By Wayne D. Garris Jr., J.D.
In addition to finding the dancers had been misclassified, the appeals court rejected the employer’s contention that a purported settlement of FLSA claims deprived the district court of jurisdiction for the remaining state law claims or that the FLSA precluded class claims for unjust enrichment.
Sustaining a jury verdict of $4.5 million for a class of dancers who brought FLSA and state wage claims against the Penthouse Club, the Third Circuit affirmed that the employer improperly classified the dancers as independent contractors, rather than employees. As a result, the employer failed to pay the dancers minimum wage and overtime wages in violation of Pennsylvania law. In addition, the court rejected the employer’s arguments that the district court lacked jurisdiction over the state law claims after a disputed settlement of FLSA claims and that the FLSA precluded the class claims for unjust enrichment. Further, the employer was not entitled to any credit or offset against the jury award for payments the dancers had already received (Verma v. 3001 Castor, Inc., August 30, 2019, Ambro, T.).
The plaintiffs were a class of current and former exotic dancers at the Penthouse Club gentleman’s club in Philadelphia. The employer required each dancer to sign an agreement stating that she is an independent contractor; each dancer’s compensation consisted entirely of tips received when dancing on stage or fixed dance fees set by the club when a dancer provided a private dance. The employer did not pay a wage to the dancers.
Deductions and fines. The club also took several deductions from the dancers’ pay. During their shifts, dancers had to rent stage time; the stage rental fees varied depending on the shift, and the employer also took a room-rental fee for each private dance. It also required the dancers to tip out $15 to the Club’s disc jockey, $10 to the “house mom.” and $5 to the podium host, for a total of $30 per shift, regardless of how much a dancer actually earned during her shift. The club trained the dancers and closely monitored their attendance, appearance, demeanor, and customer service, imposing a strict set of rules for dancers and levying fines from $10 to $100 for rule violations.
Procedural history. In 2013, one of the dancers filed suit on behalf of herself and similarly situated current and former dancers alleging claims for minimum wages and overtime under the FLSA, the Pennsylvania Minimum Wage Act (PMWA), and a claim for unjust enrichment under Pennsylvania common law. The district court granted certification of the collective action and the Rule 23 class and also found as a matter of law that the dancers were employees under the FLSA and PMWA.
Proposed settlement. Just weeks before trial, the parties purported reached an agreement in principle to settle part of the dancers’ FLSA claims, but what terms they actually agreed to, and whether there was an actual agreement, were disputed. This much was clear: The dancers were to receive $109,000 in exchange for not bringing some of their FLSA claims at trial. After the alleged settlement, however, the employer moved to dismiss the state law claims for lack of subject matter jurisdiction arguing that the settlement of the FLSA claims deprived the district court of jurisdiction over the remaining claims. The district court denied the motion, and in the resulting trial, the jury returned a verdict of over $4.5 million ($2.6M for minimum wage and $1.9M for unjust enrichment) for PMWA and unjust enrichment claims. The employer appealed.
Jurisdiction. The Third Circuit first held that the district court retained subject matter jurisdiction over the PMWA and unjust enrichment claims, notwithstanding the purported settlement of FLSA claims, under the Class Action Fairness Act. The dancers’ suit met CAFA’s criteria: The complaint alleged a class of more than 100 dancers, an aggregate amount in controversy more than $5 million, and diversity of citizenship between any class member and the employer. The employer failed to raise a factual challenge the dancers’ CAFA allegations in their complaint until a few weeks before trial; thus, the jurisdictional allegations in the complaint were controlling. Further, given the $4.5 million state law verdict, it is likely that the amount of controversy would exceed $5 million once the FLSA claims initially pleaded in the complaint and attorneys’ fees are included.
Employees or independent contractors? Next, the court applied a six-factor test to affirm the district court’s holding that the dancers are employees and not independent contractors.
Substantial control. The appeals court found that the employer exercised “overwhelming control” over the dancers’ work. It established the available shift times, checked the dancers’ attendance and fined them when they were late, trained the dancers on physical appearance and imposed dress, hair, and makeup requirements, determined the songs and number of songs that play when a dancer is dancing, prohibited them from smoking, chewing gum, or using their cellphones while on the dance floor, banned changing into their street clothes before the end of their shifts, and set the price and duration of all private dances.
Managerial skill. This factor favored the dancers as well. Although each dancer had some degree of control over her profits and losses, her managerial skill had little to do with profits or losses. The club set the hours, admission fees, food and drink prices, and prices for private dances.
Employee’s investment. Dancers made no investment in equipment or materials, as the employer owned the club’s premises, pays its licensing fees, pays for alcohol, and pays personnel.
No special skills needed. Similarly, the court rejected the employer’s argument that appearance, social skills, and hygiene are special skills that the dancers needed to perform their job duties.
Permanence. The only factor in the employer’s favor, and not enough to tip the balance, the court found there was very little permanence in the working relationship because the average dancer in the class worked only 14 of 109 workweeks in the class period. However, other circuits give very little weight to this factor.
State law claims not preempted. The appeals court also rejected the club’s argument that DOL regulations preempted the dancers’ state law unjust enrichment claims—an argument for which the employer failed to cite any authority. Congress intended for the FLSA to supplement state law, not preempt them, reiterated the court.
No credit or offset. The Third Circuit further held that the employer was not entitled to a credit or offset for the amount of money that the dancers received directly from customers from dance fees. (The club conceded that for PMWA class claims, it does not get a credit or offset but contended that an offset should have been applied to the unjust enrichment claims.) First, the employer failed to cite any authority to support its argument or explain how the credit or offset should be calculated and, thus, waived this argument. And the fact that the employer did not take all of the dancers’ money for tip-outs to other employees did not undermine the jury’s conclusion that the dancers were entitled to more than they received.
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