The Ultimate HR Compliance Guide for Cannabis Businesses in 2025 (with Insights from Canna Bookkeeper™ Founder Rosanna St. John)

You’ve got products on shelves, customers lined up, and the smell of growth in the air—until a single misclassified employee triggers a Department of Labor audit.

Now you're facing six-figure fines, an internal scramble, and headlines you never wanted.

Whether you’re a cultivator, dispensary, manufacturer, testing lab, or vertically integrated operator, the stakes are higher for cannabis businesses. Federal and state watchdogs scrutinize every step, and even small HR missteps can lead to massive consequences.

Compliance isn’t just a checklist—it’s your armor.

The Real-World Cost of Getting It Wrong

If you’re in cash-heavy operations like retail dispensaries, you already know: regulators aren’t playing.

• Financial Blowback: Misclassification or payroll missteps can lead to six- or seven-figure fines.

• Reputation Fallout: In cannabis, word-of-mouth is everything. One compliance issue can ripple across the community.

• Team Instability: Your employees know when corners are being cut—and they’ll leave for greener, safer pastures.

But it doesn’t have to be this way.

Burning Questions Operators Ask—Finally Answered

Can I Drug Test Employees If Weed’s Legal in My State?

Yes—but it’s nuanced.

Focus on impairment, not consumption. Legal off-the-clock use doesn’t equal on-the-job impairment. Train your team to spot impairment objectively, not assume based on cannabis use history. Review this with your legal counsel to stay balanced.

How Dangerous Is Misclassification, Really?

Short answer: very. Misclassifying a worker as a 1099 or exempt when they should be a W-2 non-exempt employee is one of the most common—and costly—mistakes in cannabis.

Meet the Expert: Rosanna St. John, Founder of Canna Bookkeeper™

When it comes to payroll classifications, 280E strategy, and audit-proof documentation, few voices in the industry are as trusted—or as in the weeds—as Rosanna St. John.

As the founder of Canna Bookkeeper™, Rosanna works directly with cannabis operators across the country to clean up messy books, prevent costly compliance errors, and structure financial systems that can withstand IRS scrutiny. Her firm specializes in cannabis bookkeeping, payroll advisory, and labor compliance—making her insights not just practical, but monumental for businesses operating in the industry's most regulated corners. So we pulled her in the chat to share her authentic truth.

Learn more about her services and approach at cbkny.com.

Payroll classifications and labor compliance need to stand up in audit. Classifications should be backed by source documents, job descriptions, titles, and properly classified with the payroll company. Roles and positions should be reviewed regularly to ensure compliance and accuracy. A misclassified employee can lead to a myriad of issues. We suggest adding a biannual payroll review to the executive calendar.

Many accountants agree that properly documenting the difference in job duties via classifications can reduce the impact of 280E. The most helpful differentiation involves direct labor vs indirect labor.
— Rosanna St. John, Owner, Canna Bookkeeper LLC

Now You May Be Thinking... What is Direct vs. Indirect Labor Anyway?

If you’re a processor, cultivator, or manufacturer, this directly affects your taxable income:

• Direct Labor = hands-on work tied to production or sales (e.g., trimmers, budtenders, packagers). Potentially deductible under COGS, reducing your 280E exposure.

• Indirect Labor = support roles (e.g., HR, security, admin) not directly tied to the product. Not deductible.

If you’re misclassifying or under-documenting these, you’re overpaying taxes—and increasing audit risk.

Biannual Payroll Review Checklist

Make sure your cannabis operation is keeping pace:

• Are all job classifications (W-2 vs. 1099) accurate and documented?

• Have duties evolved without updating titles or descriptions?

• Are employee classifications properly recorded in your payroll system?

• Have we evaluated direct vs. indirect labor for tax planning?

• Have we consulted a cannabis-competent HR/payroll provider?

How Can We Stay OSHA Compliant in a Grow Room or Lab?

Whether you run a cultivation facility or a testing lab, cannabis operations have unique hazards—from pesticide exposure to chemical storage.

Conduct regular safety audits. Document PPE use. Create a cannabis-specific Workplace Safety Plan. And above all, train your crew—not just your managers.

Why Does Payroll Always Feel So Complicated in Cannabis?

Short answer: because it is. Between IRS 280E, cash-heavy businesses, and multi-state expansion, payroll is a legal landmine.

Use payroll software that understands 280E. Automate tax filings. Don’t DIY across multiple states—consult experts who know the cannabis regulatory maze.

Can We Allow Off-Hours Cannabis Use Without Legal Risks?

If you’re in a legal state—yes, with the right guardrails.

Create policies that distinguish legal use from workplace impairment. Document them clearly. Train your leadership team. Reinforce during onboarding, and keep it accessible in your handbook.

The Ultimate Compliance Checklist—Custom Built for Cannabis

Employee Classification

• ✅ Distinguish W-2 vs. 1099 employees clearly

• ✅ Conduct regular role audits

• ✅ Follow FLSA rules on exempt vs. non-exempt

Payroll Compliance

• ✅ Use cannabis-specific payroll systems

• ✅ Audit tax withholdings

• ✅ Store payroll records 3–7 years

• ✅ Use digital, secure cash alternatives (e.g. pay cards)

Onboarding & Policies

• ✅ Provide localized handbooks and offer letters

• ✅ Confirm eligibility (I-9 / E-Verify)

• ✅ Communicate policies clearly and accessibly

Health, Safety, and Documentation

• ✅ Follow OSHA standards with cannabis-specific add-ons

• ✅ Document all incidents and protocols

• ✅ Keep digital records of contracts, terminations, and audits

DEI + Exit Procedures

• ✅ Create a DEI plan with real hiring equity

• ✅ Ensure final paychecks meet state-specific deadlines

• ✅ Document reasons for terminations and conduct exit interviews

Real (Hypothetical) Story: When One Job Title Cost $60K

A vertically integrated operator misclassified an “Inventory Manager” as administrative staff, even though 90% of their time was spent in cultivation. They had no updated job description and hadn’t consulted payroll since launch.

During a surprise audit, the IRS reclassified the role as direct labor, penalized them for inaccurate filings, and slapped on $60,000 in fines and back taxes.

This is a hypothetical example—but scenarios like this happen every day in cannabis.

Moral of the story? Update your job descriptions. Review roles. Don’t guess.

Compliance Questions by Vertical: Because One-Size-Fits-All Doesn’t Work in Cannabis

Each cannabis vertical has unique challenges. Here’s what to look out for in yours:

Cultivator / Producer

Trimmers and cultivation staff are typically direct labor and deductible under 280E if properly documented.

For cash-heavy setups, use secure payroll with options like pay cards.

Learn more:
IRS Publication 535: www.irs.gov/publications/p535
Green Check Verified: www.greencheckverified.com

Dispensary / Retail

Budtenders usually qualify as direct labor if involved in sales or product handling.

Multi-state hiring? Use localized onboarding tools.

See:
E-Verify Program: www.e-verify.gov
CohnReznick on 280E: www.cohnreznick.com/insights/how-does-irc-section-280e-affect-cannabis-industry

Distributor / Transporter

Drivers may not qualify as 1099 if you control their schedule or provide branded vehicles.

Transport laws vary—track local policy.

Review:
IRS Worker Classification Guide: www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee
NCIA State Policy Map: www.thecannabisindustry.org/ncia-policy-map

Lab / Testing

Cannabis labs fall under OSHA general industry rules—but with heightened risk.

Lab techs may qualify as direct labor.

See:
OSHA Laboratory Safety: www.osha.gov/laboratory-safety
Top Compliance Issues for Cannabis Labs: www.cannabisindustryjournal.com/feature_article/the-top-10-compliance-issues-facing-cannabis-labs

Manufacturer / Processor

Seasonal teams need accurate job codes and multilingual safety policies.

Check:
QuickBooks Time for Cannabis: www.quickbooks.intuit.com/time-tracking/cannabis
OSHA Language Training Standards: www.osha.gov/laws-regs/standardinterpretations/2010-04-28

Vertically Integrated

Labor must be tracked by department for accurate COGS.

Compliance reviews should be quarterly or biannual.

Start here:
KPMG on COGS and Cannabis: www.advisory.kpmg.us/articles/2022/irs-cost-of-goods-sold-guidance.html
DOL Compliance Assistance: www.dol.gov/general/topic/business

Caregiver

If you hire anyone, even casually, you may need to file 1099s.

Use:
IRS Small Business Tax Center: www.irs.gov/businesses/small-businesses-self-employed
NORML State Laws Directory: www.norml.org/laws

Hemp / CBD

280E doesn’t apply federally, but documentation and wage law compliance still matter.

Resources:
FDA CBD Guidelines: www.fda.gov/news-events/public-health-focus/fda-regulation-cannabis-and-cannabis-derived-products-including-cannabidiol-cbd
MJBiz HR & Employment Guidance: www.mjbizdaily.com/hr-issues-cbd-hemp-employers

Tribal / Indigenous

Sovereignty adds complexity—IRS and labor law still apply in many cases.

Explore:
National Indian Gaming Commission (Labor Rules): www.nigc.gov
NCIA Social Equity Resource Hub: www.thecannabisindustry.org/social-equity

Ancillary Vendors

Working onsite with cannabis companies? Your own labor records may be reviewed during their audits.

Consider:
NCIA Ancillary Member Benefits: www.thecannabisindustry.org/member-benefits
Cannabis Business Certification Program: www.thecannabisindustry.org/certification-program

What’s New in 2025 — and What You Should Start Preparing for in 2026

Staying compliant in 2025 requires more than checking a few boxes. Federal and state agencies are tightening enforcement, adopting new technologies, and embedding labor law into cannabis licensing frameworks. Here’s what’s changed in 2025—and how to stay ahead.

1. Pay Transparency Laws Are Expanding Across States

What’s happening:
More states—including California, Colorado, New York, Washington, and Illinois—now require businesses to include salary ranges in job postings. In some states, you must also disclose benefits and internal promotion paths. Several other states are expected to follow in late 2025 and into 2026.

Why it matters in cannabis:
If you're hiring across multiple states or posting jobs online, you're held to the most transparent state’s standard. Failure to comply can lead to fines, lawsuits, or even a halt in recruitment. It also affects internal pay equity, DEI strategies, and compliance audits.

How to stay compliant:
Review every job posting for:

• Accurate wage ranges

• Consistent language around compensation

• Disclosure of benefits, bonuses, and other pay types

• Alignment between postings and actual offer letters

Helpful Resource:
SHRM Pay Transparency Laws Tracker
Use this to monitor changes by state and track legislation in real time:
www.shrm.org/resourcesandtools/legal-and-compliance/state-and-local-updates/pages/pay-transparency-laws.aspx

How to use it:
Bookmark this page and assign an HR lead to check it monthly. Cross-reference your ATS or job board listings with the tracker to make sure no state-level requirement is missed.

2. IRS Audits of 280E and Labor Classification Are Ramping Up

What’s happening:
The IRS is increasingly focused on labor classifications tied to 280E deductions—especially for vertically integrated cannabis companies. The agency is also deploying more agents trained in cannabis-specific audits and using data analytics to flag inconsistent or suspicious filings.

Why it matters in cannabis:
Misclassifying labor can trigger penalties, interest, and forced restatements. Operators claiming deductions for roles that don’t qualify under 280E (like marketing or admin coded as “production”) are especially vulnerable.

How to protect yourself:

• Audit your direct vs. indirect labor documentation

• Ensure job titles and duties match payroll coding

• Keep timesheets, SOPs, and cost allocations organized

• Don’t rely on legacy classifications—update them twice a year

Helpful Resource:
Canna Law Blog – How the IRS Approaches Cannabis and Section 280E
www.harrisbricken.com/cannalawblog/how-the-irs-approaches-cannabis-companies-and-section-280e/

How to use it:
Read this article to understand how IRS agents assess 280E deductions and what documents they request. Then conduct an internal test: could you defend each labor deduction with job descriptions, time records, and a COGS rationale?

3. OSHA Cannabis-Specific Pilot Programs Are Underway

What’s happening:
OSHA is working with several states—starting with California—to conduct cannabis-specific safety enforcement pilots. These programs focus on risks like pesticide exposure, indoor air quality, fire hazards, and extraction lab safety. Businesses are being flagged for surprise inspections and documentation checks.

Why it matters in cannabis:
Cannabis workplaces (especially grow ops, extraction labs, and processing sites) are high-risk environments, but most operators don’t have cannabis-specific safety documentation. If you’re only using a generic workplace safety plan, you're vulnerable to citations—or worse, shutdowns.

How to prepare:

• Create (or update) your Workplace Safety Plan with cannabis-specific risks

• Train employees in their native language

• Maintain PPE logs, incident reports, and chemical exposure records

• Prepare a binder or digital folder with all safety protocols—auditors may ask on the spot

Helpful Resource:
Cal/OSHA Cannabis Industry Health & Safety Guidelines
www.dir.ca.gov/dosh/cannabis-industry-health-and-safety.html

How to use it:
Use this guide as a baseline to build your internal SOPs. Even if you're outside California, OSHA standards are federally adopted, so the recommendations apply nationwide. Highlight the sections on air quality, e

2026 Prep Checklist

• Review job postings for compliance with wage transparency laws

• Complete a mid-year payroll classification audit

• Update your workplace safety plan with cannabis-specific OSHA standards

• Document direct vs. indirect labor roles for 280E deduction eligibility

• Build a DEI strategy into your hiring roadmap

• Clean and digitize records in preparation for any fundraising or acquisition

From Sketchy to Scalable: Make Your Cannabis Biz Audit-Ready

Whether you’re a hemp/CBD startup, tribal grower, legacy dispensary, vertically integrated operator, or compliance-wary newcomer—HR compliance isn’t just a legal burden. It’s a leadership decision.

The cannabis industry is growing up fast. Regulators are watching. Your team is watching. And the way you treat payroll, labor, and compliance says everything about how seriously you’re building for the long haul.

You don’t have to navigate this alone.

We built Paragon’s cannabis compliance solutions to take the weight off your plate—with practical tools, audit-ready systems, and a team that actually understands the difference between plant-touching and paper-pushing.

So if you're done patchworking policies together or praying your payroll reports hold up under scrutiny...

Let’s fix it. Let’s future-proof it. Let’s do it right.

→ Explore Cannabis Compliance Solutions 
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