Exotic Dancers are Employees, Not Independent Contractors: Fourth Circuit | Practical Law

Exotic Dancers are Employees, Not Independent Contractors: Fourth Circuit | Practical Law

In McFeeley v. Jackson St. Entm't, LLC, the US Court of Appeals for the Fourth Circuit held that because of the degree of control exercised over exotic dancers by the clubs where they danced, those dancers were employees and not independent contractors.

Exotic Dancers are Employees, Not Independent Contractors: Fourth Circuit

Practical Law Legal Update w-002-6436 (Approx. 6 pages)

Exotic Dancers are Employees, Not Independent Contractors: Fourth Circuit

by Practical Law Labor & Employment
Published on 15 Jun 2016 • USA (National/Federal)
In McFeeley v. Jackson St. Entm't, LLC, the US Court of Appeals for the Fourth Circuit held that because of the degree of control exercised over exotic dancers by the clubs where they danced, those dancers were employees and not independent contractors.
On June 8, 2016, in McFeeley v. Jackson St. Entm't, LLC, the US Court of Appeals for the Fourth Circuit affirmed the district court's holding that exotic dancers were employees of the clubs where they danced and not independent contractors because, under the degree of control factor of the "economic realities" test, the control the clubs exercised over all aspects of the individual dancers' work and of the clubs' operation argues in favor of an employment relationship ( (4th Cir. June 8, 2016)).

Background

Exotic dancers (dancers) worked at Fuego Exotic Dance Club (Fuego) and Extasy Exotic Dance Club (Extasy) in Maryland between April 2009 and April 2012. Uwa Offiah (Offiah) owns and manages both Fuego and Extasy.
The dancers alleged on behalf of themselves and others similarly situated that Fuego, Extasy and Offiah (clubs) had:
  • Misclassified them as independent contractors rather than as club employees.
  • Failed to pay them the minimum wage required by the FLSA (29 U.S.C. § 201); and Maryland wage and hour laws.
The working relationship between the dancers and the clubs can be summarized as follows:
  • Dancers were required to fill out a form and perform an audition.
  • All hired dancers signed a "Space/Lease Rental Agreement of Business Space" that explicitly categorized dancers as independent contractors (the clubs began using these agreements after being sued in 2011. Offiah consulted an attorney, who drafted the agreement containing the "independent contractor" language).
  • The clubs did not pay the dancers an hourly wage or any other form of compensation. Instead, plaintiffs' compensation was limited to performance fees and tips received directly from patrons. The clubs also collected a "tip-in" fee from patrons and dancers who entered either dance club.
In January 2014, plaintiffs moved for partial summary judgment. The district court:
  • Granted plaintiffs' motion in part, finding that plaintiffs were employees and not independent contractors under both federal and state law.
  • Applied the six-factor "economic realities" test for classifying employees and independent contractors.
  • Placed special emphasis on "the degree of control that the putative employer has over the manner in which the work is performed," observing that the clubs "exercised significant control over the atmosphere, clientele, and operations of the clubs" (Schultz v. Capital Int'l Sec., Inc., 466 F.3d 298, 304-05 (4th Cir. 2006)).
  • After hearing separate testimony on liquidated damages and Fuego, Extasy and Offiah's good-faith defense, found that Offiah had consulted an attorney in September 2011 regarding classifying dancers as independent contractors and thereafter reasonably believed that they were not violating the FLSA. The court therefore awarded liquidated damages to each of the plaintiffs only for the period before September 2011.
Fuego, Extasy and Offiah filed a motion for judgment as a matter of law and/or for a new trial. Both motions were denied in May 2015. Fuego, Extasy and Offiah then appealed to the Fourth Circuit, seeking answers to the questions of whether:
  • The dancers were employees or independent contractors under the FLSA and related state laws.
  • Fuego, Extasy and Offiah acted in good faith prior to September 2011 and were therefore not liable to pay liquidated damages for that time period.
  • The district court erred in barring the clubs from presenting evidence related to plaintiffs' income taxes, performance fees, and tips.

Outcome

The Fourth Circuit affirmed the district court's holding that the dancers were employees of the clubs and not independent contractors because, under the degree of control factor of the "economic realities" test, the control the clubs exercised over all aspects of the individual dancers' work and of the clubs' operation argues in favor of an employment relationship.
The Fourth Circuit noted that:
  • The "economic realities" test established in Schultz considers whether the worker is "economically dependent on the business to which he renders service or is, as a matter of economic [reality], in business for himself." (466 F.3d 298, at 304). The test turns on six factors:
    • the degree of control that the putative employer has over the manner in which the work is performed;
    • the worker's opportunities for profit or loss dependent on his managerial skill;
    • the worker's investment in equipment or material, or his employment of other workers;
    • the degree of skill required for the work;
    • the permanence of the working relationship; and
    • the degree to which the services rendered are an integral part of the putative employer's business.
    (466 F.3d 298, at 304-05).
  • "No single factor is dispositive," (466 F.3d 298, at 305) and all six are part of the totality of circumstances presented (Baystate Alternative Staffing, Inc. v. Herman, 163 F.3d 668, 675 (1st Cir. 1998)).
The Fourth Circuit found that:
  • Based on the totality of the circumstances, the relationship between the dancers and the clubs falls on the employee side of the spectrum.
  • Most critical on the facts of this case is the first factor of the "economic realities" test, the degree of control.
  • The district court found the following manifestations of clubs' control over the dancers:
    • dancers had to sign in on arrival and pay the "tip-in" fee required of dancers and patrons;
    • the clubs dictated each dancer's work schedule;
    • the clubs imposed detailed written guidelines all dancers had to obey during working hours;
    • the clubs set the fees that dancers charged patrons for private dances and dictated how tips and fees were handled;
    • the clubs personally instructed dancers on their behavior and conduct at work; and
    • the clubs managed the atmosphere and clientele by making all decisions regarding advertising, hours of operation, and the types of food and beverages sold, as well as handling lighting and music.
  • The degree of control the clubs exercised over all aspects of the individual dancers' work and of the clubs' operation argues in favor of an employment relationship. Each of the other five factors of the economic realities test is either neutral or leads in the same direction.
  • The argument that exotic dancers can hustle to increase their profits, and that this makes them independent contractors, has been almost universally rejected. It is natural for an employee to do his part in drumming up business for his employer, especially if the employee's earnings depend on it.
The court next considered the issue of liquidated damages and liability, finding that:
  • Offiah did not seek legal advice until he faced a lawsuit in September 2011. If mere assumption amounted to good faith and reasonable belief of compliance, no employer would have any incentive to educate itself and proactively conform to governing labor law. The district court therefore did not err in rejecting the clubs' good faith defense for the period before September 2011 and awarding plaintiffs liquidated damages for that period.
  • Proof of tips and fees received is irrelevant because the FLSA precludes the clubs from using tips or fees to offset the required minimum wage.
  • To be eligible for the "tip credit" under the FLSA and Maryland law, the clubs were required to pay dancers the minimum wage set for those receiving tip income and to notify employees of the "tip credit" provision (29 U.S.C. 203(m)). The clubs cannot claim the "tip credit" because they paid the dancers no compensation of any kind and afforded them no notice of the "tip credit" provision.
  • Even if performance fees are treated separately to tips within the FLSA's "service charge" category, the clubs are ineligible to use performance fees to reduce their liability. Under the FLSA, in order to count service charges as an offset to an employer's minimum-wage liability, the service charge must have been included in the establishment's gross receipts and it must have been "distributed by the employer to its employees" (29 C.F.R. § 531.55(b)). Neither condition for applying the service-charge offset is met here.

Practical Implications

Based on McFeeley, companies in the Fourth Circuit should consider the six-factor economic realities test when deciding whether to classify individuals as employees or independent contractors. Courts will look to the totality of the circumstances in a very fact-intensive analysis with particular emphasis on the amount of control over the individual's work. Companies should also be aware that merely relying on a good faith defense of reasonable belief of compliance is likely not sufficient to avoid liquidated damages under the FLSA in the event of litigation.