On March 7, 2023, a federal court in Pennsylvania issued a ruling denying a cannabis company’s motion to dismiss claims based on the federal Fair Labor Standards Act (the “FLSA”). The opinion in DeMarco et al. v. FarmaceuticalRC, LLC et al., W.D. Pa. Case No. 2022cv-1164, covers familiar ground in the realm of FLSA misclassification cases, and explains why the plaintiffs—who work as drivers ferrying defendants’ cannabis products along their supply chain—sufficiently pled their claims. Specifically, the court applied the six-factor test for determining whether a given worker is an employee or an independent contractor and found that plaintiffs had sufficiently alleged the existence of an employer-employee relationship.
The Department of Labor is expected to issue updated guidance in May 2023 regarding proper classification of workers as employees or independent contractors. In the meantime, courts are currently using a version of the same analysis that has been in place for decades, albeit with some tweaks in the application driven by politically motivated changes pushed through by presidential administrations over the years. In short, the six factors to consider when deciding how to classify a worker are:
(1) the degree of the alleged employer’s right to control the manner in which the work is to be performed; (2) the alleged employee’s opportunity for profit or loss depending upon his managerial skill; (3) the alleged employee’s investment in equipment or materials required for his task, or his employment of helpers; (4) whether the service rendered requires a special skill; (5) the degree of permanence of the working relationship; (6) whether the service rendered is an integral part of the alleged employer’s business.
The Demarco case’s application of controlling employment law is unremarkable. What is notable about the opinion is its complete lack of attention to the issue that often keeps cannabis cases out of the federal courts: the ongoing federal illegality of the business activity underlying the claims at issue. Cannabis employers should take heed. The federal labor and employment laws apply to employers in the cannabis industry, and if the DeMarco case is any indication, federal courts have reached the point where they are entertaining employment cases without even nodding to any of the reservations applied to purely commercial cases in the industry. As mentioned before on this blog, the FLSA is but one of a panoply of federal laws governing employers, and cannabis companies need to make sure they are in compliance with those laws. The penalties for employee misclassification can be very expensive, and given the financial pressures of the industry, exposure to a misclassification claim is a risk that should not go unmitigated. Consulting an experienced employment attorney with industry expertise is your best bet for getting and staying compliant with federal, state, and local employment laws.
As always, Dykema will continue to monitor legal developments in the cannabis industry and provide updates as the situation evolves.