period from January 1 to July 1, 2018, during which time adult use and medical marijuana licensees can do business with each other, and temporary and annual state licensees can transport and sell cannabis products already in their possession in the newly regulated market. This means there are two packaging and labeling standards during this transition period: one for products that licensees bring into the marketplace from before January 1, 2018 and another for products cultivated or made on or after January 1, 2018. I covered transition period product packaging and labeling in a previous post. This post will cover the packaging and labeling requirements for those products made or cultivated on or after January 1, 2018 (collectively, “New Products”).

Retailers

For New Products, retailers won’t package or label anything. Instead, all New Products will come to retailers already packaged and labeled by either cultivators, processors, manufacturers, or distributors. The only packaging requirement retailers have for New Products is exit packaging. Specifically, per section 5413 of the Bureau of Cannabis Control Emergency MAUCRSA rules, “[c]annabis goods purchased by a customer shall not leave the retailer’s premises unless the goods are placed in an opaque exit package.”

Distributors

While distributors have lost a lot of power via MAUCRSA, they may still package, label, re-package, and re-label flower for retail sale (in line with cultivation packaging and labeling rules). That said, they cannot package, label, re-package, and re-label manufactured products unless they also own a manufacturing license and they’re dealing with their own manufactured products. The lone exception for manufactured products is if lab testing shows that the tetrahydrocannabinol (THC) content, per package or serving, was labeled incorrectly but is still within allowable THC limits. In that case, the distributor may then re-label the package with the correct amount of THC. Lastly, “transport only” distributors can’t package, label, re-package, or re-label any cannabis goods at all.

Manufacturers

For manufactured New Products, manufacturers (and Type Ps that label, package, re-label, and re-package cannabis products) must ensure that the label is in English and that all required labeling is “unobstructed and conspicuous” so that it can be “read by the consumer”. Moreover, all required labeling must go on the outside of the package or container (supplemental product information and “side effects” information can go on the inside of the packaging through inserts). There are two mandatory panel labeling requirements for manufactured New Products: the primary label and the informational label.

The primary label must contain the following items, in no less than 6-point font and in relation to the size of the primary panel and container/package:

  1. the identity of the product in a text size reasonably related to the most prominent printed matter on the panel;
  2. the net weight or volume of the contents of the package; and
  3. the THC content and cannabidiol (CBD) content for the package in its entirety (even if the CBD content is zero), expressed in milligrams per package.

If the manufactured New Product is an edible, the following requirements also apply:

  1. the words “cannabis-infused” must go immediately above the identity of the product in bold type and a text size larger than the text size used for the identity of the product; and
  2. the THC content and CBD content per serving, expressed in milligrams per serving; and
  3. this crazy symbol must be included:

You can include additional product information on the primary panel, but the foregoing MUST be on the outside label as relevant.

The informational label must also contain (in no less than a 6-point font in relation to the size of the primary panel and container/package, with limited exceptions depending on how much room you have with the label):

  1. the licensed manufacturer and its contact number or website address;
  2. the date of the cannabis product’s manufacture;
  3. the following statement: “GOVERNMENT WARNING: THIS PRODUCT CONTAINS CANNABIS, A SCHEDULE I CONTROLLED SUBSTANCE. KEEP OUT OF REACH OF CHILDREN AND ANIMALS. CANNABIS PRODUCTS MAY ONLY BE POSSESSED OR CONSUMED BY PERSONS 21 YEARS OF AGE OR OLDER UNLESS THE PERSON IS A QUALIFIED PATIENT. THE INTOXICATING EFFECTS OF CANNABIS PRODUCTS MAY BE DELAYED UP TO TWO HOURS. CANNABIS USE WHILE PREGNANT OR BREASTFEEDING MAY BE HARMFUL. CONSUMPTION OF CANNABIS PRODUCTS IMPAIRS YOUR ABILITY TO DRIVE AND OPERATE MACHINERY. PLEASE USE EXTREME CAUTION;
  4. if the product is intended for the medical market, the statement “For Medicinal Use Only”;
  5. a list of all product ingredients in descending order of predominance by weight or volume;
  6. if an edible product that contains an ingredient, flavoring, coloring, or an incidental additive that bears or contains a major food allergen, the word “contains,” followed by a list of the applicable major food allergens;
  7. if an edible product, the names of any artificial food colorings contained in the product and the amount, in grams, of sodium, sugar, carbohydrates, and total fat per serving; Instructions for use, such as the method of consumption or application, and any preparation necessary prior to use (which is completely up to the manufacturer); and
  8. the product expiration date, “use by” date, or “best by” date, if any; and, when available from the state, the UID and, if used, the batch number.

For the required packaging of all manufactured New Products, manufacturers must have packaging that is:

  1. capable of protecting the product from contamination and that shall not expose the product to any toxic or harmful substance;
  2. tamper-evident, which means that the product shall be packaged in packaging that is sealed so that the contents cannot be opened without obvious destruction of the seal;
  3. child-resistant, which means the package shall be designed or constructed to be significantly difficult for children under five years of age to open or otherwise obtain access to the product contained therein within a reasonable time, and shall not be difficult for normal adults to open or obtain access to the product contained therein;
  4. not imitating any package used for products typically marketed to children;
  5. if an edible New Product, opaque; and
  6. if the package contains more than one serving of cannabis product, re-sealable so that child-resistance is maintained throughout the life of the package.

Cultivators and Processors

Cultivators can grow and process their own flower. Processors only trim, dry, cure, grade, package, and/or label flower or non-manufactured cannabis: they don’t grow anything. Both are charged with the following packaging and labeling requirements for cultivated New Products headed for retail sale (including the same font, conspicuous placement, and English language requirements as manufacturers):

  1. all cannabis has to be labeled and placed in a resealable, tamper-evident, child-resistant package and must include, once available, a unique identifier for the purposes of identifying and tracking cannabis and cannabis products;
  2. the following statement in bold print:  “GOVERNMENT WARNING: THIS PACKAGE CONTAINS CANNABIS, A SCHEDULE I CONTROLLED SUBSTANCE. KEEP OUT OF REACH OF CHILDREN AND ANIMALS. CANNABIS MAY ONLY BE POSSESSED OR CONSUMED BY PERSONS 21 YEARS OF AGE OR OLDER UNLESS THE PERSON IS A QUALIFIED PATIENT. CANNABIS USE WHILE PREGNANT OR BREASTFEEDING MAY BE HARMFUL. CONSUMPTION OF CANNABIS IMPAIRS YOUR ABILITY TO DRIVE AND OPERATE MACHINERY. PLEASE USE EXTREME CAUTION.”;
  3. the net weight of cannabis in the package;
  4. identification of the source and date of cultivation, the type of cannabis, and the date of packaging;
  5. the appellation of origin, if any;
  6. list of pharmacologically active ingredients, including, but not limited to THC, CBD, and other cannabinoid content, the THC and other cannabinoid amount in milligrams per serving, servings per package, and the THC and other cannabinoid amount in milligrams for the package total; and
  7. information associated with the unique identifier issued by the state Department of Food and Agriculture.

Additionally, a flower label may specify the county of origin only if 100% of the cannabis or nonmanufactured cannabis product contained in the package was produced within the designated county, as defined by finite political boundaries. For more on cannabis appellations in California, see here.

In all, the packaging and labeling requirements for California cannabis products are extremely detailed and must be followed to a T by any business that wishes to maintain its medical or adult use license. All prospective licensees should begin preparations today.
Stay tuned for Part 3 of this series on California cannabis packaging and labeling, where I’ll cover the warnings and disclaimers that should go on your products (not covered under or mandated by MAUCRSA), including how to handle new Prop. 65 rules.
cannabis subordination loan
Best if landlord, tenant and lender talk out that cannabis loan ahead of time.

Commercial cannabis leases are different than other commercial leases in many important ways. In other respects, however, they can be quite similar. One item that tends to fall into the latter category is the creation of a landlord’s lien on the tenant’s personal property in the event of an uncured tenant default. For example, if a marijuana producer fails to pay rent, the landlord acquires an ownership interest in that producer’s lights, fans, security equipment, and even the cannabis itself. If the lease is drawn up correctly, the landlord would then be able to seize these assets and liquidate them, in accordance with state law.

When representing landlords, this type of provision makes it into every type of cannabis lease we draft. When representing tenants, we often try to narrow this right, especially in situations where the tenant may be taking on debt. Why? Because lenders often insist on priority rights in the event that a pot business cannot repay a loan. In many cases, the lender will come prepared with a “Waiver and Consent Agreement” or a “Subordination and Consent Agreement.” The tenant is tasked with acquiring its landlord’s signature on this contract, so that if there is a default under the lease, the landlord does not preempt the lender’s rights in the tenant’s property (which serves as collateral for the loan).

From the landlord’s perspective, subordinating its lien on the tenant’s personal property is preferred to a total waiver of the lien. The lender won’t care either way, so long as it receives a primary security interest in the cannabis and everything else. For that reason, most of the time the parties will end up with the landlord agreeing that its lien is subordinate to the lender’s right, but not totally extinguished (“waived”). That way, the landlord is assured that its tenant will receive the cash needed to operate, and will retain the right to hop in line behind the lender and lien on any assets, as needed.

Landlords should be aware that the waiver or subordination agreement will typically allow the lender to enter the leased premises and remove the trade fixtures and even the marijuana itself, subject to state rules. On this point, the landlord will want to require that the lender minimize disturbance with respect to any other tenants on site, and require that removal occur prior to the end of the lease term. Once the lender is in the space, the landlord will want to ensure that the lender is required to comply with state marijuana rules, provide evidence of insurance, and keep the premises open for inspection, among other items.

There are a host of other concerns that a boilerplate consent or subordination document will create in the context of a cannabis loan to a tenant operator. These range from specific items, like the landlord’s obligation to notify the lender of a tenant’s default, to general items, like restrictions on the ability of a landlord and tenant to amend the lease agreement. Depending on which chair you are in—landlord, tenant or lender—these items will have different repercussions and should be negotiated with that in mind.

Each party’s goal, as always, will be to minimize risk and to maximize the ability to make and receive payments, in accordance with state and local rules. If you understand the basics of cannabis leases, lender subordination agreements, and your state’s disclosure requirements for cannabis lenders, you should be able to propose a contract solution that works for everyone. That way, in the event of a default under a loan or lease, the parties won’t have to fight over what happens next.

audit marijuana cannabis
Can your cannabis business survive state scrutiny?

Like all business, cannabis businesses are subject to audit by state taxing authorities and other agencies. These audits tend to proceed differently with cannabis business, though, given the unique regulatory approach states take with marijuana. If a regulatory audit turns up issues, then fines and even loss of your business’s license could follow. This post outlines the top issues in preparing for, and managing, a regulatory audit of your cannabis business.

Plan Ahead

Every state with a regulated cannabis market has specific record keeping requirements.  Prepare for future audits by keeping meticulous records. Like other businesses, a marijuana business must keep detailed records regarding all aspects of the business including: sales, inventory management, purchases, taxes, employment, environmental compliance, legal and transportation. Unlike other businesses, a cannabis business is required to keep all source documentation. For example, purchases of goods and services must not only be supported by master goods and service contracts, but transaction level invoices; bank statements must include check and deposit slip detail.  When in doubt, keep as much detail as possible.

As stated HERE and HERE, it is wise to conduct periodic self-audits to identify any weakness in record keeping or any other compliance issues. Self-audits allow a cannabis business to address issues as early as possible. Self-audits also assist a business is constantly improving not only its regulatory compliance but improving customer service and profitability.

Each state differs in how long records must be maintained. Washington requires that records be archived for three years while California requires records be archived for seven years.  However long a state requires a cannabis business to archive records, it is a best practice to archive records in electronic format where possible, alongside retention of hard copy data.

Don’t Panic

Cannabis regulators will notify you by letter that your cannabis business is under audit. Included with that letter will be a list of records to provide. All states with regulated cannabis markets have wide latitude to inspect records and your physical business location. For example, Washington regulations require a cannabis business to archive a wide variety of documents and mandate that such records “must be made available for inspection if requested by an employee of the WSLCB.” In general, a cannabis business will have no standing to challenge a cannabis regulatory agency right to demand and to inspect records. Your time and money will be best spent gathering the records requested.

Typically, records must be produced in a very short time frame, so a cannabis business should immediately begin to gather the documents requested. Typically, information must be requested from CPA’s bookkeepers and attorneys, so give your business as much time as possible to get this information.

Disclosure and Truthfulness

Most states have strict sanctions for a cannabis business that fails to provide documents to the regulators. For example, a determination of a failure to provide documents in the State of Washington will result in the cancellation of a license. As expected, most states have strict sanctions for misrepresentations of fact to cannabis regulators. Again, a determination that a cannabis business has misrepresented facts will result in the cancellation of a license. A cannabis business must be aware that every document provided and statement made to the regulators is “on-the-record”. A cannabis business should never speculate or guess in responding to inquiries made by the regulators.

Understand the Appeal Process and Your Rights

Although your cannabis business has an affirmative duty to provide accurate information to the regulators, you do have legal rights and protections.

If the enforcement officer identifies a potential violation, the enforcement officer must follow a specific notice procedure. In Washington, the enforcement officer must issue an Administrative Violation Notice (AVN) and deliver the notice to the cannabis business, or the businesses agent or employee.

The AVN must include:

  • A narrative description of alleged violations;
  • The dates of violations;
  • A copy of the relevant statutes or regulations;
  • An outline of the licensee’s options;
  • Identify the recommended penalty; and
  • Identify any aggravating or mitigating circumstances adjusting the penalty.

Requesting a Stay

If the regulators suspend a license, the licensee must promptly initiate an adjudicative proceeding before an Administrative Law Judge assigned by the Washington office of Administrative Hearings. A hearing must be held within 90 days of the date of suspension.

In Washington, a cannabis business must petition for a stay of suspension within 15 days of service of the suspension order.  A hearing must be conducted within 14 days from receipt of the filing of the petition for stay.

Other Remedies

A Washington cannabis business has 20 days from receipt of the AVN to:

  • Accept the recommended penalty; or,
  • Request a settlement conference; or,
  • Request an administrative hearing;

Missing this key 20-day period will result in a range of sanctions from penalties to revocation of the cannabis business license.

One of the key tactical decisions is whether to request a settlement conference or to move directly to requesting an administrative hearing. Although a settlement conference offers an opportunity to resolve issues in a more informal manner, there may be instances where moving directly to an administrative hearing is wise. This tactical decision should be considered carefully in consultation with counsel, and is highly dependent on the facts and circumstances of each case.

Conclusion

Although a regulatory audit is intimidating, your cannabis business can best prepare for such an audit by aggressively implementing best practices, performing internal compliance audits, and keeping meticulous records. Remember, states that have legalized adult cannabis use, such as Washington, are under scrutiny by the federal government. Increased federal scrutiny puts pressure on states to enforce their local cannabis laws, and a key part of such enforcement is through regulatory audits. For all of these reasons, your cannabis business would be wise to plan for an audit by state regulators.

California marijuana banking
A public marijuana bank is a red herring.

It seems like every state in its own way has tried to grapple with a state-legislated solution to the notorious banking issue across the cannabis industry. And now California is going to study its own banking solution that, in all reality, probably isn’t going to go anywhere.

California is predicted to take in $7 billion by 2020 because of adult-use legalization. Its licensed operators have nowhere reliable to put all of that cash, and you can be sure that the California Department of Tax and Fee Administration doesn’t want those operators trucking hundreds of thousands of tax dollars to Sacramento. Additionally, the cash epidemic was complicated by the fact that Attorney General Sessions’s rescission of the 2014 Department of Justice (DOJ) Financial Crimes memo, which allowed financial institutions to bank marijuana businesses in states with “robust regulation”, in concert with the 2014 FinCEN guidelines. Thankfully, those guidelines still exist, but the Department of Treasury is currently looking at them in the wake of Sessions’s decision.

Back to California.

This month, Treasurer John Chiang announced that his office (along with the California State Attorney General’s office) would undertake a two-part feasibility study around forming a state-backed bank to serve California cannabis businesses. In his office’s November 2017 report, Chiang admitted that creating and supporting a state cannabis bank would be a “formidable” task and that the “definitive solution” is for the federal government to either legalize cannabis or for Congress to create some kind of legal safe harbor for financial institutions that bank the industry. Nonetheless, Chiang’s report proposed two options for a state cannabis bank:

  • “A public institution that would either (1) finance public infrastructure and expand banking for underserved groups, including the cannabis industry; or (2) take deposits, make loans, and provide other services primarily to cannabis producers, distributors, retailers, and related businesses.” Or,
  • “A privately owned bankers’ bank, supported by the state, which would not take retail or small business deposits, but instead provide financial services, compliance services, and technical assistance to financial institutions serving the cannabis industry.”

Chiang’s report goes into great detail about the pros and cons of choosing either a public financial institution or the banker’s bank model. The report runs the gamut of concerns over federal asset forfeiture risks, industry volatility, special problems with closed loop banking and the Federal Reserve, public costs, profitability, capitalization, federal and state regulatory issues, the inability to secure federal depository insurance, and various and complicated ownership structures over either model. Overall though, both models sound nearly impossible to create, capitalize, and sustain due to exiting federal regulations that are insurmountable in every way, because “marijuana” is still a Schedule I controlled substance.

While we appreciate the state’s desire to find a banking solution for cannabis operators, a state-owned, operated, and financially backed bank would have a gargantuan task just to get started–just ask Massachusetts and Colorado. Federal deposit insurers want nothing to do with a bank that is focused on marijuana businesses, regardless of whether it is state-owned. The Federal Reserve also seems unlikely to grant a master account to any newly chartered financial institution whose reason for being is to serve marijuana businesses. Without that master account, the bank wouldn’t have access to the federal money transfer system, a key aspect of banking.

California would be wise to examine state-legal marijuana banking in the Northwest. Washington and Oregon boast a small but stable number of banks and credit unions that provide services to state-licensed marijuana businesses. Private banking in those jurisdictions grew slowly as those states developed their regulations, and the vast majority of rules are promulgated by state government.

California has only just started, and banks that would serve marijuana businesses there would only now be in a position to start working with California cannabis operators. Additionally, with the level of control that California regulators allow local authorities, marijuana businesses in different, local jurisdictions still face significantly different hurdles from one another. It is more challenging for institutions in California to keep up with the myriad of state and local rules that have been promulgated, most of which are still untested and with new ambiguities being found daily.

Now that the 2014 DOJ Financial Crimes enforcement memo is gone, it’s anyone’s guess as to what Treasury will do going forward and whether increased MAUCRSA regulation will matter to banks and credit unions in California. If banks are going to participate, regulations need to be significant enough that banks believe that they are as “robust” as the Treasury guidance requires, but simple enough that a bank can feel confident about its ability to judge whether or not one of its account holders is complying with state law.

Ultimately, a public bank of any kind is a red herring for the cannabis industry. Instead, existing financial institutions need to be sufficiently supported by the states so that they feel comfortable taking on the risk of servicing cannabis accounts.

Editor’s Note: A version of this post previously ran in the author’s Above the Law column.

marijuana cannabis business
Want to show you own that canna business? Write it down.

Of all the core legal concepts that first-year law students study, property law is the most esoteric. The concept of property boils down to relative rights. Do I have more or less of a right than you do to possess, manipulate, lease, or sell this thing that I am claiming ownership of? Things get harder when we deal with intangible property. While simple possession of real property or equipment doesn’t prove ownership, it at least provides some indication of ownership. But regarding intellectual property like trademarks and copyrights, or other intangible property like interest in a partnership or a limited liability company, there often isn’t anything to possess. This has led to major problems for inexperienced cannabis business owners.

Regarding ownership interests in corporations and LLCs, it is important to make some distinctions. I’ll use Washington as an example, but most states adhere basically to the same principles. The Secretary of State’s office is in charge of forming business entities, and it maintains a database of governing persons. If I look up a company on that website, it is going to list the names of one or more people that are reported to the state as governing persons of that company. However, that listing is not proof of or even evidence of ownership. The people listed are supposed to be managers of LLCs or directors and officers of corporations. They are not shareholders (owners) of corporations, and they are not necessarily members (owners) of LLCs. Frankly, it isn’t even proof that they are governing persons. I could go in and file a new annual report for any company I wanted to and change the listing of governing persons. It is just a courtesy database made public by the state.

That notice distinction is also true of the state’s licensing agency, the Liquor and Cannabis Board. When a company goes through cannabis licensing, renewal, change of location, etc., it self-reports its governing persons and owners to the state. The state, in turn, subjects those people to criminal and financial background checks, and maintains them in a database as “true parties of interest” of the licensed business. But just being reported to the Liquor and Cannabis Board is not itself proof of ownership. The law requires a company to accurately report its owners, but that is still just a notice and reporting requirement. If a business reports its true parties of interest incorrectly, it doesn’t change who those owners are and what they actually own. If a company went through receivership or other administered liquidation, the ownership listing maintained by the Liquor and Cannabis Board wouldn’t be the ultimate authority on ownership.

How, then, is ownership of business entities actually determined? It isn’t through any type of public reporting. The United States, unlike many other jurisdictions, doesn’t tend to have any type of broad public registration of company owners. Instead, companies and individuals maintain those records privately. In our experience, most small businesses do a poor job of that.

With LLCs, the record keeping requirement is easier. Upon initial formation, the members/owners execute a limited liability company operating agreement that defines for each of them the scope of their ownership. A third party should be able to read that operating agreement and understand what right each individual has to profit distributions, liquidation distributions, profit allocations, loss allocations, etc. The agreement should also define transferability of membership and what steps need to be taken to accomplish that transfer. Someone who is buying part of an LLC would need to read that agreement to make sure that they were actually able to acquire it, lest the transfer be found inoperable. The LLC operating agreement should also contain an updated schedule or exhibit that lists the relative percentage ownership interest of each member. That schedule should be updated regularly — at least every time there is any change in membership interest.

Corporations have more paperwork, but they are also more standardized than LLCs. A corporation is initially formed by an “incorporator,” a generally meaningless title that doesn’t grant any inherent ownership rights. That incorporator appoints an initial board of directors, who take over governance of the corporation. The board of directors than adopt bylaws. Finally, they are ready to issue shares of stock. Until they do that, nobody owns the corporation. The stock is issued to individuals for some buy-in price, which could be real money or could be entirely nominal. But only upon signing a resolution approving of the issuance of stock does ownership exist. That stock is generally evidenced by a printed stock certificate that is possessed by its owner, and a ledger is kept at corporate headquarters noting the certificates that are issued. The bylaws may allow for uncertificated stock. In that case, the same information kept in the normal stock ledger is maintained at the corporate headquarters, and shareholders are given notice of what they own.

If you own an LLC or corporation and have failed to do any of this, it’s not like you have zero claim to ownership. It just means that it’s harder for you to prove it. And with intangible property, the ability to prove ownership to third parties is what it’s all about. That’s how you make money on it by accomplishing a sale, or using it to secure a loan. That’s how you convince a judge in a business dispute or dissolution claim or a receivership case that you have an actual right to business assets. So, make sure you write it down.

marijuana cannabis labeling california
There’s a lot going on with packaging and labeling requirements for California transition products.

California is just starting to get its cannabis packaging and labeling regulations right under MAUCRSA. California has a mandated transition period from January 1 to July 1, 2018, during which time adult use and medical marijuana licensees can do business with each other and temporary and annual state licensees can transport and sell cannabis products already in their possession in the newly regulated market. This means there are two packaging and labeling standards during this transition period: one for products that licensees bring into the marketplace from before January 1, 2018 and another for products cultivated or made on or after January 1, 2018.

For transition period products only, the following packaging and labeling rules apply:

Retailers and Distributors: 

If at the time it is licensed by the state (i.e., receiving the temporary or annual license), a retailer already has cannabis goods not in child-resistant packaging, those products can still be sold by the retailer if the retailer places them “into child-resistant packaging . . . at the time of sale.” Cannabis goods that do not meet the full-blown packaging and labeling requirements for new products can still be transported and sold if “a sticker with the applicable warning statement under Business and Professions Code section 26120, subdivisions (c)(1)(A) and (c)(1)(B) is affixed to the cannabis goods prior to sale by the retailer.” Retailers can still sell, and distributors can still transport, cannabis goods that have not undergone laboratory testing “if a label stating that the cannabis goods have not been tested as required under Business and Professions Code section 26070(l) is affixed to each package containing the cannabis goods prior to sale by the retailer.” In addition, dried flower held in inventory by a retailer at the time of licensure that is not packaged may (not must) be packaged by the retailer into individual packages for sale. Cannabis products held in inventory by a retailer that don’t meet the appearance or ingredient requirements pursuant to Business and Professions Code section 26130 and 26131 can still be sold by a retailer.

Manufacturers:

In the transition period, manufacturers can sell cannabis products already in their possession at the time of licensure so long as those products are: 1) packaged in child-resistant packaging; 2) labeled with the government warning set forth at Section 40408(a)(3) of the manufacturing rules; 3) within the THC limits under Sections 40305 or 40306 of the manufacturing rules; and 4) labeled with the amount of THC and, if applicable, CBD per serving and per package.

Under the manufacturing rules, “child-resistant packaging” means:

“the package shall be designed or constructed to be significantly difficult for children under five years of age to open or otherwise obtain access to the product contained therein within a reasonable time, and shall not be difficult for normal adults to open or obtain access to the product contained therein.’ A package shall be deemed child-resistant if it satisfies the standard for “special packaging” as set forth in the Poison Prevention Packaging Act of 1970 Regulations (16 C.F.R. §1700.1(b)(4)”).

A secondary package that is child-resistant is okay with the state for this requirement.

Cultivators: 

Other than having to label cannabis with the disclaimer that “This product has not been tested as required by the Medicinal and Adult-Use Cannabis Regulation and Safety Act” and having to include the government warning from Business and Professions Code section 26120, subdivisions (c)(1)(A), there are no other specific packaging or labeling requirements in the MAUCRSA emergency rules for transition period product in the possession of cultivators at the time of licensure (i.e., raw flower and unmanufactured cannabis products).

Once licensees run out of transition period product or start making or cultivating new products, the more robust packaging and labeling requirements apply to manufacturers, cultivators, and distributors. (Retailers will NOT be allowed to package and label any of the new products). However, it’s never to early to start running your mock-up labels and packaging to ensure that you comply with these very important regulations. Indeed, a proper label can make or break you in a products liability lawsuit and if you haven’t heard of Prop. 65 in the cannabis context, you’re behind (yes, transition period product should have the requisite Prop. 65 warnings).

In Part 2 of this series on California cannabis packaging and labeling, I’ll cover the packaging and labeling regulations for products cultivated or made on or after January 1, 2018.

employee marijuana cannabis
Employee or contractor? Make sure you get this question right.

We receive a lot of questions regarding employment relationships versus independent contractor relationships in the marijuana industry. Independent contractors are an excellent way for cannabis businesses to bring on individuals or companies with specialized skills to perform services or provide goods. The trick is making sure the person or company you hire will actually be viewed as an independent contractor by relevant state agencies, the IRS, and the new hire themselves. If not, you could be headed for trouble.

When done correctly, independent contractor relationships provide important benefits to both parties. Generally, employers are not responsible for independent contractors. This means that the employer does not have to worry about payroll taxes, wage and hour laws, and a myriad of other employment laws. Whether an employment agreement or an independent contractor agreement is created becomes significant when compliance with the law is in question. Not properly entering into an independent contractor agreement can cost employers a lot of money defending the relationship, and ultimately, in monetary civil penalties if there has been a violation of laws. An independent contractor relationship should not be created on the fly, and instead should be reduced to written contract drafted by a specialist.

The distinction between independent contractors and employees is not always clear (take the case of Uber drivers, for example). Courts typically examine multiple factors in order to determine if an employment agreement or an independent contractor agreement was entered into — regardless of what the parties actually called the agreement. Here are a six of the big considerations: (1) the employer’s right to control; (2) the furnishing of equipment; (3) the method of payment; (4) the right to fire; (5) economic independence of the individual; and (6) the character of the person’s work and the business. No one factor is controlling, and the court will look at the totality of the circumstances to make a decision.

The Right to Control

If an employer controls the manner and means by which the results of work is accomplished, it is more likely an employment relationship is entered into. For example, let’s say a cannabis processor contracts with a cannabis producers to supply a certain type and quantity of product. If you require the grower to grow at a certain location, use a certain type of equipment, and direct how to cultivate, then you are controlling the way the grower fulfills the agreement. Under this scenario, the grower is most likely an employee rather than an independent contractor. However, if the grower has control over these factors, he or she is an independent contractor.

Furnishing of Equipment

Using the same example above, if you contract with a grower but supply all of the equipment to grow and cultivate, it is more likely the grower is an employee rather than an independent contractor. The bottom line is that independent contractors should have their own equipment and tools to complete the services.

Method of Payment

Independent contractors are typically paid a lump sum. Employees are typically paid hourly or salaried and paid at regular intervals. Independent contractor payment structures should be distinct and different from that of employees.

The Right to Fire

Employer’s have the right to terminate at-will employees at any time for any reason, as long as the reason is non-discriminatory. Independent contractor agreements should include terms for ending the relationship, or have a termination date in place.

Economic Independence

Employees typically rely on one employer for income. Independent contractors usually obtain their income from multiple places. Using the grower example again, if the grower’s only income is from your dispensary, it is more likely the grower is an employee rather than an independent contractor.

Character of the Person’s Work

If the individual’s work is distinct from the services the employer supplies, it is likely the individual is an independent contractor rather than an employee. For example, if you hire an individual to serve as a budtender in your retail store, it is more likely they are an employee rather than an independent contractor, because a budtender is central to a retail store.

Independent contractor relationships can be an important and useful tool in your cannabis business. They should not be looked at as a way to avoid compliance with employment laws or liability, however, or to avoid any other law or regulation. Courts and regulators will see through a mere title of “independent contractor.” Comprehensive agreements outlining expectations and creating protections for cannabis businesses should be used any time an independent contractor relationship is considered.

employment cannabis marijuana
One of the most important books your cannabis company can have is an employee handbook.

The cannabis industry continues to grow. Each year we see additional states legalize recreational marijuana. Along with more legalized weed, comes more cannabis employees. And more employees means more employment litigation.

We recently hosted a litigation webinar where I spoke about employment litigation and ways to protect your marijuana business. One of the tools I mentioned was documentation. When it comes to that, one of the most important documents your cannabis business can have is an employee handbook. This is true whether you have one employee or 100.

An employee handbook plays many roles. This post will discuss some of the more important reasons to have a comprehensive employee handbook.

Communication and Orientation

An employee handbook serves as an important communication tool between employees and employers. A well drafted employee handbook will contain a mission statement, along with the values, goals, and expectations of the company and its employees. This communicates a sense of belonging to employees and provides them with an understanding of the goal they are working towards achieving.

The handbook will also communicate the benefits to which employees are entitled as cannabis business workers (free pot is not one of them). A good handbook will explain to employees can question about company benefits. This will save you time as an employer because you won’t have to answer the same questions over and over.

Guidelines and Expectations

One important aspect of an employee handbook is that it creates a uniform set of rules for employees. Employees need to know what is expected of them and when. Employee handbooks should cover everything from attendance requirements to dress requirements and drug use policies. Handbooks should also lay out discipline that can be expected if these policies are violated.

Employee handbooks should provide guidance to employees when problems arise. The employee will know who to talk to and, if properly drafted, supervisors will know how to handle situations.

Legal Protection for Employers

The most important aspect—at least from a lawyer’s point of view—is the legal protections a well drafted employee handbook can provide. In most states, employer employee relationships are “at will”, meaning the relationship can be terminated at any point by either party, as long as there is no discrimination at play. An employee handbook makes it clear that the relationship is “at will” and that other agreements cannot change that relationship.

Employee handbooks also provide the basis for defense in a harassment claim. As previously discussed,  a valid defense to harassment claims if proof of an anti-harassment policy and a complaint procedure. Employee handbooks should outline both a policy and a complaint procedure.

Handbooks also provide protection in wrongful termination cases. Wrongful termination is a broad term used to describe cases brought by former employees against employers alleging the employee was terminated for some illegal reason—for example, discrimination. An employee handbook laying out attendance requirements can be used to show that an employee was terminated for violating a clear policy rather than for other, illegal, reasons. If an employer does not have a clear policy, it will be hard to prove the employee violated any such policy.

Employee handbooks can also serve as means to inform employees of required information. Both state and federal laws require employees be informed of their rights under certain acts such as Family Medical Leave Act. Every employee handbook should have an acknowledgement page to be signed by the employee, proving they were provided with the information.

Employee handbooks are not “one size fits all.” Each cannabis business is unique and has a different mission and goal. Further, employment laws are state specific and at times, location specific. There are many drawbacks to pulling a generic employee handbook from the web. A specialist familiar with the state and local laws should draft or review handbook, or the handbook could become a liability rather than an asset.

Handbooks should also be reviewed and revised at least once every two years. Many states, including California and Oregon, have seen an uptick in state employment regulations offering more protections to employees as of late. Laws change quickly and it could mean your employee handbook is out of date and non-compliant if it is not updated frequently.

The U.S. cannabis industry employed roughly 165,000 workers as of last summer. By 2020 that number is expected to jump to 250,000 employees, which is more jobs than the expected jobs from manufacturing, utilities or governments sectors. It is no wonder that we have seen a significant uptick in cannabis industry employment claims over the past year or so in our Washington and Oregon offices. These claims can be very difficult to deal with for a business without basic employment safeguards, like a handbook and conscientious employment practices.

We have written two previous posts in this series on how to protect your marijuana business from the bad acts of your employees. You can find them here (negligent hiring and retention) and here (hostile work environment / harassment).  Today, we expand on the latter topic, providing some advice on how to investigate harassment claims.

employment cannabis marijuana
Investigating sexual harassment claims is critical. Pipe and magnifier, optional.

Ideally, sexual harassment would not occur in any business or professional seeing. Unfortunately, it does, and it is important your cannabis business is ready to properly investigate a sexual harassment claim when it arises. As previously discussed, a proper complaint procedure and investigation is important not only for legal protection against sexual harassment claims, but also to enhance your company’s credibility.

But how should an investigation be completed? While every investigation will be unique given the unique complaints and individuals involved, the procedures outlined below are good starting points to incorporate into your employee handbook and company practices, as appopriate.

Written Complaint

An employee may provide either a written or verbal complaint to the person designated in your sexual harassment policy. If the complaint was given verbally, the employer should request a detailed written complaint from the accuser. The complaint should include the name of the employee, the name of the accused, the unwanted actions by the accuser, the date, time and place of the actions, and any witnesses. If the original complaint was written, ensure it includes sufficient details to begin an investigation. A request for additional information should always come with an assurance of confidentiality and that the information will only be used for the purpose of investigating the complaint.

Assign an Investigator

After a complaint is received, an investigator should be assigned. A good investigator will objectively investigate the complaint without bias. Sometimes the investigator can be an existing employee of the company, such as a human resources manager or person previously designated as an investigator of sexual harassment complaints. Sometimes, in smaller cannabis companies, there simply is not an available existing employee that is able to objectively investigate the complaint. When that is the case, a neutral third-party investigator such as an attorney or a human resources specialist should be used. No matter what investigator you use, you must be able to trust their ability to keep the investigation and all employee information confidential.

Interviews

An investigator should plan on interviewing the accuser, the accused, and any witnesses as soon as possible. Typically the employee should be interviewed first, followed by the accused and witnesses. Interview questions should be planned before the interviews begin and be based on the written complaint. The EEOC provides a list of suggested interview questions (Section V). Interview questions may need to be revised following the interviews and the investigator should be allowed to interview employees multiple times as more information is revealed. The interviewer should record the interviews and draft detailed notes of findings after each interview such as inconsistent statements and credibility.

Obtain Evidence

The investigator should be allowed access to the accuser and the accused’s personnel files. Further, the investigator should obtain any documentation of the harassment from the accuser, accused or witnesses. Examples of documentation may include voicemails, texts, emails, photos, or video surveillance.

Evaluate all the information

The investigator should refrain from making a decision based on any one piece of information. The investigator should evaluate all avilable information once the interviews are completed and all evidence is obtained. The investigator should prepare a written report of findings and whether the accused violated any company policies or committed harassment. The written findings should include support for the conclusions.

Make a Decision 

Sometimes the investigator has decision making power for the employer. Other times, for instance, if you hired a third-party investigator, the investigator does not have that power. Regardless, the investigators findings should be used to determine if corrective action is appropriate and if so, what that corrective action should be. Corrective action can include requiring the accused to take training classes, suspension, and even termination.

Follow-Up

The investigator’s findings should be shared with both the accuser and the accused. The employer should also follow up with the accuser regarding the investigation process to determine if the accuser felt the investigation was thorough and unbiased. Following up with the employee can provide a couple of benefits. First, if the accuser has remaining concerns, you can address them. Second, feed back from the employee can lead to more thorough investigations later.

Document, Document, Document

The most important part of any sexual harassment investigation is documentation. Every sexual harassment complaint could turn into legal action in court. It is important to document everything in a sexual harassment investigation and complaint procedure. Documentation will provide evidence of the steps taken to investigate and remedy the situation. It will also prove you took the situation seriously and provide a basis for any actions taken as a result of the investigation.

cannabis marijuana employment tax
Look out for a change in tax deductions for employer provided benefits — at least for some businesses.

President Trump signed the Tax Cuts and Jobs Act (the “Act”) into law on December 22, 2017.  The Act contains several sections that will impact companies that work with cannabis businesses and provide important indications of where states might be going with taxes in the coming year. As for the Act itself, its sweeping provisions went into effect on January 1, 2018.

Note that much of the Tax Act’s deductions and credits won’t apply to cannabis businesses due to IRC 280E, but these deductions and credits are still important to many ancillary businesses that serve the industry, and which may not be subject to 280E (we recommend that anyone with questions as to where they fall seek advice from their CPA or cannabis tax attorney). If these credits and deductions prove to be popular we may see states enact similar changes that will directly affect cannabis business themselves.

On the employment front, many cannabis businesses obtain employees through staffing agencies. Those agencies should will be subject to these new tax deductions and credits. We may see an influx of agency recruits, or a decrease, depending on how the recruitment companies take advantage of these deductions and how the new laws remove deductions for benefits provided to employees.

Sexual Harassment Settlements

Prior to 2017, we didn’t hear much about sexual harassment in the workplace. One reason for this is because a majority of sexual harassment settlements contain nondisclosure agreements. A nondisclosure agreement typically prohibits the employee from discussing the sexual harassment suit, its result or even the fact that harassment was ever alleged. Currently, employers are allowed to take a tax deduction for settlements paid out for sexual harassment and sexual abuse, regardless of the terms of the settlement agreement. That’s finally changing.

Going forward, employers cannot deduct settlement payments related to sexual harassment if the settlement agreement contains a nondisclosure agreement. Employers can receive a tax deductions on sexual harassment settlements that do not contain nondisclosure agreements. Payments in sexual harassment suits can be huge–meaning the tax deduction can also be huge. (Bill O’Reilly paid $32 million to one female accuser.) This will force employers to carefully consider how sexual harassment suits are settled, which is a welcome change. States might follow suit. Plan now how to handle sexual assault cases so you don’t have to make this decision.

Paid Leave Credit

Paid family and medical leave is a significant benefit for cannabis employees. Providing paid family and medical leave can attract highly qualified employees and help retain those employees. In what has been described as the first step towards a “nationwide paid family leave policy”, the Act provides employers incentives to provide paid family and medical leave—admittedly in a very complicated fashion.

Employers can qualify for up to a 25 percent tax credit for providing paid leave for qualifying employees under the Family Medical and Leave Act (FMLA). Employers qualify for the credit by providing at least two weeks paid leave equal to at least 50 percent of the employee’s regular wages. At a minimum, employers will receive a 12.5 percent tax credit for providing paid leave. The credit incrementally increases based on the percentage of regular wages the employee receives. The paid leave credit is only applicable to employees who earn less than $72,000 and have been employed at least one year. Paid leave must be provided separately from vacation leave, personal leave, or other medical or sick leave.

The Paid Leave credit expires in 2019 unless extended by Congress. Some congressional members have suggested Congress is considering enacting separate legislation that requires paid leave. Paid sick leave requirements are already in effect in several states, including those with cannabis laws.

Pay attention to expenses related to paid leave, and consider whether this a feasible option for your cannabis business. Several states already have paid leave and more are likely to follow. If your state does not already have paid leave that applies to your cannabis business, you should assume they will enact similar tax incentives soon.

ACA Individual Mandate

The Act removes the Affordable Care Act individual mandate to purchase health insurance. At first glance, this does not seem like it would affect your cannabis business, but staffing agencies employing more than 50 full time employees. are required to purchase healthcare for their employees. Employees that are recruited to your cannabis business are considered employees of the staffing agency. The ACA’s individual mandate was designed to work with the employer mandate to provide health insurance. The employer mandate is still in place. Employers with 50 or more full-time employees are still required to provide health insurance.  Without the individual mandate, it is likely insurance premiums will continue to rise unless Congress acts to reform health care.

Further, given the mandates were designed to work together, there is a strong suggestion that Congress will start to undo the employer mandate. It will likely come in the form of fewer reporting requirements or a complete removal of reporting requirements. This means that staffing agencies may reduce the number of recruits they have out at a time to avoid the employer mandate of the ACA, meaning you will have less of a pool to pull from.