Posted Dec 28th, 2015 08:45 AM
This article was written by attorney Eric Bernstein and originally ran in the December 2015 issue of AVN magazine. Click here to see the online edition.
Eric M. Bernstein, Esq. is owner/partner in the law firm of Eric M. Bernstein & Associates, LLC located in New Jersey with clients all across North America. Mr. Bernstein and his firm represent employers/management in the fields of labor and employment law, government law, land use law, entertainment law and internet law. The law firm is also active in the gentlemen’s club industry as Mr. Bernstein serves as a member of the Legal Advisory Board of ACE National and as a member of the First Amendment Lawyers Association. He can be reached at email@example.com and his website is embalaw.com.
Without performers, there is no adult industry. It is just a fact of life—especially for owners of gentlemen’s clubs. And for as long as there have been dancers and gentlemen’s clubs, there has been another age-old question: Are They or Aren’t They? That question relates to whether dancers are employees or independent contractors. From the club owners’ point of view, most have viewed dancers as independent contractors, which avoids all of the employee-employer issues: minimum wage, taxes, workers compensation, liability matters, etc. But just as almost everything in the labor and employment field has changed over the years, so has the issue of “are they or aren’t they?”
While there is no definitive answer, more states have, at least under some circumstances, determined that dancers are employees—and owners need to consider what that means. This article addresses some of the factors that provide oversight on the issue of employee versus independent contractor, as well as the decisions that have recently been issued by the court and at several judicial alternatives. Though the focus here is on exotic dancers, the question of Are They or Aren’t They? is one that all business owners must consider if they are paying individuals as independent contracts.
First off, one must be aware of two overriding concepts:
1. There is not just one answer to this question; each situation must be looked upon on a case-by-case, club-by-club basis; and
2. Club owners must consult and retain an attorney/law firm with experience/expertise in labor and employment law and an understanding of this industry.
There are plaintiff’s employment attorneys (i.e., shysters—as a management labor attorney I can occasionally use the word) peddling their wares to any dancer, seeking a hook for a class action lawsuit against an unsuspecting club owner. Being forewarned is forearmed. While management attorneys ply their wares more subtly (articles such as this), we are equally out there giving warnings, guidance and hope to the club owners fighting this ongoing battle. In order to understand the battlefield, one must first be aware of the stakes. If an independent contractor is declared to be an employee, the employer not only has to pay (and withhold) federal and state income taxes, Social Security taxes, Medicare taxes and unemployment taxes but also is subject to minimum wage and overtime issues (overtime laws do not apply to independent contractors), damages and the possibility of providing some form of medical insurance and leave under either the Family and Medical Leave Act or a state medical leave act, or both.
The Internal Revenue Service (IRS) defines anyone who performs services for you as your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.
The IRS sets forth this definition for independent contractors: “people such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers or auctioneers who are in an independent trade, business or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. One is not an independent contractor if one performs services that can be controlled by an employer (what will be done and how it will be done). This applies even if the person is given freedom of action. What matters is that the employer has the legal right to control the details of how the services are to be performed.”
This passage above is confusing enough to make any employer groan. Then, one must review and interpret the tests that the IRS uses to determine the employee/independent contractor relationship and see if that sheds any light on the subject.
The IRS has reviewed these matters pursuant to one of two separate tests for determining if a worker is an independent contractor: the “common law” test and the “reasonable basis” test. The common law test is more complex; it initially addresses twenty factors the IRS considers in these types of situations.
The twenty factors in the common law test are as follows:
1. The putative employer’s right to require compliance with instructions;
2. Training by the putative employer;
3. Integration of the worker’s services into business operations;
4. A requirement that the worker’s services be rendered personally;
5. The putative employer’s hiring, supervising and paying a worker’s assistants;
6. A continuing relationship;
7. Set hours of work;
8. A requirement that the worker devote himself/herself substantially full time for the putative employer rather than being free to work when and for whom he or she chooses;
9. Doing work on the putative employer’s premises;
10. Requiring the worker to perform services in the order or sequence set by the putative employer;
11. Requiring the worker to submit oral or written reports;
12. Paying by the hour, week or month rather then by the job on or on a straight commission;
13. Paying travel and business expenses;
14. Furnishing tools and materials;
15. A lack of significant investment by the worker;
16. An absence of ability by the worker to realize or profit or suffer a loss;
17. Working for no more than one firm at a time;
18. The workers not making his or her services available to the general public on a regular and consistent basis;
19. A right to discharge the worker unilaterally rather than per contract terms; and
20. A right by the worker to terminate the relationship without incurring liability. (Mayfield Therapy Center v. Commissioner of Internal Revenue and Ardmore Day Sap, Inc. v. Commissioner of Internal Revenue, )
Within those twenty factors, the IRS appears to advise its own auditors to look most closely at No. 1 (instructions to workers), No. 2 (job training) and No. 16 (worker’s ability to make a profit or suffer a loss). On top of all of this, one must be aware that not every factor applies in every situation; no one factor is dispositive and the total situation is what controls.
As is abundantly clear from the complexity of the factors, this is a balancing test that is extremely fact sensitive, with the further component of weighing all of the factors as a whole—i.e., if there are ten applicable factors, do six factors weighing in favor of an independent contractor make the individual an independent contractor? While this test is extremely fact sensitive, it does have advantages for club owners because it allows the individual owner to distinguish between his/her club and another club, as well as between each dancer. The biggest problem with the common law test is it is tedious and requires significant analysis on all parties’ part. However, it may be more amenable to club owners than the other IRS test considered in these situations, which is the reasonable basis test.
The reasonable basis test is based predominantly on how the courts and/or the IRS have classified similar workers in the industry or the specific club in the past. Some parties have even classified the test as a so-called “safe harbor” test, but this is again a fact-sensitive test as to the ultimate implementation of the safe harbor provision. Safe harbor in this situation indicates that if a club owner can show that he/she had a reasonable basis for classifying a worker as a in independent contractor, the IRS is then prohibited from reclassifying the worker as an employee either prospectively or retroactively. However, in order for the safe harbor provision to apply, one or more of the following conditions may need to exist:
1. A court ruling in favor of treating workers in similar circumstance as non-employees;
2. An IRS ruling (most notable a Revenue Ruling) stating that similar workers are not employees subject to employment taxes;
3. An IRS Technical Advice Memorandum or Private Letter ruling to a club owner, indicating that a particular worker is not an employee;
4. A past IRS payroll audit that did not find workers in similar positions at the club to be considered employees, and/or
5. A longstanding, widely recognized practice in the gentlemen’s club industry of treating similar workers as independent contractors. (See other comments below)
While this is obviously a more succinct set of factors than the common law test, it is equally (or possibly more) problematic than the common law test based upon court decisions and/or IRS rulings for a specific club and/or may occur in a specific jurisdiction. A number of federal and state courts have rendered decisions over the last several years, almost unanimously determining dancers were employees. One must caution that each case is fact sensitive and no decision is binding on any other club per se or in any other jurisdiction other than the court’s specific jurisdiction.
As far back as 1993, the United States Fifth Circuit Court of Appeals (covering Louisiana, Texas and Mississippi) ruled in Reich v. Circle C Investments (“Circle C”) that exotic dancers were employees under the meaning of the Fair Labor Standards Act (FLSA) and therefore the club has willfully violated the minimum wage, overtime and recording provisions of the act. The court’s review, using some of the factors in the common law test, focused in determining employee/independent contractor status on whether the individual at issue is, as a matter of economic reality, in business for himself. Based on the specific factors of this case, the court concluded that “… here, the economic reality is that the dancers are not in business for themselves but are dependent upon finding employment in the business of others. We reject the defendants’ creative argument that the dancers are mere tenants who rent stages, lights, dressing rooms, music ….”
In Harrell v. Diamond Entertainment, Inc. (1997) a United States District Court for Middle District of Florida decision, the judge rejected the argument of defendants that their dancers were exempted under the FLSA as an exempt professional. While the court deemed the argument unique and a case of a first impression, the court rejected their argument under both the long and short tests (common law and reasonable basis) by indicating that the club failed to meet the standards that exotic dancing required “invention, imagination or talent” to be an exempt professional. In the Southern District of Indiana, a federal court judge, using Circle C and Harrell as the basis for the court’s decision, found that dancers at an Indianapolis club were employees under the FLSA (Morse v. Mer Corp ).
The Federal District Court in the District of Columbia, in April 2011 (Thompson v. Linda and A, Inc.), determined, based on the facts of that case, that dancers in a D.C. club were employees under the FLSA, citing five factors—control, profit and loss, degree of skill and independence, permanency of work and the work being an integral part of the business—and, quoting Circle C, found that with the exception of permanency, the dancers exhibited the position of employees. In a September 2011 decision, Climcy et. al. v. Calardi South Enterprises, Inc., the Federal District Court for the Northern District of Georgia, covering Atlanta, found that exotic dancers were employees and not independent contractors. One must note that this case differed from many of the others in that the dancers were not paid by the club directly; they paid for the right to perform. They all had independent contractor agreements; however, they all paid house fees and disc jockey fees (among other things), and the club set the prices for dancers and created rules of conduct. In Kansas, Massachusetts and Montana—respectively, Milano’s Inc. v. Kansas Dept. of Labor, Contributions Unit (Division of Court of Appeals), Luciene Chaves and Another v. King Arthur’s Lounge, Inc. (Massachusetts. Superior Court) and Renee Smith et. al. v. Tyad Inc. (Montana Supreme Court)—state courts have all found, based on the specific facts of the individual case, dancers in question to be employees, rather than independent contractors.
Before everyone reading this article determines that they need to enter into another line of work, there are alternatives available other than outright litigation with either a governmental agency or a plaintiff’s attorney on behalf of a group of dancers. One option, though far from foolproof, is to have your dancers enter into separate written independent contractor agreements. The mere existence of such an agreement is hardly a successful bar from litigation, but the absence of any written agreement makes it exceedingly difficult to prove independent contractor status. Furthermore a provision in such an agreement calling for claims as to employment status to be arbitrated rather than litigated may have some heightened validity under the April 2011 U.S. Supreme Court decision in AT&T Mohlety v. Concepcion. Such provision would agree to arbitrating such claims and waiving any right to be part of a class action lawsuit, requiring each dancer to arbitrate her own claim.
A second alternative is a written agreement with the dancers that going forward they will be considered employees and treated in such a manner, but a waiver of any claim for damages, back wages and related items. This is obviously a red flag, especially when there has been no inclination that your dancers must be treated in such a manner; however, all it takes is one unhappy dancer to file a suit in court or bring a claim with a governmental entity to start the ball rolling.
A third alternative, at least as to federal employment taxes (SSI and Medicare), is the previously mentioned safe harbor provisions under Section 530 of the Internal Revenue Code. However, you must meet all the tests of the safe harbor provision: reasonable basis, substantive consistency and reporting consistency. A fourth alternative is an IRS program titled the Voluntary Classification Settlement Program (VCSP); this is an optional program which provides employer taxpayers with a voluntary opportunity to reclassify their workers as employees for future tax periods with limited federal employment tax liability for past nonemployee treatment. It must be pointed out that the last two alternatives are tax related only and do not address or resolve wage and/or other benefit claims.
Finally, if you do go to litigation, it is not the be all and end all. There are a number of points prior to trial where settlement can exist and/or a matter can be dismissed for numerous procedural and/or substantive reasons, and the courts generally encourage such approaches. However, in this litigious society, the chances of more and more litigation of this type clearly exist.
In conclusion, this is a relatively new front in which the gentlemen’s club industry will have to address. Club owners need to be proactive; sticking one’s proverbial head in the sand will not make the threat go away. The use of employment counsel is a key business operation decision. This article is merely a starting point for awareness and discussion and action by the individual club owner and the industry as a whole. Use the upcoming exotic dancer convention as an opportunity to explore with colleagues and others what they have done and what you can do. It is in everyone’s best interest that we stay focused on this and related issues. It is unfortunately the nature of doing business in these and future economic times.
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