By Kathleen Kapusta, J.D. The court below properly captured the economic reality of the relationship between exotic dancers and the defendant clubs for which they danced, said the Fourth Circuit, finding that the many ways in which the defendants directed them rose to the level of control that an employer typically exercises over an employee. Thus, the appeals court affirmed the district court’s holding that they were employees and not independent contractors (McFeeley v. Jackson Street Entertainment, LLC dba Fuego exotic Dance Club, June 8, 2016, Wilkinson, J.). Between April 2009 and April 2012, the dancers worked at two clubs owned and managed by the same person. Alleging on behalf of themselves and others similarly situated that the defendants misclassified them as independent contractors rather than employees and failed to pay them the minimum wage required by the FLSA and state law, they sued for unpaid wages and liquidated damages. Lower court proceedings. The parties filed cross-motions for summary judgment and the district court, applying the “economic realities” test, found the dancers were employees and granted their motion in part, reserving various disputes over monetary recovery for the jury. The jury found in favor of the dancers, awarding them damages for unpaid wages. As to liquidated damages, the district court found that the defendants had consulted an attorney in September 2011 regarding classifying dancers as independent contractors and thereafter reasonably believed they were not violating the FLSA. Accordingly, it awarded liquidated damages only for the period prior to September 2011. Employee side of spectrum. The employee/independent contractor distinction is not a bright line but a spectrum, said the appeals court, finding that based on the totality of the circumstances presented here, the relationship between the dancers and the defendants fell on the employee side of the spectrum. Most critical was the first factor of the economic realities test: the degree of control the putative employer has over the manner in which the work is performed. Here, the district court found that the dancers were required to sign in upon arriving at the club and pay a “tip-in” or entrance fee. Further, the clubs dictated dancers’ schedules; imposed written guidelines all dancers had to obey; set the fees the dancers were supposed to charge and dictated how tips and fees were handled; personally instructed dancers on their behavior and conduct at work; and managed the clubs’ atmosphere and clientele. Agreeing with the district court, the Fourth Circuit found that the defendants’ significant control over how the dancers performed their work bore little resemblance to the latitude normally afforded to independent contractors. As to the test’s other five factors, the court found that the lion’s share of the managerial skill and investment normally expected of employers came from the defendants as the clubs set the hours of operation, coordinated and paid for all advertising, managed the atmosphere, and paid rent and bills. The dancers’ investment was limited primarily to their own apparel. Thus, the ratio of managerial skill and operational support tilted heavily to the clubs and supported an independent contractor classification. Remaining factors. The minimal degree of skill required for exotic dancing at these clubs also supported an employee classification. The permanence of the working relationship, which was an at-will arrangement, did not affect the outcome. Finally, as to the importance of the services rendered, the clubs conceded that an exotic dance club could not function, much less be profitable, without exotic dancers. “Considering all six factors together, particularly the defendants’ high degree of control over the dancers, the totality of circumstances speak clearly to an employer-employee relationship between plaintiffs and defendants,” said the court. Good faith defense. While the district court found the owner’s reliance on his attorney’s advice from September 2011 onward constituted good faith and reasonable belief of compliance with the FLSA, the defendants asserted that the good faith defense also applied for the period prior to September 2011. They argued that when the owner took over the clubs, the dancers had been classified as independent contractors and thus he assumed that classification was appropriate. But, said the court, he made no effort to look into the law or seek legal advice until he faced a lawsuit in September 2011. Thus, the district court did not err in rejecting the good faith defense for this period. Earnings. Nor did it err in finding that proof of tips and fees received was irrelevant because the FLSA precludes defendants from using tips or fees to offset the minimum wage they were required to pay plaintiffs. To be eligible for the “tip credit” under the FLSA and corresponding Maryland law, the defendants were required to pay the dancers the minimum wage set for those receiving tip income and to notify them of the “tip credit” provision. Because the clubs paid the dancers no compensation of any kind and afforded them no notice, they could not claim the “tip credit.” The clubs were likewise ineligible to use performance fees paid by patrons to the dancers to reduce their liability. Treating the performance fees as a possible separate offset within the FLSA’s “service charge” category, the court pointed out that there are at least two prerequisites to counting “service charges” as an offset to an employer’s minimum-wage liability. They “must have been included in the establishment’s gross receipts,” and been “distributed by the employer to its employees.” Neither condition was met here as the defendants never recorded or included as part of the dance clubs’ gross receipts any payments patrons paid directly to dancers. Since none of those payments ever went to the clubs’ proprietors, the defendants could not have distributed any part of those service charges to the dancers, said the court, finding that as a result, the “service charge” offset was unavailable to them.
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