FLSA and the Cannabis Industry: 10th Circuit Rejects ‘Illegality’ Defense

Holland & Hart - Employers' Lawyers

Holland & Hart - Employers' Lawyers



Although legal for medical and recreational use in Colorado, cannabis is still federally classified as an illegal Schedule 1 substance. As such, tension results when considering the applicability of federal employment regulations to cannabis merchants and their employees. The U.S. Court of Appeals for the 10th Circuit (whose rulings apply to all Colorado employers) recently addressed some of the tension when it ruled cannabis industry employees aren’t categorically exempt from the Fair Labor Standards Act’s (FLSA) overtime provisions, notwithstanding their employment in an industry that violates the federal Controlled Substances Act (CSA). Simply put—just as Al Capone was required pay taxes on his mob money, marijuana industry employers must also follow federal wage and hour laws when it comes to their employees.

Law governing overtime pay for nonexempt employees

The FLSA obligates employers to pay overtime to nonexempt employees who work more than 40 hours in a workweek. The Act’s coverage is expansive, defining an “employer” as “any person acting directly or indirectly in the interest of an employer in relation to an employee.” It provides protections for employees who are either “engaged in commerce or in the production of goods for commerce” or “employed in an enterprise engaged in commerce or in on the production of goods for commerce.”

The FLSA then enumerates certain exempted employees who aren’t subject to overtime pay regulations. Colorado and 10th Circuit case law strongly support the application of FLSA protections for employees unless the business or the employee “plainly and unmistakably” falls within one of the enumerated exemptions.

Kenney v. Helix TCS, Inc.—background

Robert Kenney worked as a security guard for Helix TCS, Inc., which provides security services for marijuana businesses in Colorado. In January 2018, he sued Helix in federal court, claiming the company misclassified him and other similarly situated employees as exempt from the FLSA’s wage and hour protections. He also alleged it owed him overtime pay for the hours worked over 40 hours per week.

Helix filed a request to dismiss the overtime claim because it argued the CSA—the statute establishing federal drug policy under which the manufacture, importation, possession, use, and distribution of certain substances is regulated—precluded Kenney’s claim. It didn’t dispute that he worked more than 40 hours per week, but it asserted an “illegality” defense, stating that his employment in a federally illegal industry excluded him from FLSA overtime provisions and protections. Likewise, Helix argued the CSA had the effect of impliedly repealing the FLSA’s overtime provisions for employees in the marijuana industry.

The U.S. District Court for the District of Colorado rejected the company’s illegality and implied repeal arguments and held it was required to comply with federal wage and hour laws, notwithstanding that it operated in a federally illegal industry.

10th Circuit affirms the lower court’s rejection of arguments

In its appeal before the 10th Circuit, Helix again contended its employees aren’t entitled to FLSA protections because of the illegal nature of the industry under federal law and the inherent inconsistency between the FLSA and the CSA. In its appellate brief, Helix stated, “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.” Therefore, it contended that since the FLSA and CSA directly conflict, and since employees in state marijuana industries inherently assume the risk their employment will subject them to federal criminal sanctions, they are neither entitled to overtime protections under federal law nor should they have redress in federal courts to enforce them.

The 10th Circuit rejected Helix’s arguments. Regarding the illegality defense, the court said the “case law is clear that employers are not excused from complying with federal laws because of their other federal violations.” It equated the employer’s federal regulation violation to Al Capone’s failure to pay taxes on his mob activity-derived income, writing “The employers’ argument [against complying with federal law because of their other federal violations] rests on a legal theory as flawed today as it was in 1931 when jurors convicted Al Capone of failing to pay taxes on illicit income.”

Regarding Helix’s implied repeal argument, the 10th Circuit concluded the FLSA and CSA weren’t incompatible when considering protections for employees in the marijuana industry. “Adhering to the plain language” of the two statutes, the court concluded that, together, the two statutes would actually “level the playing field” both within and beyond the marijuana industry by preventing “unlawful businesses from procuring an unfair advantage over all other legitimate employers” that are required to comply with the FLSA and its overtime provisions. In other words, the 10th Circuit recognized it would be fundamentally unfair for a business such as Helix to rely on its own “illegality” under the CSA in order to dodge its overtime obligations to its employees under the FLSA. Kenney v. Helix TCS, Inc.

Ramifications of Kenney beyond the FLSA

Kenney affirms that employers in Colorado, no matter the industry, must comply with the federally established wage and hour laws. The case is worth noting because the 10th Circuit’s reasoning regarding the “implied repeal” and the “illegality defense” is broad enough to apply outside the context of the FLSA.

Moving forward, it will be worth watching to see how Kenney will be applied to other employment laws in the future.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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