New Employee Classification in the Fourth Circuit: Exotic Dancer

By Karen Federman Henry

As a government legal adviser, I often encountered the question of whether a person performing services for Montgomery County was an employee or an independent contractor. The distinction held significance, because it determined who had responsibility for Social Security payments, unemployment insurance premiums, workers’ compensation benefits, overtime, and other aspects of the employment relationship. Simply designating a person as an independent contractor usually did not make it so. Instead, the activities performed by the person and the manner of performing them became key focal points.

The analysis took an intriguing twist in McFeeley v. Jackson Street Entertainment, No. 15-1583 (4^th Cir., June 8, 2016), in which a defendant nightclub, based on the advice of an attorney about the relationship with the exotic dancers who worked there, began using an agreement titled “Space/Lease Rental Agreement of Business Space” with them. The dancers had to sign the agreement and pay a fee to dance. Typically, merely signing a document that says someone is an independent contractor does not suffice — the analysis must consider the traditional “economic reality” factors used to identify whether a person is an employee or an independent contractor:

• The degree of the employer’s control of the manner in which the work is performed;
• The worker’s opportunities for profit or loss dependent on his own 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 of the working relationship; and
• The degree to which the services rendered are an integral part of the business.

The Fourth Circuit Court of Appeals’ evaluation of these factors led to its conclusion that the dancers qualified as employees rather than independent contractors. The dancers worked on a schedule created by the business, during hours established by the business, and did not have additional opportunities for profit based on their own skills. In fact, the business admonished the dancers not to charge too much to the customers, and imposed many restrictions on the dancers (e.g. no drinking or smoking, no loitering at the club, no family or friends during work hours).

The decision made the dancers eligible for the minimum wage required by the Fair Labor Standards Act, the Maryland Wage and Hour Law, and the Maryland Wage Payment and Wage Collection Law. What stands out here is that the Court determined that the club’s good-faith reliance on the advice of counsel relieved it of responsibility for paying back wages during the time that the agreement was in effect. Although the end result is that the dancers are employees and presumably must be treated that way going forward, the Court found a way to reduce the cost to the clubs by only having to pay lost wages for part of the time period at issue.

Using independent contractors often causes dilemmas for a business, so it is worth exercising additional caution when engaging an individual to perform services. Consulting an attorney is a good step, but may not always avoid the problem. The degree of an entity’s control of an individual governs the outcome, but does not provide for a bright-line test.