We have been working through some employment issues lately with a few clients, all involving the ins and outs of termination. The United States differs from Europe and much of the rest of the world in employment rights. In the U.S., the vast majority of employees are employed “at-will,” meaning that the employer has the right to terminate employment at any time for almost any reason — no cause needs to be shown. That said, there are still some exceptions to this rule that employers need to keep in mind, and there are some specific steps that smart employers should take when they are contemplating terminating an employee.
For cannabis businesses, the main reasons we have been seeing terminations lately are for regulatory violations and economic reasons. Marijuana-licensed businesses face huge repercussions for violations of state law, including license cancellation. When an employee commits a violation that exposes the cannabis business to regulatory penalties, termination has to be on the table, if only because the state tends to hold the marijuana business strictly liable for the violation. These types of terminations can broadly be called “misconduct” terminations. On the economic end, many licensed cannabis businesses are beginning to realize they are too bloated to compete effectively. State caps on production and licensing tend to shield businesses from some competition early on, but over time, markets tend to drive cannabis prices down, and companies need to get lean in order to survive. Sometimes, that means there are too many employees, and some of them have to be let go. These terminations tend to be called layoffs.
One of the first challenges an employer needs to figure out after making the decision to terminate an employee or employees is whether to put up a fight if the employee files for state unemployment benefits. If an employee is laid off, that employee is generally entitled to unemployment benefits. If an employee was fired, however, there’s an open question. If a company fires an employee for financial reasons or because that employee was determined to just be a bad fit for the position, the employee is likely still entitled to get unemployment. On the other hand, if the employer fired the employee for misconduct, that employee likely won’t qualify for unemployment. It is in the employer’s interest to contest undeserved unemployment claims for two main reasons. The employer’s unemployment insurance rate will potentially increase based on the claim. Additionally, contesting unemployment can lay the groundwork of evidence that will be used if the employee brings a wrongful termination suit.
And yes, wrongful termination is still a thing despite the general policy of at-will employment. There are four main exceptions to the at-will doctrine: statutory protections, public policy, express or implied contract, and covenant of good faith. These exceptions don’t all exist in every state, but certain employee-friendly states like California have all of them. Statutory protection, exists to some extent in every state at least for federal protections, includes things like certain discrimination claims, firing employees for participating in lawful union activities, firing employees for protesting unsafe working conditions, whistleblowing, etc. And yes, federal employment laws do apply to marijuana businesses, and federal courts are unlikely to throw an employee’s claim out just because they were employed by a cannabis company. See Cannabis Industry Labor Laws. The public policy exception says that an employee is wrongfully discharged when the termination violates an existing, well-established public policy of the state. For example, in many states a company cannot fire an employee for providing truthful testimony in a deposition when the company had instructed the employee to lie. Well established public policy mandates honesty in depositions, so an employer can’t punish an employee for abiding by that law. Contractual exemptions mean that employees can negotiate with employers to not be terminable at-will. These contracts can be implied, like when an employee doesn’t have a contract but has a handbook stating that he or she will only be fired for just cause. Finally, there is a good faith exception, but that only exists in a few states. This situation comes when, for example, an employer has a pension available for employees that have worked there for 15 years but decides, for no legitimate reason, to fire an employee in her 14th year. Again, this exception isn’t widespread in the U.S., but employers should steer clear of conducting business in bad faith regardless.
Firing employees is sometimes a necessary evil for cannabis businesses, but cannabis businesses must — just like other businesses — stay alert for employment law pitfalls. In later posts we will discuss recommended documentation for employers contemplating terminating employees, termination issues involving written employment agreements, severance agreements, and waivers of claims.