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Maneuvering in the legal/illegal cannabis business

Marijuana grows at an indoor cannabis farm in Gardena, Calif. The U.S. House of Representatives passed a bill last month that would grant legal marijuana businesses access to banking, a measure that would clear up a longstanding headache for the industry. (Richard Vogel/Associated Press)

On its website, Helix TCS Inc., boasts that it provides its customers “with the most powerful and effective operating services platform in the market. Its suite of services enable business owners and operators to better manage and mitigate risk while they focus on their core business.” Helix offers a range of technology, compliance and security services to its business customers.

Every single one of whom is violating federal law, because “Helix TCS’s technology suite is a comprehensive seed-to-sale platform for licensed cannabis businesses.” According to Governing Magazine, 11 states plus the District of Columbia have legalized recreational marijuana while all but 17 states permit its medical use. (For the moment, New Mexico remains in the medical use-only camp.) But while the sale of marijuana is legal under the laws of most states, in specified circumstances, its possession and sale remain illegal under the federal Controlled Substances Act.

The legal cannabis market is huge, by most estimates reaching the eight to 10 billion dollar range. The black market is almost certainly larger. Earlier this year, Barclays estimated that “the total US cannabis market, if legalized today, could be worth $28 billion.” But in the market’s current half-legal, half-illegal condition, producers and retailers have limited access to the nation’s financial system. Which is to say, they generally operate on a cash-only basis.

That could change in the near future. The SAFE Banking Act, which would grant safe harbor protections for businesses providing financial services to the legal cannabis industry, passed the House of Representatives earlier this year. The bill, backed enthusiastically by the Credit Union National Association and other pillars of the establishment, is currently pending before the Senate’s Banking, Housing and Urban Affairs Committee.

In the meantime, legal dispensaries are “a prime target for crime,” as the credit unions put it. Not only are their tills stuffed with cash, but their inventory is both untraceable and easily sold on the black market. That’s where Helix TCS steps in. Its suite of security services includes “armed, unarmed, and virtual security guards.”

Robert Kenney belonged to the non-virtual variety of security guard. During his 14 months of employment with Helix in Colorado, his duties “included monitoring security cameras, patrolling assigned locations, investigating and documenting all facility-related incidents, and enforcing client, local, state, and federal policies and regulations,” according to a recent opinion from Denver’s Tenth Circuit Court of Appeals. Kenney worked hard at his job, regularly putting in more than 40 hours a week, or so he claimed. But Helix failed to pay him overtime.

Kenney sued under the Fair Labor Standards Act (FSLA), the federal statute that sets the 40-hour workweek. Helix’s defense to the lawsuit was startling: “Helix asserts that the FLSA does not apply to workers such as Mr. Kenney because Colorado’s recreational marijuana industry is in violation of the Controlled Substances Act” (CSA). Helix, whose entire business is devoted to providing services to the cannabis industry, was claiming that because its business was illegal, therefore it could violate laws governing the conditions of employment.

Helix phrased it differently than that, of course. It told the Tenth Circuit that “extending overtime benefits in this case would require the court to find that Congress intended to both forbid (under the CSA) and reward (under the FLSA) the same conduct: drug trafficking.”

But the 40-hour workweek isn’t a “reward.” Rather, as our courts have long recognized, its purpose is “to promote ‘the health, efficiency, and general well-being of workers.'” Moreover, Helix’s argument is a classic example of proving too much, because if its workers weren’t entitled to overtime pay, Helix itself would receive the handsome reward of reduced payroll costs. And it would receive that reward only because it aids and abets the sale of marijuana.

Besides, illegal businesses have always been subject to the same laws that regulate lawful enterprises, as Al Capone famously discovered to his sorrow when he cheated on his income taxes. The even-handed enforcement of labor laws prevents unlawful businesses from gaining a competitive advantage over lawful ones.

Like most people, I long assumed that legalization of marijuana was a binary proposition, a yes or no question. Either the government regulated the industry or it allowed criminals to do so. Either it broadened its tax base to include this multi-billion dollar industry or it didn’t. But in the last six years, we as a nation have demonstrated that it’s possible for an activity to be legal and illegal at the same time. Piecemeal legalization continues with the Tenth Circuit’s formal recognition that workers in the cannabis industry are protected by federal labor laws.

Joel Jacobsen is an author who recently retired from a 29-year legal career. If there are topics you would like to see covered in future columns, please write him at legal.column.tips@gmail.com.

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