Cannabis companies must follow federal, state, and local law regarding hiring and firing employees. Letting go of an employee improperly or illegally may result in a wrongful termination lawsuit, which is time-consuming and costly to defend. Notably, many of these employee protection laws apply, regardless of the age or size of the company at issue. Companies must plan employment law compliance into their launch and all of their operations.
Good preparation is the key to prevention. What’s at risk, and what should be done to properly follow the law in the event of a termination?
What does wrongful termination mean?
Wrongful termination, also called wrongful dismissal, is when an employer fires an employee for an illegal reason. The reason can be dictated by federal, state, and/or city law. Examples of wrongful termination include:
- Due to status as a protected class, such as age or sex
- Refusing to conduct an illegal act on the company’s behalf
- Refusing to participate in harassment at work
- Due to reporting wrongful conduct (retaliation)
Notable wrongful termination lawsuits in cannabis
High Times
The now-defunct High Times made headlines in October 2016 when its former chief executive, David Kohl, filed a $6 million wrongful termination lawsuit against the marijuana magazine’s parent company.
Reportedly, after one year with High Times, Kohl was fired after demanding, among other things, that the High Times staffers be “more professional.”
In his lawsuit, Kohl alleges that his criticism of the board’s “laziness” and “ineffectiveness” was “entirely justified” and that his termination stemmed from “efforts to alter the culture of professionalism and inappropriate behavior” allegedly present at High Times.
In comparison, Matt Stang, the High Times director who terminated Kohl, had been arrested in 2012 with 45 others, for alleged cannabis trafficking in connection with a multimillion-dollar New York City drug ring. Stang pleaded guilty and paid a $250,000 fine, but it isn’t a stretch of the imagination to view his transgression as worthy of termination even though it was a cannabis offense. Yet, the magazine elected to retain Stang.
When Kohl was subsequently fired, he alleged that High Times “manufactured” the reason for his dismissal to avoid paying the three years of severance that was owed to him under his employment agreement. When considering cases like this, courts look to see whether an employee was truly fired “for cause” or “without cause.”
Electrum Partners
Headlines also followed a 2017 lawsuit in which a former Electrum Partners employee alleged that she was wrongfully terminated for receiving a cancer diagnosis and reporting intra-company sexual activity that posed a risk to the company.
The former employee informed Electrum that she was diagnosed with stage-4 breast cancer. Soon after her diagnosis, Electrum allegedly fell behind on payments for the former employee’s work. When she expressed alarm at the missing payments, the employee claimed she was fired via email.
This case raises the important issues of policies for termination. While a company may be able to fire someone via a quick email according to local law, a lack of structure around termination makes defending terminations far more difficult.
Curaleaf
In 2024, cannabis giant Curaleaf was charged by the National Labor Relations Board with four unfair labor violations, including wrongful termination.
The violations focused on a specific dispensary in Gilbert, Arizona. Regulators said the company made employees feel like they were under surveillance, threatened the loss of tips if workers unionized, promised benefits if they didn’t unionize, and wrongfully terminated a unionizing employee.
Upon panel review of the Administrative Law Judge’s decision, the wrongful termination allegations were dropped. It was determined that Curaleaf fired the employee at issue in accordance with its neutral four-step disciplinary policy.
Curaleaf’s case is a perfect example of the importance of consulting with a lawyer as early as possible in your business’s life cycle. A lawyer can help you build and enforce a neutral disciplinary policy so that your business is more protected from potential wrongful termination suits.
Termination for cause vs. wrongful termination
Not surprisingly, “cause” is among the most heavily negotiated terms in an employment agreement. Employers want to maintain broad discretion to determine what constitutes termination “for cause.” Many employers define cause as a breach of contract (such as confidentiality or intellectual property provisions), violation of a code of ethics, or a failure to follow company policy.
Cause also frequently includes employee infractions such as fraud, embezzlement, theft, violence, harassment, misuse of company property (such as watching pornography online), failing a drug or alcohol test, or conviction for certain crimes involving “moral turpitude” (dishonesty, immorality, or unethical behavior).
Depending on the state in which an employer operates, the obligation to pay severance typically hinges on the language of the offering and employment agreements. In general, employers tend not to award severance to employees who have been terminated for their own misconduct, i.e., “for cause.”
This chart breaks down the main differences between termination for cause and wrongful termination:
What about at-will employment?
At-will employment means an employer can let go of an employee at any time, for any reason, as long as the reason is legal. This further emphasizes the importance of a strong and thorough “for cause” provision in employment contracts.
The status of wrongful termination for medical and recreational cannabis use
Cannabis-related employment litigation is being dominated by whether medical cannabis use by employees where it’s legal constitutes “cause for termination.”
The Americans with Disabilities Act (ADA) precludes employers from taking an adverse employment action, such as termination, based on disability. The ADA also requires employers to make reasonable accommodations to disabled employees, subject to undue hardship on the employer. Yet, the ADA contains exceptions for drugs that are unlawful under the Controlled Substances Act, including cannabis.
As a result, most states and courts have determined that employers are permitted to enact zero-tolerance policies and are not required to accommodate employees’ legal use of medical cannabis. This is often regardless of whether the employees’ use of cannabis was on or off the job.
Courts in Oregon and California have determined that the voters who legalized medical cannabis did not intend to affect an employer’s ability to include cannabis use as cause for termination or other adverse employment actions. A few states, including New York, Delaware, Arizona and Minnesota, protect employees from termination for failing a drug test, assuming they have medical authorization.
Tips to protect your cannabis company against wrongful termination lawsuits
Employment agreements are central to protecting companies from wrongful termination lawsuits. Ensure that the provisions in your contract are strong and thoroughly vetted by an attorney experienced in labor law and the cannabis industry. Employment agreements should also be reviewed annually to ensure continued compliance with applicable laws.
Carefully define termination for cause
To avoid wrongful termination lawsuits stemming from termination without cause, employers should draft employment agreements in a manner that clearly defines “cause” and specifies the compensation or benefits employees would be entitled to receive in the event of termination for cause. Employment agreements should spell out whether all cause, or just certain categories of cause, eliminates the employer’s obligation to pay severance.
Maintain written records
It is critical to notate everything that leads up to the employee’s termination. This includes regular and recurring performance reviews and appraisals. Supervisors should be encouraged to speak openly with their employees about their performance and to document these matters throughout the year.
Conduct thorough investigations before terminating an employee
Thorough record-keeping extends to a proper inquiry into employee termination. This includes, among other things, following up on claims of poor performance and reviewing written performance reviews, appraisals, employment agreements, and offer letters. Preparedness is critical to ensuring termination is lawful.
Include human resources and management
Bring in others to review the grounds for, and to observe, the termination. This could help to avoid a “he said/she said” account of what transpired during terminations. Clear statements concerning an employer’s reasons for termination may reduce the likelihood that employees will reach their own conclusions about why they were let go. Draft talking points and avoid apologies — less is more.
Purchase employment practice liability insurance
EPLI covers your company in the event of a wrongful termination lawsuit. Standard general liability insurance generally does not include such coverage. The cost of premiums frequently pales in comparison to full-blown litigation.
Protect your company from wrongful termination lawsuits with the right planning
Cannabis companies are targets for expensive termination lawsuits, and they should work expeditiously to avoid them. Thorough preparation is essential to minimizing the risk of fallout in the event of an employee’s termination. Whether you’re hiring new employees or need to terminate someone for cause, proper and competent legal representation is a must. Contact the experienced cannabis industry attorneys at Rudick Law Group to assist you in building employment agreements and to guide you through the termination process.
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