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Oct 15, 2013

By Carmon M. Harvey

For those of you who have ever patronized an entertainment establishment commonly referred to as a “strip club,” it may not have crossed your mind how those “entertainers” are compensated.

Unless, of course, your job is to prosecute Fair Labor Standards Act collective actions and such visits are merely “business development.”

The compensation of strip club dancers became an issue very recently in Hart v. Rick’s Cabaret, a collective action in the U.S. District Court for the Southern District of New York, in which the court found that the dancers at Rick’s had, since the establishment opened in 2005, been improperly classified as independent contractors.

How the court evaluated the dancers’ claim

As independent contractors, the dancers received no wages for their “services” (which included stage performances, personal dances, and various entertainment in semi-private rooms); rather, they received a “fee for service” directly from the customer.

In evaluating the dancers’ claim that they were really employees, the court considered:

  1. The degree of control by the club over the dancers;
  2. The workers’ opportunity for profit and loss;
  3. The skill required to perform the work;
  4. The duration of the working relationship; and,
  5. The extent to which the work is an integral part of the employer’s business.

The court found that, under the club’s “Entertainment Guidelines,” the club micromanaged the dancers, forbidding the dancers from, among other things, chewing gum, having a bad attitude, and using a cell phone on the dance floor.

Without revealing too much, the club also dictated, among other things, work schedules, the dancers’ appearance, the length of the dancers’ dresses, the types of shoes they could wear (a 4-inch minimum stiletto heel, if you were wondering), the songs for which they were required to be in a state of undress, and how they were to interact with customers while performing on stage. (Seriously, just go read the Opinion if you want more details.)

Failure to follow any of the Guidelines could result in discipline, up to termination.

Club said rules were not to control the dancers

The club took the position that the Guidelines were not to control the dancers, but were in place for the dancers’ safety (because, apparently, anything less than a 4-inch stiletto would have been just plain dangerous) and to otherwise comply with the law, not to control the conduct of the dancers. But the court didn’t buy it and found that the club controlled both the dancers and the operation of the club.

The court likewise found that the majority of the other factors tipped in favor of the dancers, as the club, and not the dancers, had the dominant opportunity for profit and, as much as patrons might enjoy the performances, neither “hustling” customers nor exotic dancing requires any “genuine skill” (now that may be a little harsh).

Also, contrary to the club’s assertion that customers came to the club mostly for the restaurant, bars, and televisions, the court found that the dancers were integral to the success of the club. (Even the president of the club testified that, “without the girls, we’re just selling overpriced beers at a sports bar with bad TV’s.”)

The court held, based on this analysis, that the relationship between the club and the dancers was that of employer/employee.

So, why do employers misclassify employees as independent contractors?

Great risk in improper classification

The incentive for employers to do so is great – employers avoid having to pay employment taxes, workers compensation, unemployment insurance, and benefits such as health insurance, and they are not required to comply with the countless rules and regulations governing the employer/employee relationship.

But the risk of an improper classification is no tease, as the penalties in the form of back employment taxes, back wages, retroactive exposure for employee benefits, unpaid unemployment insurance contributions, fines, and penalties often well exceed any short-term advantage in taking an aggressive approach in classifying workers.

As employers at this point well know, the U.S. Department of Labor has made worker misclassification a specific area of enforcement to recover billions for federal and state governments. And penalties resulting from misclassification will be increased exponentially through the Affordable Care Act.

We’re talking lots of dollar bills.

Just to be clear, all employers must properly classify their workers – even those whose employees are required to remain fully clothed while on the job. So, employers, take care when determining whether you are hiring an employee or engaging an independent contractor. An incorrect decision could leave your company stripped of its savings.

This was originally published on Montgomery McCracken’s Employment Law Matters blog.

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