Cannabis in California urged to get serious — by doing the boring things other businesses do every day

In the wake of the passage last November of Proposition 64, which legalized recreational use of marijuana for adults 21 and older, by some estimates cannabis in California may be on the verge of becoming a $7 billion industry.

Thursday evening, about 50 current and prospective owners of cannabis businesses gathered in a conference room near University City. But they were not talking about things like cultivation methods or different strains of pot.

Instead, the topics were much more buttoned-down, even boring — employee classification, liability insurance and regulatory compliance.

After decades of outlier and outlaw status, marijuana in the Golden State is just months away from becoming a legally licensed enterprise and the speakers at Thursday’s meeting said those in the cannabis sector must make sure they concentrate on regulatory and compliance issues that often have been overlooked or simply ignored.

“These issues are going to be so much more important now,” said San Diego attorney Kimberly Simms, who has worked with clients in the marijuana industry for the past eight years and organized Thursday’s meeting. “We’re going to have to be a flexible industry. California over-regulates everything and cannabis is not going to be an exception to that.”

Some issues are as simple as making sure a business writes and enforces an employee handbook. Others include misconceptions over labor and employment law, ranging from things such as too often classifying employees as independent contractors, correctly tabulating overtime, dealing with discrimination accusations and handling payroll.

Overlooking details can lead to battles in court that can threaten the very existence of a nascent business, said Danielle Moore, an expert in workplace law and who counsels employers in the cannabis industry for the firm of Fisher Phillips.

“Everybody wants to be part of the industry because it has so much potential,” Moore said. “They think it’s going to be easy. It’s not easy.”

Moore gave a PowerPoint presentation showing how a lawsuit over unpaid overtime to one employee earning $60,000 a year can potentially end up costing a company with a staff of 15 nearly $900,000.

“Starting and launching a small business is always hard,” Moore said. “But for cannabis, it’s times 10.”

That’s because while pot may be legal in California, the federal government still classifies marijuana as a Schedule I drug, in the same category as narcotics like heroin.

That often leads to closer scrutiny from law enforcement and also scares off banks from taking on clients in the cannabis sector, which means many owners deal exclusively in cash.

Jeffrey Rosen, the co-founder of San Franciso-based CBZ Insurance Services, warned Thursday’s audience that a bigger marijuana industry will lead to greater exposure to legal battles, such as product liability lawsuits.

Companies that deal in “edibles” are also likely to face suits should a customer consume too much or get ill.

“People running cannabis companies have to look at insurance as a mandatory part of their business,” Rosen said. “They need to protect themselves from all different types of liability. But I find in this industry that people see insurance as an ‘as-needed’ item, meaning, ‘when I think I need it, I’ll get it but until then I’m not going to.’”

There are other considerations, too.

For example, the state will classify cultivation of marijuana as agriculture.

A representative from the California Agricultural Labor Relations Board was at Thursday’s meeting and said if cultivators and growers of marijuana with 20 or more employees want to receive a license from the state they must sign what’s called a “labor peace agreement,” in which the employer promises not to resist attempts by a union to organize workers.

There are also OSHA (Occupational Safety and Health Administration) regulations to consider as well as potential action from federal law enforcement agencies. In March, the Securities and Exchange Commission charged a West Hollywood marijuana company with falsifying earnings.

“A lot of the cannabis industry is coming from an era of black market to self-regulation to quasi-compliance,” said Simms. “Regulation is just around the corner and these issues are going to become so much more important.”

Prop 64 passed with 57 percent of the vote, making California the largest state to legalize recreational use of marijuana. State officials are in the process of establishing a licensing and taxation regime that is scheduled to go into effect Jan. 1, 2018.

Moore said those considering jumping into the cannabis business need to be extra careful.

“This is not something you can do easily,” Moore said. “So for someone who wants to come into it, you need to plan for that, be prepared to commit to the challenges and be über-compliant.”

rob.nikolewski@sduniontribune.com

(619) 293-1251 Twitter: @robnikolewski

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