In May 2016, the Fourth Circuit Court of Appeals determined that two Maryland exotic dance clubs misclassified their dancers as independent contractors rather than employees. The dancers sued under the Fair Labor Standards Act (FLSA) and Maryland wage and hour laws for unpaid wages and liquidated damages. The Court found that the facts presented suggested that exotic dancers are employees.
According to the Department of Labor, the misclassification of employees as independent contractors presents one of the most serious problems facing affected workers, employers and the entire economy. Employee misclassification is the practice of labeling workers as independent contractors, rather than employees, to avoid paying unemployment and other taxes on workers. Employers must also withhold Social Security and Medicare taxes from the employee’s wages, pay the employer’s share of Social Security and Medicare taxes, pay unemployment taxes, and provide workers compensation insurance coverage.
On the other hand, independent contractors are not protected by most state and federal employment laws, including the FLSA. Thus, if a worker is considered an independent contractor, the worker is responsible for paying her own income and self-employment taxes. She will have no worker’s compensation coverage if she is injured on the job, and she would not be entitled to unemployment benefits should she lose her job.
Generally, an employee who sells his or her services to one “customer,” the employer, is economically dependent upon that work. On the other hand, an independent contractor is in business for herself, invests in her own equipment and supplies, and has a broad customer base. In this case, the Court applied the “economic realities” test to determine whether the dancers were economically dependent on the dance club or whether the reality suggested that they were in business for themselves. In applying the test, the Court considered the following:
- Did the would-be employer exercise a degree of control over the manner in which the work was performed?
- Did the dancers have a meaningful opportunity for profit and loss based on their managerial skill?
- Do the dancers invest in equipment or material for purposes of plying their trade?
- Do dancers need to possess a certain degree of skill in order to perform the work?
- Is the work relationship permanent or ephemeral in nature?
- Are the services rendered by the dancers integral to the would-be employer’s business?
The Court determined that the factors weighed in favor of an employer-employee relationship stressing that the most critical factor in its assessment is the first: the degree of control that the would-be employer has over the labor of the worker. The Court, however, was quick to acknowledge that there is no bright-line rule marking the distinction between an employee and an independent contractor; rather, each case is fact-specific.
Despite being found liable for misclassification, the club owner was able to successfully raise a “good faith” defense to the dancers’ demand for penalties. Employees who are not paid as required by FLSA have the right to sue their employers to recover “unpaid minimum wages” and “unpaid overtime compensation.” If a court finds that the employer did not pay employees properly, the court can double the damages as a penalty. However, if the court determines that the employer’s act or omission was made in good faith, and that it had reasonable grounds for believing that its act or omission was not a violation of the FLSA, then the court may award no liquidated damages.
In this case, the defendants successfully raised a “good faith defense” by arguing that in September 2011 they had sought and received legal advice with respect to the classification of the dancers. Acting in accordance with that advice, they adopted certain independent contractor agreements, which they were advised were FLSA-compliant. It was against this factual backdrop that the Court concluded the employers had reasonable grounds to believe they were in compliance and that the misclassification was not willful but instead done in good faith.
This case is instructive because it highlights the need for employers to do a thorough review of each of the job descriptions of its personnel. In conducting such a review the emphasis should be in truly assessing the reality of the relationship vis-à-vis the economic realities test laid out above. Where necessary, changes should be implemented immediately.
Don’t wait until it’s too late to implement changes and insulate your business from potentially costly and disruptive legal battles. The attorneys at McMillan Metro can guide you through this potential classification minefield. Contact us today to discuss your matter.