Tag Archives: payroll

An Interview with Würk CEO & Chairman, Scott Kenyon

By Aaron Green
No Comments

The cannabis industry operates in a legal gray area between federal restrictions and state legalization in a constantly changing regulatory environment. Maintaining payroll and HR compliance is a burden cannabis companies face that grows exponentially with geographic expansion of the workforce.

Würk allows cannabis companies to manage payroll, human resources, timekeeping, scheduling and tax compliance, minimizing compliance risks in the ever-changing cannabis regulatory environment. The company uses its expertise and trusted partnerships to provide guidance on 280E tax law, accounting and banking. Its platform is designed to scale nationally with the growth of the industry while incorporating the local laws and regulations unique to individual states. Their clients include Cresco Labs, Canndescent and NUG.

We caught up with Scott Kenyon to ask about Würk’s approach to human capital management, challenges facing cannabis businesses and industry trends. Scott sat on the Board of Würk before becoming its CEO and chairman. Prior to Würk, Scott held leadership roles at Dell and Phunware.

Aaron Green: How did you get involved in the cannabis industry?

Scott Kenyon, CEO and Chairman of Würk

Scott Kenyon: My wife and I were early investors in a few companies in Colorado and Nevada. From early on (this was back in 2015) we learned the hard way of cannabis and how difficult it is to run these businesses, especially in those early days. We’ve progressed a ton over the years, but it’s still very difficult to run cannabis businesses.

I joined Würk about five years ago as a board member. I came on as CEO at the beginning of 2021 after our founder and previous CEO Keegan Peterson, who was an early trailblazer in the industry, passed away. So, I’ve been CEO at Würk for about 18 months.

Green: Tell me about Würk and the main problems you’re trying to solve.

Kenyon: Early on we were focused on establishing getting out of the cash business for these cannabis companies. Allowing them to pay payroll, taxes and be tax compliant electronically was a huge early advantage for us as a company. Now, fast forward seven years later and a lot of different banks (credit unions) are in the industry and that is allowing people to move money. So, that’s not as big of an advantage for us anymore, but early on that was huge.

Our advantage now is the scars on our back, for lack of a better phrase, from what we’ve gone through over the last seven years. We anticipate. We prevent. And most importantly we’ve seen all those problems for our customers. Last year, a big thing of mine was being “Smokey the Bear.” We want everybody to be Smokey the Bear: prevent fires and prevent issues for our customers. When I came in, we were the world’s best firefighters. I didn’t want that title. I wanted to prevent issues for our customers. That takes you from being a vendor to a partner.

If you look at it, on our platform we have 80% of the enterprise cannabis market, about 60% of the mid-market and then low single digits in the small business space. We have that market share because we provide invaluable experience and guidance to our customers. The biggest MSOs have different challenges from a “Joseph and Scott” dispensary, or a “Mary and Jane” grow facility. We’re able to adapt to all those different segments.

At the core of our product, we offer payroll services and what we call HCM – human capital management. That’s everything from scheduling, applicant tracking systems processing and paying your payroll taxes. So, we have the full gamut of product offerings that any type of HCM or HRIS software system does, whether you’re outside of cannabis or inside of cannabis, we’re offering the same thing.

Green: How does Würk differ from say a Professional Employer Organization (PEO)?

Kenyon: We aren’t a PEO. We don’t manage employees. At a high-level, a PEO is basically managing HR for these companies. Our platform enables HR professionals to go out there and do that. PEOs are more popular down in the small business space, because people are not at the scale to hire an HR team. We’re similar in that we’re processing payroll and have all the software that these companies need, but we’re different in that we’re not running their HR for them.

Green: How do you work benefits into the mix?

Kenyon: We leave it to the client, and we integrate their benefits provider into our platform so it’s an easy one-stop shop. We have single sign-on for a lot of our integrations. For the HR organizations, we want them to log into our platform and everything they need will be there.

Green: How is SAFE banking going to affect the HR industry in cannabis?

Kenyon: It’s going to be great for the industry, obviously. For HR specifically, it’s going to bring in more providers of payroll and more competitors for us for sure. But also it’s going to bring in more providers of services that can come in and offer that right now because of the federal illegalization.

Green: How does 280E affect your business and your customers?

Kenyon: We don’t guide people around 280E because that’s a tax specific matter. We refer them to their tax experts. We process payroll tax, which is different than what 280E affects. I think 280E was a big challenge, it’s still a big challenge, but that’s mostly because people didn’t really understand it. I think 280E was a problem five to seven years ago. In the last two years most companies are very familiar with it. That doesn’t mean 280E is the right thing. I think 280E is an awful thing. And while I think I hope SAFE banking is the first thing to fall legislatively, I think 280E has a good chance of getting across first.

On any given day my opinion on which will go first changes. I just want something to get across the line.

Green: What are some unemployment and payroll challenges your customers face?

Kenyon: We really watch unemployment changes and changes in job descriptions or job codes. For example, if an unemployment rate changed, and that unemployed person moved to a different place, which happened a lot during COVID, that company needed to report that and they needed to collect the appropriate charges or taxes there.

Green: What geographies are you in right now?

Kenyon: As of January 1, we had people on our platform in 46 states and just under 600 different jurisdictions. So, even though cannabis isn’t legal in all those states, big companies have employees across the United States.

Green: How do you help your users manage compliance across multiple jurisdictions? That must be a complex undertaking.

Kenyon: Our platform automatically plugs into the states that have electronic notifications around laws, which most states do. In our tax department, we have certain group members that are experts, let’s say, in the west coast. So, we assign people to certain regions to ensure that they have the best knowledge.

From our support piece, where a lot of our customers come in, somebody might say, “Hey, I have a unique question for Utah” and we’ll say we have a person that is specialized in Utah, but we don’t force them there, we just give them the option. But in our tax queue, we actually direct the customer like, “Hey, here’s a Massachusetts Question, so that goes to a particular person because they are our Massachusetts expert.”

Green: How do you deal with timekeeping issues like overtime?

Kenyon: Well, our system does that automatically. Let’s say they’re working overtime in a state that’s difficult to keep time for like California. In the state of California, if they’re working overtime on a Saturday or Sunday or a holiday, that’s a whole different calculation than working longer on a Thursday night. So, our platform is made to automatically calculate that for our customers. There’s no manual adjustments or coaching happening there. We just follow the state law based on where the employees are.

Green: Are you seeing any unionization of employees within the cannabis industry?

Kenyon: There’s unionization in many of our states, I don’t know the exact number, but California being the biggest, there’s a lot of union representation. Illinois is probably the second biggest union state on our platform. I’m assuming New York will be once it becomes adult use.

Green: How does Würk approach cybersecurity?

“Cannabis customers don’t want to buy on the illicit market. They want to buy from a trusted source. It just takes time to make that happen.”Kenyon: Well, we approach it very seriously and I recommend everybody take cybersecurity seriously. We test our internal systems regularly. We test our employees through phishing scams. And we’re always just trying to educate our team on the risk that we have.

I can’t share specifically the prevention steps that we’re taking, but I can tell you we partner with some of the biggest experts and make sure that we’re following everything that they’re recommending. More importantly, we’re testing for human failures, because where most failures happen is with people.

Green: What trends are you following in the industry right now? 

Kenyon: Any type of activity in Congress is going to be huge for this industry. So that’s something I always keep abreast of. The next thing that comes down the line which is tied to that is interstate commerce: How is interstate commerce going to really come into play? And how does that change this industry?

Within the industry, the big question is how do we combat the illicit market? Over the last five years, I’ve heard all kinds of different ideas. But in the end, I think we have to out-innovate the illicit market, and that’s what I’m most excited about.

There are new product categories, beverage being one that is starting to gain traction. How are these new products and new variations of the cannabis plant able to treat and help people in ways that we’ve never thought of? That’s part of out-innovation. I was reading an article today about new terpenes that were discovered and how 100 products could come from each one of those new terpenes. I think we’re just still at the tip of the iceberg of product innovation.

How do we fight the illicit market? I think that is just through coming up with new products that treat different illnesses and ailments, that allow customers to get away from pharmaceuticals. Cannabis customers don’t want to buy on the illicit market. They want to buy from a trusted source. It just takes time to make that happen. They’re not going to do it when there’s a huge price difference, but they will do it when there’s a huge product difference. And right now, our products are very similar to what you can find on the illicit market. You can find vapes, you can find gummies, you can find all that in the illicit market. We’ve got to out-innovate the illicit market.

Green: What in your personal life are you most interested in learning about?

Kenyon: I am the father of two teenagers right now and I really like to learn how to be a better parent to them because it’s really frickin’ tough!

Green: Great, that concludes the interview!

Kenyon: Thanks, Aaron.

How Section 280E is Still Hindering the Cannabis Industry

By Jay Jerose
No Comments

The cannabis industry is an unprecedented industry and one under constant review and control. Following the November 2020 elections, fifteen states and Washington DC have legalized adult use cannabis, a number that will continue to grow as legalization slowly becomes more widely adopted in other states. Beyond that, a continuously growing number of states allow residents to purchase legal medicinal cannabis, and many have also decriminalized adult use. However, it still remains a Schedule I substance under the Controlled Substances Act and is therefore illegal on all accounts at the U.S. federal level, which creates a number of issues for businesses in the cannabis industry duly operating in states where it has been legalized.

Not only is it difficult for cannabis companies to avail themselves of alternative banking solutions, but there are also obstacles in place preventing these companies from taking advantage of notable tax deductions. The primary obstacle being Internal Revenue Code (IRC) Section 280E.

What is Section 280E?

Section 280E is a relatively short code section, only 77 words to be exact, but it carries significant weight and can have a debilitating effect on the taxable income of marijuana [sic] related businesses (MRB). Section 280E of the IRC prohibits taxpayers who are engaged in the business of trafficking certain controlled substances, including cannabis, from deducting typical business expenses associated those activities. Section 280E, which was enacted in 1982 during the “War on Drugs” era, has become increasingly relevant for cannabis businesses. The cannabis industry has grown substantially in recent years with annual market values expected to reach $30 billion by 2025.

However, while Section 280E greatly restricts the tax deductions of state-legal cannabis businesses, there is some reprieve. Current IRC provisions permit state-legal cannabis businesses, including growers, producers, wholesalers or retailers, to deduct the Cost of Goods Sold (COGS) in computing their US federal income tax liability, despite the application of Section 280E.

Impact of Section 280E on Businesses

 What does Section 280E mean for cannabis businesses today? It is intended to prevent dealers from claiming tax deductions for their business expenses, interpreted to include state-legal cannabis businesses, reduced deductions that result in increased taxable income and MRBs will face higher federal tax rates. 

The IRC disallows any deductions or credits paid or incurred during a tax year if those deductions or credits relate to trafficking controlled substances. The courts have taken the position that the term “trafficking” in this case means “engaging in a commercial activity – that is, to buy and sell regularly.” Simply, the law denies cannabis businesses any U.S. federal income tax deduction for ordinary and necessary business expenses, despite being duly licensed as a legal business in their state of operation.

Typically, the ability to deduct ordinary business expenses means that a business is subject to federal tax on its net income (i.e., gross receipts minus expenses). However, the definition of Section 280E and the classification of cannabis as a Schedule I substance severely hinders legal cannabis companies from taking advantage of tax deductions for actual economic expenses incurred in the ordinary course of business, which results in a significantly higher effective tax rate as compared to other businesses.

Legal Actions and Challenges to Section 280E

There have been court challenges and concessions made to Section 280E. Specifically, the 2007 court case Californians Helping to Alleviate Medical Problems, Inc., v. Commissioner. This court case reinforced the precedence that Section 280E does not apply to cost of goods sold. The Internal Revenue Service (IRS) defines cost of goods sold to be “expenditures necessary to acquire, construct or extract a physical product which is to be sold.” Generally, for a retail MRB, this means that the direct cost of acquiring cannabis products for resale. Deductions for rent, utilities, wages, insurance and other operating costs common to ordinary businesses are generally disallowed. New York State has specifically indicated that it intends to follow Section 280E for its own income tax calculations, disallowing these same deductions against New York taxable income

Tax Court and Section 280E

The Tax Court has also been aggressive in tamping down efforts by MRBs to separate cannabis related and non-cannabis related activities. The courts argue that these separate activities constitute a single trade or business when they share a close and inseparable organizational and economic relationship. In addition, the risk of cannabis related activities tainting a taxpayer’s other business concerns exists if services or employees are shared between an MRB and a non-MRB. Allocation of expenditures to cost of goods sold, as well as any allocations of costs between MRB and non-MRB entities, need to be well thought out and supported by defensible tax and accounting positions.

The Future of MRBs and Section 280E

All indications point to an increased frequency of IRS audits of MRBs compared to audits of non-cannabis related businesses. Therefore, documenting the methodology behind the calculation of costs of goods sold is even more important for MRBs. It is vital to consult with a tax advisor to ensure you are maximizing your cost of goods sold deductions and preparing the best documentation possible to support your 280E tax positions.

Disclaimer: The information presented in this article should not be considered legal advice or counsel and does not create an attorney-client relationship between the author and the reader. If the reader of this has legal or accounting questions, it is recommended they consult with their attorney or accountant.

Best Practices for Workforce Reduction

By Conor Dale
No Comments

Due to anticipated contractions in the industry and concerns over a potential nationwide recession, cannabis industry employers may be planning on implementing large scale reduction in force (RIF) layoffs or employee furloughs to reduce payroll. While RIFs can provide business-saving cost reductions, they can subject an employer to substantial potential legal liability, including but not limited to class action lawsuits and enforcement actions from state and federal agencies. Understanding and addressing potential legal pitfalls before implementing an RIF can help in materially limiting an employer’s potential legal exposure.

Employers should first consider potential cost saving alternatives to implementing mass employee layoffs. Such steps can include reducing the salaries and/or work hours for current employees, temporarily freezing company operations for limited periods, or placing non-critical positions in a limited paid leave of absence at reduced wages. While each of these steps bear their own risks, they may assist in avoiding mass employee layoffs.

Next, federal law and the laws of certain states require employers to provide written notice to employees and local governments at least 60 days before implementing mass layoffs. For example, under the federal Work Adjustment and Retraining Notification (WARN) Act, an employer must generally provide a written notice to employees regarding an impending reduction in force when it: (1) permanently or temporarily shuts down a worksite which results in an employment loss of 50 or more employees; (2) lays off between 50 to 499 workers at a single worksite when such layoffs constitute at least 33% of the employer’s workforce; (3) lays off at least 500 employees within a 30 day period; (4) implements a wide scale temporary layoff of more than 6 months; or (5) reduces the work hours of 50 or more employees by at least 50% during each month of any six month period. Please note that the WARN Act aggregates layoffs over 90 days; thus, an employer conducting a series of smaller layoffs may still need to provide employees with a WARN notice. An employer who fails to provide a required notice could owe each impacted employee up to 60 days’ back pay, which includes but is not limited to the cost of potential employment benefits.

An employer should also take steps to limit potential discrimination claims based on an RIF. It is illegal for an employer to select an employee for layoff because of their protected characteristics, including but not limited to race, religion, gender or age. The primary defense to such a discrimination lawsuit is to prove the legitimate, nondiscriminatory reason for the layoff decision. As a result, employers are strongly encouraged to create a formal RIF plan which documents the legitimate reasons for layoff decisions. The RIF plan should expressly articulate the cost-saving grounds for the RIF and the goals to be achieved by its implementation; these grounds and goals should be the sole reason for any subsequent layoff decision.

Employers are strongly encouraged to consult with legal counsel before implementing an RIFFor example, an employer should identify all necessary positions and employee skills needed for a company’s current and future business operations in order to identify non-essential positions that may be subject to position eliminations or layoffs. Similarly, employers should create standards to select employees for a RIF when multiple employees hold the same or similar jobs. These standards commonly include considering employees’ education, skills, unique knowledge, previous job performance and seniority. Most importantly, an employer should make actual layoff decisions that are consistent with its articulated RIF plans; under both state and federal law, a termination decision that is inconsistent with or contradictory to the articulated reasons for a layoff decision may provide an employee with considerable evidence that that his or her termination was at least partly motivated by their protected characteristics.

Even when making and implementing a reduction in force plan based solely on legitimate business reasons, employers must be aware of the adverse impact those decisions have on certain groups of employees. It is illegal for an employer to implement policies and practices that are facially neutral but have an unintentional discriminatory effect on protected groups of employees if those policies and practices are not job related or required by business necessity. Before implementing an RIF, employers are strongly encouraged to perform a statistical analysis of the protected characteristics of individuals selected for layoffs to determine whether they are being selected for layoffs at a significantly higher rate than other employees. If an employer does discover that certain groups are being selected for layoffs at a disproportionate rate, an employer should review its layoff decisions to confirm that these decisions are in fact required by business necessity.

Finally, employers will commonly provide severance packages to laid off employees to assist in their transition to other employment. A key factor in these packages is an employee providing an employer with a full release of potential legal claims in exchange for a severance payment. Employers are strongly encouraged to ensure that they obtain full and complete legal releases in any severance agreements they provide. For example, under California law, an employee can only provide a full and complete release of legal claims when a separation agreement specifically cites and waives a specific provision of California’s civil code. Additionally, an employer cannot obtain a legal release of federal age discrimination claims when it offers a separation package to multiple employees over 40 during an RIF program unless it provides specific information regarding the job positions and ages of employees who were and were not selected for layoffs.

While a reduction in force layoff program may help ensure a business’ survival, employers are strongly encouraged to consult with legal counsel before implementing an RIF to detect and avoid potential future legal claims.

Four Payroll Best Practices for Cannabis Companies

By Michelle Lanter Smith
6 Comments

Among the myriad business challenges facing cannabis companies, processing payroll ranks right up there. On top of the industry’s overarching banking and regulatory hurdles—not to mention prohibitive tax liability—its varied, sometimes unconventional pay models can fall outside the scope of traditional payroll processing.

Obviously, despite the many business issues clamoring for attention, the cannabis industry is powered by people—and for a business to succeed, employees must be paid accurately, legally, and on time.

While the industry is still evolving in many respects, there are steps cannabis businesses can take right now to ensure payroll is processed correctly and compliantly—including these four best practices.

1. Implement Foolproof Tracking Processes for Each Pay Model

In addition to salaried and hourly employees—who can be difficult to time-track, depending how they’re distributed—some growers pay bud trimmers by the ounce or pound of trimmed, manicured product. While such productivity-based compensation may make absolute sense for your business, most conventional time and attendance and payroll software isn’t equipped to administer this pay model.

As a result, some companies may resort to manual tracking—but that can create regulatory recordkeeping challenges of their own. The answer: flexible time and attendance software that allows companies to track employees’ time and/or productivity using a variety of data collection methods for different elements of the workforce. It may mean using conventional biometric time clocks at processing facilities and retail dispensaries…mobile time-tracking apps for gardeners and growers in the field…and versatile apps that track employee output by work order or piece rate, however your business chooses to define it.

Furthermore, regardless of how it’s collected, all that data needs to flow seamlessly into your payroll processing system, ensuring pay is calculated correctly for every pay model. The HR payroll software is out there, but you may need to look for it.

2. Verify that Your Payroll Provider Is Cannabis-Friendly

Perhaps you’ve heard horror stories of cannabis companies getting abruptly dropped by their software providers with a mere 30-days’ notice. Some leading HR payroll software companies have made seemingly overnight decisions to withdraw from servicing the cannabis industry, leaving employers struggling to pay their people. Who can implement new HR payroll software in 30 days?

Make sure your payroll provider is committed to serving the cannabis industry for the long haul. If the commitment isn’t there, start looking elsewhere. Beyond avoiding potentially damaging business disruptions, partnering with a software provider that actively services the cannabis industry will offer unique capabilities you may not find elsewhere.

3. Become an Expert on IRS Code 280e (COGS)

Thanks to section 280e of Internal Revenue code, state-compliant cannabis business cannot deduct business expenses except for the cost of goods sold (COGS).

The saving grace here for growers and processors: labor costs that are inventorial in nature are considered cost of goods sold. That includes the cleaning, trimming and curing of product, as well as packaging and inventory labor.

Therefore, for tax purposes, it’s critical to assign each employee a specific title and role within your operation. This is particularly important for vertically-integrated companies whose employees wear more than one hat.

Say, an employee works part time in cultivation and part time in your retail dispensary. You need to be able to track their work time and compensation separately—i.e., you need a time and attendance system that can track split shifts—and keep detailed records of what labor costs are and aren’t deductible.

 4. Consider Integrated HR Payroll Software

Because of payroll challenges, many cannabis businesses are still piecing together disparate HR systems, such as applicant tracking, time and attendance, payroll and benefits. But when their integration isn’t flawless it can create the need for duplicate inputting and elaborate manual workarounds.

Furthermore, a patchwork software can stop businesses from accessing reports and analytics that inform decision-making and better position the company for growth—while also ensuring the company is in a position to provide whatever regulatory information may be required.

The answer: choose a payroll provider that offers complete, integrated HR payroll software—one that that can demonstrate its long-term commitment to serving the state-licensed cannabis industry.