In May 2016, the Fourth Circuit applied a six-part, economic realities test to determine that two Maryland dance clubs had misclassified their exotic dancers as independent contractors. This case is important for several reasons: understanding
- the elements of the court’s “economic realities” test;
- the application of the court’s “economic realities” test;
- the legal basis for the dancers’ claims;
- the good faith defense to liquidated damages; and
- the extent to which an independent contractor agreement protects the employer.
The touchstone of this “economic realities” test was whether the dancers were economically dependent on the dance club or “as a matter of economic reality” were in business for themselves. The application of this test turned on six factors:
- the degree of control that the putative employer has over the manner in which the work is performed;
- the worker’s opportunity for profit and loss that is dependent on her managerial skill;
- the worker’s investment in equipment or material, or her employment of other workers;
- the degree of skill required for the work performed;
- the permanence of the working relationship; and
- the degree to which the services rendered are an integral part of the putative employer’s business.
In ruling that the factors weighed in favor of an employer-employee relationship, the Court acknowledged that the distinction between an employee and an independent contractor cannot be articulated with a bright line, but each case turns on its own set of facts. But the Court stressed that the most critical factor is the first – the degree of control that the putative employer has over the worker.
The dancers were suing under the Fair Labor Standard Act and Maryland wage and hours law (which tracks the FLSA) for unpaid wages and liquidated damages. The FLSA permits covered employees to sue for “their minimum unpaid wages, or unpaid overtime, and an additional, equal amount as liquidated damages.” (29 U.S.C § 216(b)). The liquidated damages are an additional penalty against those employers who misclassify workers.
But, the dance clubs successfully raised a “good faith defense” under the FLSA (29 U.S.C § 260) to liquidated damages after September 2011. In September 2011, the club owners sought legal advice and acted in accordance with the advice given to use independent contractor agreements, which were represented to be FLSA compliant. Prior to that date, the Court rejected the dance clubs’ claim of ignorance of the law. Ignorance of the law is never an excuse. Please note that the Court did not rely on the independent contractor agreement to classify the dancers, but it did rely on the agreements and the legal advice the dance club owners sought to insulate them from the post-September 2011 liquidated damages.
First, don’t wait. Seek legal advice now about the distinction between employees and independent contractors in your business.
Second, if you have such agreement, review your independent contractor agreements to ensure that they track the economic realities of your business.
The attorneys at Sands Anderson PC are interested in helping you with this very relevant, and potentially very costly, issue. Please contact us.
Finally, Noah Feldman has a very interesting commentary on this Fourth Circuit opinion as it relates to the ever-present Uber, and the lingering question about the proper classification of Uber drivers.