An important decision for every business is whether it should classify workers as employees or independent contractors. This distinction is important for many reasons such as taxes and liability. Furthermore, if a worker is an independent contractor, wage and hour provisions under the Fair Labor Standards Act (FLSA) do not apply. For this reason, many companies try to get away with misclassifying workers as independent contractors to avoid minimum wage and overtime requirements.
A recent case came before a United States District Court questioning whether a group of exotic dancers had been misclassified as independent contractors. The plaintiffs were a group of dancers, also known as entertainers, at Rick’s NY, an adult cabaret club. The club had always classified its dancers as independent contractors and had therefore never paid any dancers a regular hourly wage or salary. Instead, the dancers received only “performance fees” from customers in return for private dances. The dancers brought suit against the club, claiming Rick’s NY should have classified them as employees under FLSA standards, and thus deserved to earn a minimum wage under federal and state labor laws.
The Economic Realities Test
FLSA recognizes that employers can often write a contract to make it seem as if a worker is an independent contractor to avoid wage laws, when in reality the worker should be an employee. Therefore, FLSA uses an “economic realities” test to determine an employer-employee relationship instead of merely looking at the technicalities of a contract. The Supreme Court has found that certain factors are significant in the economic realities test, such as:
-Whether services rendered by the worker are an integral part of the business.
-Permanency of the relationship.
-Amount of the worker’s investment in facilities and equipment.
-Nature and degree of control of the worker by the business.
-The worker’s opportunities to receive profit and/or suffer loss.
-Whether the worker has a certain level of skill, initiative, judgment, or foresight to compete in the open market as an independent contractor.
In the Rick’s NY case, the court recognized that the fact that the dancers were free to dance at other clubs worked in the club’s favor, as the relationship was not exclusive or permanent. However, the court found that many other factors clearly indicated that the dancers were, in fact, employees. First, the dancers’ work was found to be an integral part of the business. Next, the club exercised a significant amount of strict control over the dancers’ conduct. The dancers had zero investment in the club’s facilities or equipment, and finally, most of the dancers began work at the club with no prior experience and, therefore, did not have the skills or initiative to be competitive in the open market. For all of these reasons, the court found the dancers were misclassified and were entitled to receive a minimum wage under FLSA.
If you believe your employer has misclassified you as an independent contractor or has otherwise violated wage and hour laws, call the employment attorneys at HKM today.