Regulating a "Growing" Industry: The Role of Background Checks in the Cannabis Sector
The retreat of the War on Drugs on the issue of marijuana sparked a revolution and led to the genesis of a new industry ...
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Not too long ago, cannabis was viewed as an illicit drug. Today, it’s thought of as one of the biggest economic opportunities. That shift has been brought by a trend of marijuana legalization in the United States. Some might say that particular trend began back in 1996 when California became the first state in the country to legalize marijuana for medical purposes. But while medical marijuana legalization did bring about a profitable industry in the cultivation, processing, and sale of marijuana products, that market was inherently limited by the medical-only designation.
It wasn’t until Colorado legalized marijuana for recreational usage in 2012 that cannabis culture became the economic force it is today. In the decade since, 18 other states and counting – plus Washington, D.C. and Guam – have passed their own laws legalizing recreational (or “adult use”) weed. Now, according to Fortune, legal sales of marijuana are expected to top $33 million by the end of 2022. That number is likely to grow significantly in the years to come as additional states legalize marijuana use, reaching an estimated market value of $52 million by 2026.
All this growth has occurred despite a few complicating factors, ranging from the checkerboard of legalization across the United States and the fact that marijuana remains illegal at the federal level. Indeed, though Congress considered marijuana decriminalization bills at the federal level in 2022 – with one of those bills even passing the House – a true nationwide legalization effort remains a hypothetical potentiality for now.
For these reasons and others, cannabis is arguably one of the most heavily regulated industries in the U.S. For entrepreneurs or businesses thinking about breaking into this burgeoning industry, full compliance with all regulations is vital to avoid legal troubles, issues with public image and customer trust, and bad optics for the industry. In this white paper, we will take a closer look at background check policies in the world of marijuana, from the grower’s side to the processors and sellers.
Requirements for cannabis business owners and employees
First, it is important to understand that background checks in the cannabis sector are just some of the regulatory requirements that you might face if you are seeking a job or trying to launch a business in this industry. While some of the regulations in the marijuana sector certainly revolve around vetting the people who work in that sector, others touch on everything from growing practices to marijuana potency to typical health and safety protocols.
In general, the best way to view regulations in the cannabis industry is to split them into two categories. On one side, you have the compliance rules that apply to cannabis business owners and key executives whose names appear on the business license. On the other side are the rules that apply to people who wish to work in the cannabis industry – including job seekers looking for full-time or part-time employment, independent contractors, consultants, and more.
As is typically the case in any industry, more of the regulatory burden in the cannabis sector falls upon the business owner or license holder. Someone trying to start a marijuana business will face heftier requirements and prerequisites than a job seeker who simply wants to work for an existing cannabis company.
This point is certainly true regarding background check policy, which can be significantly stricter for a leader at the helm of a marijuana business than for an employee. Some states, for example, have rules that bar individuals with certain criminal convictions from getting a state license to open a cannabis business. At the same time, a person with the same conviction would often be allowed to go to work for an existing cannabis business without jeopardizing that company’s licensing.
If an employer goes through the licensing process and gains the privilege to operate as a cannabis business in their state and/or local jurisdiction, they have already likely navigated a gauntlet of lengthy background checks, stacks of paperwork, and more. While this process can be onerous, that doesn’t necessarily mean that the next step of establishing a cannabis business is entirely straightforward.
That next step – hiring employees to staff your cannabis company – can have its own points of confusion and complexity. Understanding these little potential pitfalls up front is vital, as it can mean the difference between a smooth opening and one plagued with lawsuits or other costly problems.
One of the most difficult things to grasp regarding hiring in the marijuana world is that what’s required for background checks for cannabis growers, processors, or retailers can vary dramatically from one place to the next.
Specifically, some states have stringent requirements that employers must follow when vetting and hiring new personnel to join their cannabis operations. In Colorado, for instance, a person must have a particular type of permit, called a “med license” issued by the state regulatory industry, to get a job in the marijuana industry. Getting that permit involves a significant background check process, and employers must make sure each person has that license in hand before they can start work.
In California, on the other hand, cannabis business leaders go through lengthy background checks during the licensing process and other strict application requirements. Still, there is no state requirement for employee background checks. The state leaves it up to cannabis employers to decide how they vet their prospective personnel.
The bottom line is that cannabis employers need to review all relevant regulations before starting a hiring process. Every state has its own cannabis industry regulations that can impact hiring significantly, including the use of background checks. Local jurisdictions – including counties, townships, cities, and villages – can also have specific rules by which local cannabis operators must abide. Navigating these multiple layers of regulations can be especially confusing for larger cannabis companies that do business in multiple states or local jurisdictions. However, the fact is that a one-size-fits-all compliance structure doesn’t exist in the marijuana industry, and any company hoping to be successful in this sector must play by the rules – no matter how complex they might be.
While regulations specific to the cannabis industry are essential to monitor, note that those regulations are not the only compliance factors that matter. Specifically, regarding pre-employment background checks, cannabis employers must also pay attention to broader regulations that apply to all employers regardless of industry. Those requirements include federal regulations, such as the Fair Credit Reporting Act and guidance from the Equal Employment Opportunity Commission, and more localized regulations, such as fair chance hiring ordinances. Those ordinances, often known as ban the box, can affect whether you can ask questions about criminal history on job applications when you are allowed to run background checks and more in the hiring process. Similar to cannabis-specific hiring regulations, ban the box rules can vary significantly from one state or local jurisdiction to the next.
One of the most important regulations in the cannabis industry regarding hiring and personnel is the concept of “badging.” While many people newer to the industry assume that “badging” and “licensing” are the same, they are fundamentally different. Here is a brief primer about licensing vs. badging – and why both matter for your cannabis business.
Let’s start with licensing. If you wish to do business in the marijuana industry, your company needs to obtain a dedicated cannabis license – and sometimes even multiple licenses, depending on the type of operation you are running. For instance, cannabis operators must have a business license granted by the relevant regulatory agency in the state or states where they are doing business. This license is a more general, big-picture license that allows the company to maintain cannabis operations in that state.
Note that some of the background check procedures in the cannabis world occur at this level, with most states requiring that every person listed on the business license (including owners and other officers) go through background checks before the license application can be approved. Some states have specific requirements that key players in cannabis businesses must meet to be licensed, such as having no past convictions for drug trafficking.
For the most part, this practice ensures that all persons associated with the business's funding, operation and management meet specific requirements set by state law and regulation (for example, that none of the affiliated members have criminal financial histories, drug trafficking convictions, etc.).
In addition to a state license, your enterprise may need other licenses from local units of government to do business in those jurisdictions. For instance, most cities adopting recreational marijuana ordinances limit the number of marijuana dispensaries (or retailers) they let operate within city limits. This limitation means there are only so many retail licenses in those areas. Similar limitations (and therefore, licensing protocols) may exist for grow operations, cannabis processors, and other types of cannabis operations. Every local jurisdiction is unique regarding what its local ordinances allow, the license limitations, and what steps prospective licensees must go through to earn their licenses. Sometimes, those steps may include background checks, inspections, or other due diligence processes. It is the responsibility of any cannabis company to understand these local regulations and universal state or nationwide requirements.
Badging, meanwhile, is a part of the regulatory process in most states, in addition to licensing. Badging is essentially a credentialing process intended to ensure every person working in the industry has been vetted and approved to work. Typically, some badging will occur during the licensing process, with business owners and top officers getting their badges that way. However, some states also require badging approval for other personnel, including employees, contractors, and volunteers. The core part of the badging process is typically a background check.
Because the cannabis industry currently exists on such a segmented state-by-state basis, expect each state’s badging requirements will be different. Some states may not require that all employees be badged, which would give an employer more freedom in staffing, say, a retail dispensary. Other states allow job seekers interested in working in the cannabis industry to get badged on their own, offering those credentials as job applicants. Other states require that a marijuana business licensee (the employer) apply for badging on behalf of an applicant or employee. Employers should ensure they understand their state’s requirements before proceeding with any form of hiring.
Because cannabis is a developing industry, its available jobs are growing steadily. According to Forbes, the cannabis industry currently supports more than 428,000 “full-time equivalent jobs” in the U.S. – 100,000 of which were generated in 2021 alone. Long-term, that same report predicts that the industry could grow to support 1.75 million jobs nationwide eventually.
Clearly, this sector has a lot of activity and many opportunities for interested job seekers to find careers. However, there are also challenges here for employers. The sheer number of marijuana companies coming online, combined with the unsettled nature of this fast-evolving industry, means that many companies are competing for employees. Add the complicating factor of a low- unemployment economy and the Covid-era “Great Resignation” trend, and it’s clearly a job seeker’s market right now. That market has recently proven difficult for many employers to attract and retain top talent.
As employers within the cannabis industry seek to establish and grow their workforces, regulatory compliance is another big factor that is important to consider. These regulations – including rules about the types of backgrounds candidates are allowed to have – are intended to make a safer, more legitimate cannabis industry. Because cannabis was once an illicit drug, the heavily regulated nature of the industry is likely to play an essential role in helping the marijuana market gain legitimacy. In the meantime, employers may find that strict regulatory requirements further compound their hiring challenges.
Consider the Massachusetts marijuana industry as an example. The state adopted recreational marijuana legalization in 2016 and then created regulatory boards and set down boundaries for the industry. As written, the state law stipulated that employers could not automatically disqualify someone from a cannabis job because of past drug convictions. The exception? Drug trafficking, which regulators said indicates a higher level of illegal activity than simple possession or minor distribution. As a result, cannabis employers are not allowed to hire candidates with drug trafficking convictions.
Other states have their own requirements around conviction types that can or can’t be deemed automatic boundaries to employment. While in place for many reasons, these rules may make it slightly more difficult for cannabis employers to find interested candidates in a limited talent market.
As we’ve already discussed, there can be multiple types of cannabis licenses that a business needs to operate in this industry. A general business license granted by the state doesn’t necessarily give a marijuana company the freedom to open a cannabis dispensary anywhere they please. Local licensing requirements exist for dispensaries, grow/cultivation operations, processors, and more.
One of the more overlooked aspects of this tangled web of licensing is cannabis delivery. During the pandemic, when retail operations were largely shuttered, delivery became popular in many business sectors, from groceries to restaurants. Cannabis was no exception to that rule, with many dispensaries keeping their stores closed but continuing to do business by offering delivery of their products to nearby addresses. Delivery was so successful for many of those businesses that cannabis delivery has now become its own important revenue stream for many retailers.
While cannabis delivery has a lot of potential as a market segment and revenue driver, it comes with its own regulatory requirements. In some states or jurisdictions, marijuana enterprises may need extra licenses to offer delivery services. In other areas, the privilege of delivery may already be provided for under the general business license.
In Michigan, for example, the state’s recreational marijuana legalization act in 2019 included a section that expressly permits licensed dispensaries to offer cannabis delivery provided specific requirements are met. For example, the age of their drivers (they must be 21 years old or older), the amount of marijuana they can carry (no more than 15 ounces at any one time), and general security (the cars must be outfitted with GPS, and the product must be secured inside the car if the driver leaves the vehicle unattended for any length of time.
Every state’s rules and requirements for cannabis delivery are different, so review these regulations with an attorney before adding the service.
Perhaps the biggest challenge facing the cannabis industry right now – and the factor that makes it unique from virtually every other industry sector of its size or prominence – is the legalization factor. While marijuana is big and growing, it is also 1) still illegal in many states and 2) still illegal federally.
These legal factors can make the industry a labyrinth to navigate for multiple reasons. First, the wildly varying rules from one state to the next make it difficult for marijuana companies to do business across state lines. Right now, there isn’t a dominant marijuana brand on a national level – in the way, there is for, say, beer. Instead, cannabis tends to have smaller “micro-economies” in each state. If a state has legalized recreational marijuana, it likely has several major players in the cannabis industry – companies with dispensary locations in multiple cities or towns throughout the state or businesses that are “vertically integrated,” which means they have their hands in everything from marijuana cultivation to processing to retail. However, these entities rarely operate across state lines, partly because regulations vary so much from state to state and partly because federal law makes interstate cannabis commerce a sticky legal situation.
Second, the fact that marijuana remains illegal on the federal level can sometimes spook other business types that, in a different situation, might be more willing to work with cannabis companies. Perhaps the biggest example is insurance. Cannabis businesses often have difficulty getting insurance coverage through standard business insurance companies, and it’s usually because those businesses are hesitant to work within a sector that exists mainly in a legal fog.
These challenges are not impossible to negotiate. States with legal recreational markets have thriving cannabis industries, to the point where businesses don’t necessarily need to expand over state lines. There are also insurance providers that will cover marijuana providers – and sometimes even focus on the cannabis sector specifically. However, these challenges are certainly out there, making marijuana a unique industry to do business.
Ultimately, the question of “What do background checks for cannabis growers look like?” is challenging to answer succinctly. Because of the unique legal situation that surrounds the marijuana industry, the answer to any question about background check procedures and requirements will vary from one state to the next. The best bet employers in the cannabis sector have is to consult with their attorneys to make sure they understand the laws and regulations that apply to them – including requirements for background checks.
Could this situation change in the future? Someday, it’s possible that federal legalization of recreational marijuana could come through, at which point this industry's legal landscape would shift nationwide. That shift wouldn’t necessarily standardize background checks or other regulatory requirements for the marijuana industry across the board. After all, even in long-established professions such as law, teaching, and medicine, the licensing requirements from one state to the next are not always identical. However, it is possible that nationwide legalization could bring about more uniformity in the background check procedures for cannabis businesses.
In the meantime, employers should recognize the state-to-state differences in background check policy for their businesses and work with their attorneys to understand the ins and outs of industry compliance at the state and local levels.
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