One HR lesson from two exotic dancers on misclassifying employees as independent contractors.

It’s getting hot in herrrrrrrrrrrrre!

Well, tepid. It’s an employment law blog, after all.

A strip club in Ohio employed two women for several months. Let’s call them, oh, I dunno, “plaintiffs.” During their time working for the club, the plaintiffs neither received minimum wage nor overtime. Why? Because the club treated them as independent contractors.

Under the Fair Labor Standards Act, covered nonexempt workers must receive minimum wage of not less than $7.25 per hour and overtime pay at a rate not less than one and one-half times the regular rate of pay when working more than 40 hours in a workweek. Independent contractors, however, have no such rights. You can pay them in literal peanuts if you’d like.

Well, after the plaintiffs stopped working at the club, they sued and claimed that the club — let’s call the club and its owner “defendants” — misclassified them as independent contractors rather than as employees.

A few weeks ago, the DOL proposed a rule to help distinguish between independent contractors and employees. The Sixth Circuit Court of Appeals’ opinion (here) involving our plaintiffs and defendants predates the proposed rule. But, let’s see how the appellate court analyzed the issue because the same analysis could apply in your workplace — even if you don’t blast Motley Crue, Shaggy, or Def Leppard in a Champagne Room.

The six-part “economic reality” test.

The Sixth Circuit disregarded the independent contractor label and applied a six-part “economic reality” test.

1. the permanency of the relationship between the parties;
2. the degree of skill required for the rendering of the services;
3. the worker’s investment in equipment or materials for the task;
4. the worker’s opportunity for profit or loss, depending upon his skill;
5. the degree of the alleged employer’s right to control how the work is performed; and
6. whether the service rendered is an integral part of the alleged employer’s business.

The permanency of the relationship between the parties

While the court noted that strippers often come and go and work at many clubs, the two plaintiffs worked exclusively for the defendants for 7 and 12 months, respectively.

Advantage plaintiffs.

The degree of skill required for the rendering of the services

Both sides agreed that exotic dancing does not require any special training, and the defendants did not train the plaintiffs.

Advantage plaintiffs.

Investment in specialized equipment

***Be careful, Eric. Resist the strikethroughs. Keep it PG***

The defendants invest in essentially the entire operation (e.g., utilities, insurance, taxes, food, drinks, advertising, phone systems, and software). They also control the lighting, décor, layout, and operating hours. Conversely, the dancers smell nice and buy some outfits.

But, here’s the best part from the Sixth Circuit opinion: “In its brief, [the club’s] only argument against this is that the dancers must pay “some of their dance revenue proceeds” to the club. The value of a few twenties passed to the owner pales in comparison to the substantial amount of money it costs to operate [the club].”

Advantage plaintiffs.

Opportunities for profit or loss

This factor examines whether workers have opportunities for greater profits based on their management and technical skills. Defendants basically run the entire operation. However, they argued that the plaintiffs could “hustle” to earn more money. 🤔 Uh, ok.

Advantage plaintiffs.

Degree of control

This factor focuses on the level of control that the employer has over its workers and whether the employer retains the right to dictate the manner’ of the worker’s performance. This is a biggie.

The club’s management utilized sign-in sheets and required that dancers work shifts for at least six hours and weekday shifts to work weekend shifts. Plus, they needed permission from a manager to leave early. The club also enforced a dress code for its dancers, controlled the rates for their dances, and kept a portion of all their tips.

Advantage plaintiffs.

Integral part of the business

I usually give the example of a widget factory that hires a landscaper to cut the lawn. One makes widgets; the other cuts lawns. Here, the club sells pretty ladies dancing on poles and, I assume, laps. Presumably, the plaintiffs do that. The court also noted that while the club called itself a bar and grill, it has no kitchen and instead sometimes serves precooked microwavable burgers, hot pockets, and pizza from Sam’s Club.

Advantage plaintiffs.

And since the plaintiffs swept the board, they won their FLSA claim.

Employer takeaways.

You don’t have to operate a strip club to grasp the importance of avoiding misclassification. Indeed, the club probably got off lightly given we’re only talking about two plaintiffs that worked for less than two years combined.

Imagine a situation in which you misclassify a larger group of workers, either as independent contractors or exempt employees. The damages (back wages, liquidated damages, interest, and attorney’s fees) can be crippling.

I get that you probably still have your hands full with COVID-19. But, consider squeezing in the time and resources to conduct an internal pay audit now. It will be your flood insurance before the flood hits.