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.
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.