Employee or independent contractor? It is a long-standing question that continues to challenge businesses that seek to properly classify workers. Many employers, like the exotic dance clubs in this case, rely on independent contractor agreements to defend their classifications. In a thorough review of an employee/independent contractor analysis, the 4th U.S. Circuit Court of Appeals reminded businesses that such analyses should run much deeper and the determinative issue is the economic realities of the underlying relationship.
Several exotic dancers at two commonly owned and managed dance clubs in Prince George’s County, Md., brought a lawsuit on behalf of themselves and other similarly situated dancers for nonpayment of minimum wages under federal and Maryland law. The clubs denied that the dancers were employees entitled to payment of minimum wages.
The clubs had asked all dancers to sign a “Space/Lease Rental Agreement of Business Space” document that identified the dancers as independent contractors. The dancers were not paid any wages. Rather, compensation was limited to tips received directly from patrons. The lower court granted partial summary judgment in favor of the dancers, finding no material dispute that they were employees and, under the law, entitled to payment of minimum wages.
The appeals court undertook an illustrative analysis of a Fair Labor Standards Act (FLSA) employee/independent contractor six-factor test, which looks at:
The degree of control that the putative employer has over the manner in which the work is performed.
The worker’s opportunities for profit or loss dependent on his or her managerial skill.
The worker’s investment in equipment or material, or his or her employment of other workers.
The degree of skill required for the work.
The permanence of the working relationship.
The degree to which the services rendered are an integral part of the putative employer’s business.
As for the degree of control, the appeals court highlighted that the clubs took attendance, dictated work schedules, maintained several rules of conduct during working hours, set the fees dancers could charge, counselled dancers on proper behavior, and maintained control of decisions concerning music and lighting for the performances. Given the extent of control over the dancers at the clubs, the appeals court concluded that the first factor of the six-factor test weighed in favor of a finding of employee status.
However, the appeals court cautioned that its conclusion did not “suggest that a worker automatically becomes an employee covered by the FLSA the moment a company exercises any control over him.” The appeals court noted that the appropriate focus of inquiry should be on the degree of control.
The second and third factors, the appeals court found, were largely two sides of the same coin. The clubs controlled the prices dancers could charge and paid for rent, utilities, insurance, advertising and wages for other workers at the clubs. Investment by dancers was limited to their outfits and items they brought to the clubs for their dances. The appeals court noted that the proper analysis of these criteria should address “the worker’s contribution to managerial decision-making and investment relative to the company’s.” It held that the “ratio of managerial skills and operational support” by the clubs, in comparison to the dancers, weighed against an independent contractor classification.
In finding the remaining factors either neutral or indicative of employee status, the appeals court affirmed the decision of the lower court and concluded that the dancers were improperly misclassified as independent contractors.
McFeeley v. Jackson Street Entertainment, 4th Cir., No. 15-1583 (June 8, 2016).
Professional Pointer: Multiple tests for independent contractor status arise in different areas of the law, such as tax and labor. Such analyses also differ across federal and state law. Careful consideration must be given to classification issues to help ensure compliance with these varying standards.