When Paychex, the fifth largest payroll processor in the country and the largest payroll service provider to accept cannabis-related businesses as clients, announced a suspension of several key services for cannabis companies as of May 1, it left more than 1,000 plant-touching businesses scrambling for a new provider.
“They’ve pretty much f****d the cannabis industry,” said Marc Rodriguez, president of Green Leaf Payroll and Business Solutions.
In the last week of March, Paychex alerted most of their cannabis clients that they would need to find new providers for direct deposit, employee time and attendance services, and perhaps most jarring, automatic payroll tax administration. The decision by one of the country’s largest payroll services providers to reverse course after an aggressive push into the industry forced hundreds of cannabis companies to change providers in a matter of weeks to avoid tax and reporting fines.
“Cannabis-related businesses (CRBs) continue to face significant banking obstacles because major banks will not allow electronic fund transfers from CRBs over their networks – typically because of differing state and federal regulations around cannabis,” the company stated in its announcement. “Paychex has worked diligently to provide as many of our services as we can within the parameters established by our banking partners. Unfortunately, we can no longer provide you with some of the services you are currently receiving from Paychex.”
The company will still supply paper checks for clients’ employees, but it will no longer track those employees’ earned time off or other benefits linked to worked hours.
The payroll tax administration service involves setting aside each company’s accrued payroll taxes so that the money is there each quarter when those tax payments are made. Such tax withholding services are a core component of payroll administration and a critical service for employers. For licensed cannabis businesses, timely tax payments are typically a requirement to maintain their licensing status.
A spokesperson from Paychex did not respond to requests for comment.
Paychex challenged with cannabis compliance
Almost immediately after the Paychex announcement, rumors began to swirl that the change was a result of the failure of Silicon Valley Bank. In March, a bank run on Silicon Valley Bank, which was a leader among institutions financing tech start ups, caused the bank to collapse. If Paychex truly had been using SVB for its payroll banking services, this would have resulted in Paychex needing to find a new bank. This can be particularly tricky with cannabis clients, because they bring the baggage of strict anti-money laundering monitoring.
Basically, transferring cannabis client accounts between banks is more complicated because it requires more in-depth disclosure of financial information. There has been no confirmation by Paychex that the decision to leave the cannabis industry was related to SVB’s demise.
Chris Lagana, a self-employed cannabis consultant who formerly worked for cannabis human resources company Wurk, wrote in a social media post that he believed Paychex was affected by the failure of Silicon Valley Bank, but that prior to the bank’s failure, Paychex was already planning to exit the industry.
“When SVB collapsed, their leadership decided it was not worth their time and effort to move the cannabis companies to a new banking partner. Paychex is a publicly traded company that moves billions in payroll, the 20 mill or so in ARR for cannabis companies is just a drop in the bucket for Paychex,” he wrote. “It’s a shame Paychex has not set up an exit strategy for their cannabis companies.”
When contacted directly, Laguna declined to comment further.
Regardless of whether the collapse of SVB affected Paychex, the payroll company had already been planning to suspend payroll tax administration services in late 2022, according to Rodriguez.
Paychex started a pilot program in late 2020 to begin offering its services to cannabis clients. This pilot blew up to where the company was servicing somewhere between 1,000 to 1,500 clients, each bringing financial reporting requirements more elaborate than typical clients, such as coffee shops.
Rodriguez suggested that at some point, Paychex realized it had a problem meeting the extensive tax reporting requirements for cannabis clients, as a result of the ongoing federal prohibition.
“I got word from someone at Paychex late last year that they would be stopping tax payment services for any new clients,” said Rodriguez. “Paychex knew they had a problem with cannabis companies in their ecosystem.”
Robert Baron, chief experience officer at StandardC, a banking and financial consulting and software company based out of California, clarified that Paychex was not officially leaving all of its cannabis clients behind, though it was still significantly reducing services that are vital for cannabis businesses.
“Payroll checks have to be cleared so it’s not like there’s a hold on your payroll,” explained Baron. “Yes, it is an inconvenience, but it’s not like they’re not going to get their payroll.”
Baron said that he had not necessarily heard much “doom and gloom” from his own customers over the situation, though he also said he was worried that a rush from cannabis clients suddenly needing to swap payroll service providers could have a ripple effect that further inundated the larger industry.
“It’s a really precarious situation,” said Baron. “Causing that panic is not in the best interest of the cannabis industry.”
Panic or not, Rodriguez did confirm that his company, Green Leaf, has recently been inundated with new potential clients that left Paychex.
“We’ve had hundreds of inquiries over the last week, and we’re bringing all these clients on,” said Rodriguez. “I have friends at other payroll companies that are saying the same thing. There’s probably 300, 500, maybe 600 that aren’t going to meet that deadline.”
Switching services mid-quarter can make it difficult to avoid unexpected fines, according to Rodriguez.
“We have more clients than I can count that have over 300 employees,” said Rodriguez. “They now have to pivot in a month’s time to get payroll, tax payments and time-keeping all set up. Time-keeping in a lot of states today is essential for labor law compliance.”
Rodriguez speculated that it would be the smaller cannabis operations that are hurt the most from this move.
“It’s going to completely f**k the cannabis industry in terms of the clients that are going to get left behind. The larger companies are very aware of what’s going on because they’ve been through this before,” he said. “There’s all these little guys that, when notified, say ‘I don’t know what that means.’ They’re the ones that are going to get hosed the worst.”
