Human resources titan Paychex (Nasdaq: PAYX) essentially announced its exit from the legal cannabis industry via an email sent last week to its marijuana company clients that used it for payroll and other services, leaving potentially hundreds of operators in the lurch.
According to the email, a copy of which was obtained by Green Market Report, Paychex told cannabis clients that it would be drastically scaling back its services, to the point that is tantamount to an exit, two industry insiders said.
Paychex wrote, “Unfortunately, we can no longer provide you with some of the services you are currently receiving from Paychex.”
The pullback could affect upwards of 300 cannabis businesses across the country, said Chris Lagana, a New York-based marijuana industry consultant and former executive at cannabis payroll firm Wurk. He said Paychex’s footprint dates back roughly four years.
Lagana said Paychex had already begun scaling back its footprint in January when it notified clients that it would be phasing out its Taxpay service for marijuana businesses, and the most recent announcement basically completed Paychex’s withdrawal from the cannabis sector altogether.
The Paychex notification said that as of May 1, it would cease offering not only Taxpay services but also direct deposit payroll services and recordkeeping for employee time and attendance. As part of a transition, the company will provide check-signing services, for instance, but it didn’t have much of an exit plan laid out for its cannabis clients, Lagana said.
San Francisco-based tax attorney Regina Unegovsky said Paychex was “one of the top service providers” in payroll and HR for cannabis companies, primarily because most national firms – such as ADP – still won’t touch marijuana clients.
That means Paychex’s withdrawal is “definitely pain-in-the-ass level” for cannabis operators, she said.
“It’s not the end-all, be-all. It’s just like switching your insurance. It’s just a lot of paperwork involved on the back end,” Unegovsky said. “It’s just a difficult scenario to be put in.”
Unegovsky warned that cannabis companies should be careful to whom they switch from Paychex, because errors in payroll can trigger federal audits, and nobody in cannabis should want to face down the Internal Revenue Service over a payroll tax error.
Lagana said he’s also convinced that Paychex’s marijuana exit is connected to the failure last month of Silicon Valley Bank, which he described as a “cannabis-friendly” bank when it came to ancillary businesses, such as payroll providers like Paychex.
“(Paychex) did have banking relationships with SVB. I don’t think that’s any secret. And I know they moved most of their cannabis companies through SVB,” he said.
The most likely explanation for Paychex’s pivot, Lagana said, is company leadership simply decided cannabis was one more risk it didn’t need after SVB went under.
Lagana also noted that for a company the size of Paychex – with a $40 billion market cap and $1.3 billion in revenue last quarter alone – the likely millions it gets from the marijuana sector represent “a small drop in the bucket.”
It’s also a reminder that the marijuana business stigma still exists thanks to federal prohibition, Lagana said.
“It just goes to show that cannabis companies are still very underserved,” Lagana said.
Lagana said cannabis operators in need of a replacement for Paychex should check out his former company, Wurk, along with Kayapush and Paragon Payroll.
April 7, 2023 at 11:08 am
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