After reading that headline you might be asking yourself, “what on earth can an enterprise client learn from a strip club?” It is true that exotic dancers are not a category of worker that most organizations have to contend with, and to my knowledge is not one that any of TalentWave’s enterprise clients have ever asked us about. However, employment law applies to all categories of workers and a recent court ruling provides some important reminders which today’s contingent workforce program managers can learn from.
Nearly all strip clubs classify the dancers who entertain their clients as independent contractors. Among other things this means they don’t have to pay them minimum wage, in fact many clubs pay no wages at all, with dancers relying solely on tips for their income. In addition, because of this worker classification decision clubs don’t offer dancers benefits, or worry about being held liable for sexual harassment or other discrimination claims.
Across the US there have been a number of recent cases where dancers have begun to fight back. Individuals and groups of strippers have brought lawsuits claiming that this treatment is illegal and that they are not independent contractors but rather are regular employees deserving of all the protections that come with the designation.
Last week, the US Court of Appeals for the Fourth Circuit issued a decision confirming that a group of six former dancers who worked for Fuego Exotic Dance Club and Extasy Exotic Dance Club in Maryland should have been classified as employees, not independent contractors. This ruling affirmed a district court decision that found that the dancers were illegally misclassified and deserved to be paid back wages and damages by the clubs.
In the opinion, Judge J. Harvie Wilkinson III, wrote, “The clubs insist they had very little control over the dancers. Plaintiffs were allegedly free in the clubs’ view to determine their own work schedules, how and when they performed, and whether they danced at clubs other than Fuego and Extasy. But the relaxed working relationship represented by defendants — the kind that perhaps every worker dreams about — finds little support in the record.” He concluded, “We agree with the district court that, based on the totality of the circumstances presented here, the dancers at Fuego and Extasy were employees covered by the FLSA [Fair Labor Standards Act] and analogous state laws. They were not independent contractors.”
Analysis on “Economic Realities” Factors
In reaching that conclusion, the court considered the six factors that are used to determine whether someone can should be classified as an independent contractor or a regular employee. These “economic realities” factors are helpful guides in resolving whether a worker is truly in business for himself or herself, or like most, is economically dependent on an employer who can require (or allow) employees to work and who can prevent employees from working.
The Supreme Court has indicated that there is no single rule or test for determining whether an individual is an employee or independent contractor for purposes of the FLSA. The Court has held that the totality of the working relationship is determinative, meaning that all facts relevant to the relationship between the worker and the employer must be considered.
While the six factors considered can vary, and while no one set of factors is exclusive, the following factors are generally considered when determining whether an employment relationship exists under the FLSA (i.e., whether a worker is an employee, as opposed to an independent contractor):
1) The extent to which the work performed is an integral part of the employer’s business. If the work performed by a worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer and less likely that the worker is in business for himself or herself. For example, work is integral to the employer’s business if it is a part of its production process or if it is a service that the employer is in business to provide.
2) Whether the worker’s managerial skills affect his or her opportunity for profit and loss. Managerial skill may be indicated by the hiring and supervision of workers or by investment in equipment. Analysis of this factor should focus on whether the worker exercises managerial skills and, if so, whether those skills affect that worker’s opportunity for both profit and loss.
3) The relative investments in facilities and equipment by the worker and the employer. The worker must make some investment compared to the employer’s investment (and bear some risk for a loss) in order for there to be an indication that he/she is an independent contractor in business for himself or herself. A worker’s investment in tools and equipment to perform the work does not necessarily indicate independent contractor status, because such tools and equipment may simply be required to perform the work for the employer. If a worker’s business investment compares favorably enough to the employer’s that they appear to be sharing risk of loss, this factor indicates that the worker may be an independent contractor.
4) The worker’s skill and initiative. Both employees and independent contractors may be skilled workers. To indicate possible independent contractor status, the worker’s skills should demonstrate that he or she exercises independent business judgment. Further, the fact that a worker is in open market competition with others would suggest independent contractor status. For example, specialized skills possessed by carpenters, construction workers, and electricians are not themselves indicative of independent contractor status; rather, it is whether these workers take initiative to operate as independent businesses, as opposed to being economically dependent, that suggests independent contractor status.
5) The permanency of the worker’s relationship with the employer. Permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee, as opposed to an independent contractor. However, a worker’s lack of a permanent relationship with the employer does not necessarily suggest independent contractor status because the impermanent relationship may be due to industry-specific factors, or the fact that an employer routinely uses staffing agencies.
6) The nature and degree of control by the employer. Analysis of this factor includes who sets pay amounts and work hours and who determines how the work is performed, as well as whether the worker is free to work for others and hire helpers. An independent contractor generally works free from control by the employer (or anyone else, including the employer’s clients). This is a complex factor that warrants careful review because both employees and independent contractors can have work situations that include minimal control by the employer. However, this factor does not hold any greater weight than the other factors. For example, a worker’s control of his or her own work hours is not necessarily indicative of independent contractor status; instead, the worker must control meaningful aspects of the working relationship. Further, the mere fact that a worker works from home or offsite is not indicative of independent contractor status because the employer may exercise substantial control over the working relationship even if it exercises less day-to-day control over the employee’s work at the remote worksite.
The two key considerations the circuit court considered were: How much control an employer exerts, and whether the worker is economically dependent on the business or is a business herself.
The circuit court found that the clubs exerted significant control over the dancers through a variety of business practices, which resulted in the creation of an employer/employee relationship. For example, dancers testified that the clubs dictated their schedules and that they had to sign in when they arrived for work at the club. The clubs set the fees they were allowed to charge for services and charged a “tip-in” fee to enter the club building. They also made dancers follow rules such as prohibiting them from leaving the club and returning later in the night, requiring them to wear dance shoes at all times, and banning them from seeing friends or family during work hours. If the dancers violated any of these rules they could be suspended or fired. The club managers also provided training in the form of coaching dancers who they thought didn’t have the “right attitude” or behavior. The court also concluded that the owners were in total charge of the clientele and atmosphere through advertising, hours, food and beverages, and lighting and music. All this, amounted to more control than one would expect from a client of an independent contractor.
Of significant note, the clubs didn’t pay the dancers anything at all. “At no point did the clubs pay the dancers an hourly wage or any other form of compensation,” the opinion reads. Instead, the only money dancers made was the fees and tips they got from the club’s clients, and the dancers had to pay an entrance fee to the club.
“We must be mindful in the end that we are applying a statute which Congress thought was necessary to provide ‘fair labor standards’ for employees, including those marginalized workers unable to exert sufficient leverage or bargaining power to achieve adequate wages in the absence of statutory protections,” Wilkinson concludes his opinion. “To rule for the clubs under the circumstances here would run too great a risk of undercutting the Act’s basic aim.”
The practice of classifying dancers as independent contractors is widespread throughout the industry. And it isn’t hard to see why club owners have an economic incentive to keep it that way. With that designation, it means clubs don’t have to pay hourly wages or overtime, carry workers compensation policies or pay into unemployment insurance, or worry about sexual harassment and discrimination cases, since only workers classified as employees can bring them.
The lessons provided by this court ruling on exotic dancers are important for enterprise contingent workforce program managers to remember. For organizations that rely on contingent workers to get vital work done, worker misclassification enforcement is a growing area of risk and must be managed appropriately. Companies want to use independent workers such as freelancers, consultants, and independent contractors for project work, but they don’t want to run afoul of complex and sometimes contradicting federal and state regulations. Fortunately Independent Contractor Compliance and Engagement experts, like TalentWave, can help build and manage a comprehensive IC engagement program which enables a client company to attract and retain talent, including independent contractors where appropriate, while mitigating the risk.