Exotic Dancers: Employees or Independent Contractors – The High Costs of Misclassification – Act I

This article was written by Lawrence Brocchini, a Partner of the Firm.

A New York federal judge recently awarded nearly $11 million in unpaid minimum wages to a class of exotic dancers that the owners of a New York “cabaret” incorrectly classified as independent contractors, not employees. The employers in that case face additional damages and penalties at trial. The substantial damages that United States District Court Judge Paul A Engelmayer awarded in Hart v. Rick’s Cabaret International Inc. illustrate the high cost to employers who misclassify employees as independent contractors. In a series of short articles we will discuss the classification issues raised in Rick’s Cabaret to allow employers (in conjunction with their counsel) to better understand how to properly classify their workers. Proper classification is essential not only with respect to minimum wages, but also to address such matters as payroll tax withholding and obtaining legally required unemployment and workers’ compensation insurance: regulatory minefields all.

The fundamental question in Rick’s Cabaret was whether exotic dancers were “employees” as defined in the federal Fair Labor Standards Act (“FLSA”) and New York Labor Law (“NYLL”), both of which apply to most New York employers. As will be seen, the answer to that question is not always clear cut. This is owing in no small part to what one court termed the necessarily broad definition of “employee” needed to affect the “remedial purposes” of labor legislation. Thus, FLSA circularly defines “employee” to mean “any person employed for hire by an employer,” and under NYLL broadly defines “employee” to mean “any person employed for hire by an employer in any employment.” The two statutes define “employer” with similarly expansive breadth, with FLSA’s definition including “any person acting directly or indirectly in the interest of an employer in relation to an employee…”; and NYLL including “any person, corporation, limited liability company, or association employing any individual in any occupation, industry, trade, business or service.” Muddying the classification waters further is the fact that, despite closely similar statutory language, the tests for determining employee status under the two laws is different. The challenge for employers and their counsel to get it right is substantial, just as the consequences of misclassification are potentially grave.

Those tests for classification will be discussed in later installments in this series. The lesson of this article is a simple starting point: While there is no substitute for a full analysis by knowledgeable counsel, the first step an employer should take is to have counsel review how the courts and government agencies have classified particular categories of workers in the past. This sort of precedent often can give the employer a very good idea how its employees should be classified. Thus, in Rick’s Cabaret, the Court’s classification of the dancers as employees was strongly supported by the fact that “nearly ‘[w]ithout exception’” courts that have addressed the question had “found an employment relationship and required the nightclub to pay its dancers a minimum wage.” The starting point for employers and their counsel making – and periodically reviewing – classification decisions is a careful review of case law, regulations and other statements from state and federal agencies involving the types of workers at issue.

The next installment will analyze the factors under federal law for distinguishing between employees and independent contractors under FLSA, and future installments will address state law and other issues raised by Rick’s Cabaret that employers and their counsel need to understand to avoid misclassification mistakes and costly litigation.

This article is intended only as a general discussion of these issues. It is not considered to be legal advice or relied upon. We would be pleased to consider providing additional details or advice about specific situations. For additional information on this topic, please feel free to contact Lawrence Brocchini who regularly counsels clients in employment matters and handles the full range of employee misclassification issues.