In 1938, Congress enacted the Fair Labor Standards Act (FLSA), which created a federal minimum wage and required employers to pay overtime. Now, 29 states have enacted their own minimum wages that are higher than the federal standard of $7.25 an hour, and employers in all states are required to pay non-exempt employees 150% of their regular rate for any hours worked beyond 40 in a single week.
This article focuses on federal law; however, it’s important to remember that employers are required to comply with the laws that are most favorable to the employee.
Is the worker an employee?
The FLSA’s overtime and minimum wage requirements only apply to employees; they do not apply to non-employees, such as owners of the business or independent contractors.
Some employers think they can classify all their workers as independent contractors. This has been tried before, and it does not hold up in court. Without getting too deep into the details, the determining factor is whether workers rely on the employer for their livelihood or run their own business. The more control exercised over the worker (setting schedules, prescribing how work is done, setting the workplace rules, etc.) and the more the worker depends on that company to earn a living, the more likely the worker will be deemed an employee.
Unfortunately, there is no single bright-line test to determine if someone is an independent contractor or an employee. Rather, there are several multi-factored tests employed by different governmental agencies and the courts. And these tests are becoming stricter; the U.S. Department of Labor recently opined that the type of worker that qualifies as an independent contractor is very rare and that most workers are employees.
A simple test is to ask yourself what a worker’s response would be if someone asked, “Who do you work for?” If the worker’s answer is you or your company, the worker is more likely an employee than an independent contractor. For example, consultants hired to conduct security assessments for a dispensary are likely independent contractors because they run their own business — the consultants decide if and when they will offer services, exercise control over their own schedule, have the power to hire and fire others, etc. On the other hand, budtenders are employees — the company sets their schedules; managers tell them how to do their job; and they do not have the power to hire others to help them complete the job. Budtenders are dependent on the company for their earnings.
Employers routinely get in trouble for incorrectly treating workers as independent contractors.
Business managers should be very careful and talk to an expert before deciding to classify any worker as an independent contractor.
Is the employee exempt?
Certain types of employees are exempt from the overtime requirements imposed by the FLSA, and some are even exempt from the minimum wage requirements. The FLSA contains more than 30 exemptions that apply to different kinds of employees. These exemptions are very narrow, and all requirements imposed by the statute must be satisfied for the employee to be exempt. Most employees will not fit any exemption category, meaning they must be paid at least minimum wage and overtime at 150% of their regular rate.
We will focus on the few exemptions that most often arise in the cannabis industry.
One group of FLSA exemptions applies to “white collar” employees. Employees who meet both the “salary test” and “duties test” as defined by the FLSA are exempt from overtime and minimum wage.
The salary test is pretty easy: Employees who do not earn at least $23,660 a year (which will increase to $47,476 in December 2016) are not exempt. Simple as that.
However, even employees who are paid enough are not exempt unless they also perform “executive, administrative or professional” duties. Generally speaking, the executive exemption covers managerial employees who have the power to direct and hire/fire two or more full-time employees; professional employees are those who have advanced knowledge in a field of science or learning and use that knowledge in their job; administrative employees are those that exercise discretion and independent judgment with respect to matters of significance.
Of these, the executive exemption is the most straightforward, and the administrative exemption is the most nebulous (and therefore dangerous). An administrative exempt employee must have the power to make discretionary decisions that could significantly impact a company’s bottom line.
Other exemptions that may apply to cannabis industry employees are those applicable to outside salespeople and agricultural employees. Outside salespeople are those who customarily engage in making sales away from the employer’s place of business; they are exempt from both minimum wage and overtime requirements.
Agricultural workers are also exempt from overtime requirements. Additionally, some agricultural employees that work on small farms or perform certain hand-harvesting duties (which could include many trimmers in the cannabis industry) are exempt from both overtime and minimum wage.
What is the employee’s regular rate?
The third and final factor we need to understand is the concept of a “regular rate.” As long as employees are paid more than minimum wage, the law does not say how much companies have to pay them. But, the amount employees are paid for their regular, non-overtime work determines how much they have to be paid for overtime hours.
The regular rate equals the amount employees are paid each week divided by the number of hours the employee worked. Generally speaking, regardless of how much workers are paid, they must be paid 150% of that rate for all hours worked in excess of 40. For example, businesses are not required to pay any employee $20 per hour, but if they agree to do so, they must pay that employee $30 for every overtime hour.
Who cares as long as the employee is happy?
Not to be overly moralistic, but complying with the law is the right thing to do, and employees will likely be happier and more productive if they know they are being treated right. Plus, state and federal government agencies will impose penalties upon businesses that are not paying employees correctly. Employees who do not meet the exemption requirements cannot agree to be paid less than minimum wage or not be paid overtime. So, even if the employee is happy, the government may still come after the employer.
Finally, employees may sue if they are not being paid correctly. While employees may be happy today, they might not be tomorrow. There are many, many plaintiffs’ attorneys out there who are eager to take up these suits. In fact, one such attorney often has the following written at the bottom of every email: “Behold, the wages you withheld from the workers who harvested your fields, which you kept back by fraud, are crying aloud; and the cries of the harvesters have reached the ears of the Lord Almighty. James 5:4.”
While not all plaintiffs’ attorneys are as righteous as this one, they are very good at finding problems with the way businesses pay their employees. If any employees sue, they will seek to recover not only the wages they should have been paid, but also penalties and attorney fees, which can quickly add up to tens of thousands of dollars.
Wage claims are expensive and avoidable. Businesses should put in the time and effort to review their pay practices and make sure they are in compliance now to avoid a major headache in the future.
Alex Wheatley is an attorney in the Portland office of Fisher Phillips (www.fisherphillips.com), a national law firm committed to providing business solutions for employers’ workplace legal problems. He defends employers in employment-related administrative claims and lawsuits. He specializes in representing businesses in the cannabis industry, having worked with a number of growers, processors and retailers to implement effective workplace policies.