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More Exotic Dancers' Misclassification Suits Dispute Clubs' Business Model, Lawyers Say

Monday, August 11, 2014

By Anna Kwidzinski  

Aug. 8 — Exotic dancers have been bringing more wage and hour lawsuits over the past few years, and federal and state courts increasingly are finding the dancers are employees rather than independent contractors, upending a long-established and previously unquestioned business model in the strip club industry, wage and hour attorneys told Bloomberg BNA.

The uptick in misclassification cases brought by dancers reflects an issue that is exploding in many industries around the country, practitioners say. Contributing to this trend is more awareness among plaintiffs' lawyers of successful claims, but another is that many strip clubs have shed affiliations with criminal networks and now are managed by legitimate corporations with deep pockets. Practitioners also say federal agencies, such as the Internal Revenue Service and the Labor Department, have increasingly scrutinized independent contractor classification models on the whole.

Changing attitudes toward the historical business model in this industry, coupled with the media attention garnered by dancers' misclassification lawsuits, has led to the creation of “professional plaintiffs,” practitioners say. They described situations in which the same dancers serve as plaintiffs in more than one action in multiple jurisdictions.

Although independent contractor misclassification cases are widespread across multiple industries, exotic dancers have become “poster children” for this type of suit, plaintiffs' attorney Aaron D. Kaufmann of Leonard Carder in California said.

Lawyers representing the dancers argue clubs favor independent contractor status to avoid paying minimum wage, overtime, workers' compensation, insurance and other benefits. But many clubs that aren't national chains or franchises still face lawsuits from former dancers who previously made a lot of money in tips but now are looking for windfalls, defense lawyers say.

Although independent contractor misclassification lawsuits are widespread across multiple industries, exotic dancers have become “poster children” for this type of lawsuit, plaintiffs' attorney Aaron D. Kaufmann of Leonard Carder LLP in California told Bloomberg BNA July 25. He said any time a company tries to implement policies and procedures to control a core set of the workforce that provides services to meet high customer demand, it runs the risk of operating as an employer.

“Just the fact that this is a female-dominated industry has made it easier over time for employers to exploit” workers, Catherine Ruckelshaus, general counsel for the National Employment Law Project in New York, told Bloomberg BNA July 31. Given that women generally earn lower wages and work in more hazardous positions, their “jobs can be emblematic of exploitation,” she added.

But management attorney Barry J. Miller, partner at Seyfarth Shaw in Boston who has represented clubs, told Bloomberg BNA Aug. 1 that clubs historically utilized the independent contractor device not to pay dancers less but to accommodate a relatively itinerant workforce. Dancers tend to travel around because they get better responses from customers if they are new, thus producing unpredictable schedules and making supervision more difficult based on their leverage with the customer, he said.

Economic Realities Test in FLSA Suits

Attorneys on both sides agree that courts evaluating exotic dancers' misclassification cases typically examine the business relationship itself, rather than relying solely on labels the parties choose to characterize their agreement.

Much of the time, courts give great weight to the amount of control a club has over work schedules and conditions, especially in Fair Labor Standards Act lawsuits premised on the six-factor economic realities test, practitioners said.

Under this six-factor test, federal judges determine whether an employment relationship exists by considering:

 

  •  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 managerial skill;
  •  the worker's investment in equipment or material or his employment of other workers;
  •  the degree of skill required for the work;
  •  the permanence or duration of the working relationship; and
  •  the degree to which the services rendered are an integral part of the putative employer's business.
  •  

    Applying the economic realities test, federal courts in New York, Maryland and Georgia have found on summary judgment that clubs are liable as employers to exotic dancers for minimum wage and other compensation (Hart v. Rick's Cabaret Int'l, 967 F. Supp. 2d 901, 21 WH Cases2d 1230 (S.D.N.Y. 2013); Butler v. PP&G, Inc., D. Md., No. 13-430, 11/7/13; and Clincy v. Galardi South Enters., Inc., 808 F. Supp. 2d 1326, 18 WH Cases2d 245 (N.D. Ga. 2011)).

    But under this same test, a federal district court in Arkansas declined to grant summary judgment to dancers in January because factual questions arose as to the first three prongs of the test (Cruthis v. Vision's, E.D. Ark., No. 4:12-cv-00244, partial summary judgment to plaintiffs denied 1/24/14). That same court in 2012 granted summary judgment to another strip club based on evidence that dancers retained significant control over the manner in which their performances were conducted, invested significantly in equipment and materials used in performances, possessed and exhibited special skills even though these didn't require certification and were free to work for competitors (Hilborn v. Prime Time Club, Inc., E.D. Ark., No. 4:11CV00197, summary judgment granted 7/12/12).

    Legally, exotic dancer misclassification cases should be a “slam dunk” under the economic realities test, David Borgen, a partner at Goldstein, Borgen, Dardarian & Ho in Oakland, Calif., told Bloomberg BNA July 31. Dancers are integral to the club's business; yet they usually don't contribute major investments in the form of capital or equipment, don't possess specialized skill or training and lack the opportunity for independent profit or loss, he said.

    But because the industry is so cash-dependent, damages are hard to calculate, which may prevent dancers from suing, Borgen said.

    Clubs may also lack solid record-keeping systems because of high dancer turnover and a transient workforce, mediator and management-side attorney Chuck Stohler of Carmody Torrance Sandak & Hennessey LLP in New Haven, Conn., told Bloomberg BNA July 29.

    Practitioners noted that many cases don't go to trial because they are settled or resolved on summary judgment. One of the biggest settlements came in Trauth v. Spearmint Rhino Cos. Worldwide, Inc., C.D. Cal., No. 09-01316, amended order granting final approval issued 11/7/12. Some 11,000 exotic dancers in California and Nevada settled their state and federal misclassification claims against the Spearmint Rhino chain of adult entertainment clubs for $12.97 million.

    Another large settlement was reached in In re Penthouse Exec. Club Comp. Litig., S.D.N.Y., No. 10-cv-1145, final approval granted 1/14/14. About 1,245 dancers in two consolidated FLSA collective actions agreed to settle with a Manhattan strip club for $8 million.

    Control is Key

    Dancers have been found to be employees, rather than independent contractors, under state law, too.

    Massachusetts, for example, has a stringent test to determine employee status, making it very difficult for employers to classify workers as independent contractors, plaintiffs' attorney Shannon Liss-Riordan of Lichten & Liss-Riordan P.C. in Boston told Bloomberg BNA July 18. She has regularly litigated dancer misclassification cases, including Chaves v. King Arthur's Lounge, Inc., Mass. Super. Ct., No. 07-2505, 15 WH Cases2d 569, partial summary judgment granted 7/31/09.

    “Under Massachusetts law, a worker will be considered an employee unless: ‘(1) The individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact; and (2) the service is performed outside the usual course of the business of the employer; and, (3) the individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed,' ” the Chaves court wrote.

    It decided that the club exerted sufficient control over the dancers to be held liable as an employer, even though dancers collected gratuities as the only form of compensation and chose their own music and costumes. The club failed to support its independent contractor business model under state law because it retained authority to hire, fire and train dancers, and its principal course of business was providing adult entertainment, the court said.

    “In bigger clubs, in larger cities, women can make huge amounts of money yet those same women in those cases are entitled to pay on a minimum wage theory,” mediator Chuck Stohler of Carmody Torrance Sandak & Hennessey in Connecticut said. “It's a difficult concept practically and emotionally for owners to get over.”

    Similarly the Supreme Court of Alaska found that an exotic dancer was an employee for purposes of the state Wage and Hour Act, which is based on the FLSA (Jeffcoat v. State, Dept. of Labor, 732 P.2d 1073, 27 WH Cases 1709 (Alaska 1987)).

    The Colorado Court of Appeals also determined that a club may have exerted some control over its dancers and their performances, signaling possible employment status under the Colorado Wage Claim Act, which provides that “an individual primarily free from control and direction in the performance of the service” isn't an employee (Redmond v. Chains, Inc., 996 P.2d 759 (Colo. Ct. App. 2000)).

    Emotional on Both Sides

    Despite these ostensibly consistent liability rulings in favor of the dancers, cases typically settle—although usually for cents on the dollar, Kaufmann said. This tangible financial fallout has prompted many clubs to reclassify their workers as employees, attorneys said. But reclassification may not always be welcome or help patch the rift created by the lawsuit.

    “There is no question that these cases are difficult ones and can be emotional for both sides,” Stohler said. While dancers sometimes forgo participating in a lawsuit for fear of retribution, club owners often “feel like they are being held up,” he added.

    “In bigger clubs, in larger cities, women can make huge amounts of money yet those same women in those cases are entitled to pay on a minimum wage theory,” Stohler said. “It's a difficult concept practically and emotionally for owners to get over.”

    “Dancers hate it,” Miller said. For the past several years, he has kept track informally of dancer misclassification cases nationwide and said dancers don't like being reclassified as employees for various reasons, including new tax implications.

    The Class Action Route

    “My experience is that these clubs have fought pretty hard,” Liss-Riordan said. Clubs have a lot of money streaming in, and owners tend to perpetuate the belief that dancers are making a fortune, she added. In reality, a lot of dancers are “just barely making it,” and are struggling to make minimum wage because they aren't in rich geographic areas, Liss-Riordan continued.

    Although attorneys said they heard of some unionization attempts in parts of the country, they added that the independent contractor model prevents widespread labor organization in the adult entertainment industry. However, some dancers suing for minimum wage and employee status have been successful in obtaining class or collective certification of their claims, attorneys said.

    Most recently, the California Supreme Court in Ayala v. Antelope Valley Newspapers, Inc., 173 Cal. Rptr. 3d 332 (2014), ruled that newspaper delivery workers may bring misclassification liability claims as a class, even though break period and overtime inquiries must be decided on an individual basis. The proper inquiry is not how much control the company actually exercises over the workers' duties but whether the company has a legal right to control the work and whether that legal right is commonly provable, the Ayala court determined.

    Kaufmann and Borgen said the Ayala decision opens the door for class certification on independent contractor theories, at least in California courts.

    If clubs wish to continue classifying dancers as independent contractors, they should review common independent contractor rules, including allowing dancers to set their own hours, Stohler said. Most times, continuing to have independent contractor status is an “uphill battle.”

    At the federal level, a judge in Pennsylvania recently issued a mixed ruling in Verma v. 3001 Castor, Inc., E.D. Pa., No. 2:13-cv-03034, 6/30/14. The Verma court granted conditional certification of an FLSA collective action based on the dancer's modest factual showing that she was similarly situated to putative members, but it denied class certification on state law claims, given the mixed record and “potentially complex damages calculations” that would predominate over common issues.

    Even in employee-friendly Massachusetts, the trial court in Cruz v. Dartmouth Clubs Inc., Mass. Super. Ct., No. 10–1042, order allowing decertification 11/6/13, decertified a class action of dancers suing a club for misclassification.

    Certification of class or collective actions isn't guaranteed because it depends largely on the facts of each case, lawyers said. For instance, in 2013 a federal court in Arkansas declined to conditionally certify an FLSA collective action of dancers, bouncers and a disc jockey (Collins v. Barney's Barn, Inc., No. 4:12CV00685, 20 WH Cases2d 1056 (E.D. Ark. 2013). The workers failed to show they were similarly situated because they were subject to different policies and practices as a result of different job categories, the court said.

    Before pursuing a class or individual action in court, plaintiffs should carefully understand what the legal standard is and marshal their facts accordingly, Ruckelshaus said. Exotic dancers may also seek state agency review of their misclassification charges, given that some private attorneys may refuse to take a case they see as too risky, expensive and unprofitable, she added.

    Best Practices for Club Owners

    When choosing how to classify dancers, club owners should look to their policies and how they are compensating other workers, such as disc jockeys and bartenders, Stohler said. This type of policy review is a best practice not just from the management's perspective but also from a mediator's standpoint, Stohler added.

    Stohler has served as management defense counsel for the past 30 years but has recently been asked to mediate a number of wage and hour cases by both plaintiffs' and defense firms. He pointed out that another major sticking point is the tip policy.

    Some states have tip-pooling laws and statutes on whether to disclose tipping policies to the customer, he said. Club owners should be consistent in promulgating tip policies in writing while implementing tip-sharing agreements in practice, Stohler said.

    If clubs wish to continue classifying dancers as independent contractors, they should review common independent contractor rules, including allowing dancers to set their own hours, Stohler said. Most times, continuing to have independent contractor status is an “uphill battle” because even if there is a written independent contractor arrangement, courts may not give credence to it, he said. Stohler added that presenting dancers with a written agreement at least may force a discussion.

    Miller emphasized that written independent contractor agreements may not always be the preferred practice. Most clubs tend to be smaller businesses run by a few people who don't necessarily have the training and sophistication of business owners in other industries, Miller said.

    He added that practices around the independent contractor model are less than perfect. Small club owners sometimes promulgate handbooks that seem to control the dancers. In reality, the rules are ignored and impossible to enforce but they generate documents that can be used as evidence in litigation, Miller said.

    Because most clubs are owned by smaller companies, owners aren't always defended by experienced defense counsel for budgetary or other reasons, even though they are defending against experienced professional plaintiffs' lawyers, Miller said. This kind of imbalance typically generates skewed results, he added.

    To contact the reporter on this story: Anna Kwidzinski in Washington at akwidzinski@bna.com

    To contact the editor responsible for this story: Susan J. McGolrick at smcgolrick@bna.com

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