Page 40 - AVN December 2015

LEGAL NEWS
STOP, THIEF | |By Nate Glass
As is abundantly clear from the complexity of the factors, this
is a balancing test that is extremely fact sensitive, with the fur-
ther 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 indepen-
dent contractor? While this test is extremely fact sensitive, it
does have advantages for club owners because it allows the in-
dividual 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 situa-
tions, 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 circum-
stance 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 con-
tractors. (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 deter-
mining 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
tin 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 com-
mon 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, dress-
ing rooms, music ….”
In Harrell v. Diamond Entertainment, Inc. (1997) a United States
District Court for Middle District of Florida decision, the judge
40 | AVN.com | 12.15
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 “in-
vention, 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 [2010]).
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 employ-
ees under the FLSA, citing five factors—control,
profit and loss, degree of skill and independence,
permanency of work and the work being an inte-
gral 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 employ-
ees 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—respective-
ly, Milano’s Inc. v. Kansas Dept. of Labor, Contribu-
tions 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 out-
right 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 incli-
nation 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 employ-
er 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 proce-
dural 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; stick-
ing 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 op-
portunity 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.
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. Bern-
stein 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
embernstein@embalaw.com and his website is embalaw.
com.