By Kevin C. McCormick
The U.S. Court of Appeals for the 4th Circuit—which covers Maryland, North Carolina, South Carolina, Virginia, and West Virginia—recently held that a group of exotic dancers are employees under the Fair Labor Standards Act (FLSA), not independent contractors. Consequently, the dancers are entitled to minimum wage for all hours they work and overtime pay when they work more than 40 hours in a workweek.
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Whether exotic dancers should be classified as independent contractors or employees has been the subject of >much recent litigation. On the one hand, club owners have claimed that the dancers are true independent contractors who perform for tips and other compensation received directly from customers.
On the other hand, the dancers have consistently maintained that because the club owners exercise a significant amount of control over the way they perform their services, they are in fact employees entitled to minimum wage and overtime pay. Unfortunately for club owners, most courts have sided with the dancers, finding they are employees, not independent contractors.
The recent decision by the 4th Circuit sends a clear message to club owners in Maryland, North Carolina, South Carolina, Virginia, and West Virginia that exotic dancers must be treated like employees and are entitled to the protections of the FLSA.
Background facts
Several exotic dancers who worked at Fuego Exotic Dance Club and Extasy Exotic Dance Club in Prince George’s County alleged that the club owners had misclassified them as independent contractors rather than employees and failed to pay them the minimum wage required under the FLSA, the Maryland Wage and Hour Law, and the Maryland Wage Payment and Collection Law. The dancers sued for both unpaid wages and liquidated damages.
The clubs responded that the dancers were independent contractors and raised a number of counterclaims alleging breach of contract, unjust enrichment, conversion, and fraud. All of the counterclaims were dismissed by the court before trial.
According to the evidence, anyone who wanted to dance at either club was required to fill out a form and perform an audition. The club owners asked all dancers to sign an agreement titled “Space/Lease Rental Agreement of Business Space,” which explicitly categorized them as independent contractors. The clubs began using the agreement after being sued in 2011 by dancers who claimed they were employees rather than independent contractors. The club owners consulted with an attorney, who drafted the agreement that contained the independent contractor language.
The dancers’ duties at the two clubs primarily involved dancing on stage and in other areas of the clubs. At no point did the clubs pay the dancers an hourly wage or any other form of compensation. Rather, their compensation was limited to performance fees and tips received directly from patrons. The clubs also required a “tip in” fee from everyone who entered either dance club, whether they were patrons or dancers.
On January 3, 2014, the dancers filed a motion requesting judgment in their favor without a trial, and the club owners countered with a cross-motion for judgment in their favor. The district court granted the dancers’ motion in part, finding they were employees under both federal and state law.
In reaching that conclusion, the district court applied the six-factor “economic realities” test for classifying employees and independent contractors. The court placed special emphasis on “the degree of control” the putative employer has over the manner in which the work is performed, observing that the club owners exercised significant control over the atmosphere, clientele, and operations of the club.
The court reserved various disputes over monetary damages for the jury. Before trial, the dancers asked the court to prohibit the club owners from asking them about their income tax records, performance fees, and tips. The trial court granted their motion.
The case was tried before a jury in February 2015. The trial court rejected the clubs’ objections to the jury instructions and the verdict sheet. The jury found in favor of the dancers and awarded them $267,000 in unpaid wages.
After hearing testimony on the issue of liquidated damages, the district court found that because the club owners had consulted an attorney about the proper classification of the dancers in September 2011, they reasonably believed they weren’t violating the FLSA.
As a result, the court awarded the dancers liquidated damages only for the period before September 2011. Under the FLSA, liquidated damages are generally awarded in an amount equal to the back wages that are owed.,/
Decision on appeal
On appeal, the club owners raised three basic issues:
- Whether the dancers were independent contractors or employees under the FLSA and related state laws;
- Whether the club owners acted in good faith prior to September 2011 and were therefore not liable for any liquidated damages; and
- Whether the trial court erred in barring them from presenting evidence related to the dancers’ income taxes, performance fees, and tips.
Employee status. In deciding whether the dancers were employees or independent contractors, the appellate court considered the “economic realities” of their relationship with the club owners.
The court found that the touchstone of that test is whether a worker is “economically dependent on the business to which [she] renders services or is, as a matter of economic reality, in business for [her]self.”
The outcome of the economic realities test turns on six factors:
- The degree of control the putative employer has over the manner in which the work is performed;
- The worker’s opportunities for profit or loss, dependent on her managerial skill;
- The worker’s investment in equipment or material or her 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.
The appellate court found that based on the totality of the circumstances, the relationship between the dancers and the club owners fell on the employee side of the spectrum. According to the court, the club owners exercised sufficient control over the manner in which the dancers performed their work to make them employees.
The clubs maintained that they had very little control over the dancers because they were free to determine their own work schedules, how and when they performed, and whether they danced at clubs other than Fuego or Extasy. However, the dancers countered than they were required to sign in upon arriving at the club and pay the “tip in” fee charged to both dancers and patrons.
Moreover, the clubs dictated each dancer’s work schedule and imposed written guidelines that all dancers had to obey during working hours. Those rules, which went into considerable detail, banned dancers from drinking while working, smoking in the bathrooms, and loitering in the parking lot after business hours.
The dancers were also prohibited from leaving the club and returning later in the evening, were required to wear dance shoes at all times, and could not bring family or friends to the club during working hours. Violations of the club guidelines carried penalties such as suspension or dismissal. Although the club owners maintained that they didn’t enforce the rules, the district court found that an employer’s potential power to enforce its rules and manage employee conduct is a form of control.
The clubs also set fees that the dancers were supposed to charge patrons for private dances and dictated how tips and fees were to be handled. The guidelines explicitly stated, “Do not overcharge our customers. If you do, you will be kicked out of the club.” Further, the owners personally instructed the dancers on their behavior and conduct at work and often coached them to have the right attitude and told them when they weren’t behaving properly.
Finally, the owners managed the club’s atmosphere and clientele by making all decisions about advertising, hours of operation, and the types of food and beverages sold, as well as handling lighting and music for the dancers.
Taking all of those circumstances into account, the district court found, and the appellate court agreed, that the clubs’ significant control over how the dancers performed their work bore little resemblance to the latitude normally afforded independent contractors.
Liquidated damages. The club owners tried to avoid liability for liquidated damages in two ways. First, they raised a good-faith defense to shield themselves from liquidated damages. Second, they attempted to characterize the performance fees and tips paid by patrons as offsets to any compensation they were obligated to pay.
In addressing the good-faith defense, the district court found the owners had established that based on the advice they received from an attorney, they believed the dancers were independent contractors rather than employees. The attorney further suggested that the dancers sign an agreement in which they were designated as independent contractors and acknowledged the reasons for that designation.
On appeal, the club owners attempted to claim that the good-faith defense should cover the period before they sought legal advice in September 2011. The owners argued that since they had always classified the dancers as independent contractors, they assumed the classification was appropriate.
However, they admitted that they made no effort to look into the law or seek legal advice until September 2011. According to the court, “If mere assumption amounted to good faith and reasonable belief of compliance, no employer would have any incentive to educate [it]self and proactively conform to governing labor law.”
Exclusion of evidence. The club owners also questioned the trial court’s decision to exclude any evidence about the dancers’ income tax returns, performance fees, and tips. The clubs contended that fees and tips kept by the dancers could have reduced any compensation the club owners were required to pay under the FLSA.
The owners maintained that the fees and tips the dancers received directly from patrons exceeded the minimum wage mandated by federal and state law. Had the excluded evidence been admitted, they argued, the jury might have awarded the dancers less in unpaid wages. The appellate court disagreed.
The district court found, and the appellate court agreed, that evidence related to the dancers’ earnings was irrelevant, and if it had been allowed, it might have confused the issue and misled the jury. Proof of tips and fees received by the dancers wasn’t relevant because the FLSA precluded the owners from using tips or fees to offset the minimum wage they were required to pay the dancers.
To be eligible for a “tip credit” under the FLSA and corresponding Maryland law, the owners were required to pay the dancers the minimum wage applicable to employees who receive tip income and notify them of the tip credit provision. However, the clubs paid the dancers no compensation of any kind and gave them no notice of any tip credit.
The clubs were also ineligible to use performance fees paid by patrons to reduce their liability to the dancers. The club owners attempted to distinguish performance fees from tips as a “service charge” that could be considered an offset to the minimum wage payments. Under the FLSA, a “service charge” is a compulsory charge for service imposed on a customer by an establishment.
There are at least two prerequisites for counting 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.
Proof of both requirements is necessary to ensure that employees actually received the service charge as part of their compensation as opposed to relying on the employer’s assertion or say-so. The appellate court found that neither condition was established in this case.
The clubs never recorded or included as part of the dance clubs’ gross receipts any payments patrons made directly to the dancers. Indeed, the club owners maintained that any fees the dancers earned belonged to the dancers, not the clubs. Since none of the fees ever went to the club owners, they couldn’t have distributed any part of the service charges to the dancers. As a result, the service charge offset wasn’t available in this case.
Following the trial, the jury awarded the dancers $197,000 in lost wages under the FLSA and the corresponding Maryland statutes. The trial judge awarded an additional $70,000 as liquidated damages for the period from April 2009 to September 2011. Those awards were upheld by the 4th Circuit. Laura McFeeley, et al. v. Jackson Street Entertainment, LLC, d/b/a Fuego Exotic Dance Club, 4th Circuit, Case No. 15-1583, decided June 8, 2016.
Bottom line
This is an interesting case for a number of reasons. First, the decision clearly outlines the test used to establish whether a worker is an independent contractor or an employee. While this case involved exotic dancers, the principles discussed in the court’s opinion apply with equal force to all other types of employment.
Second, the decision highlights the potential damages an employer faces when it misclassifies employees as independent contractors. The club owners paid no wages to the dancers at all, assuming the tips and service charges they received from patrons would be sufficient to offset any minimum wage claims.
As the court held, however, that assumption was incorrect. The club owners were required to pay the dancers for each hour they worked at the clubs and were not permitted to tell the jury about the tips and service fees the dancers earned while they were working.
Readers who have never visited an exotic dance club may not realize that successful dancers can often earn tips and service fees amounting to hundreds, if not thousands, of dollars per shift. Although the club owners created an environment that allowed the dancers to earn tips and fees, they couldn’t use that compensation as an offset to their minimum wage obligations.
In fact, the court prohibited the owners from introducing any evidence about the tips and fees, which might have led the jury to incorrectly conclude that the dancers didn’t receive any compensation for their work.
Kevin C. McCormick, an editor of Maryland Employment Law Letter, can be reached at kmccormick@wtplaw.com or 410-347-8779.