A significant amount of wage and hour class/collective jurisprudence has developed around the issue of whether exotic dancers are employees or independent contractors. We’ve blogged many of these issues in the past [June 6, 2019, August 27, 2018, January 27, 2017, December 3, 2014, November 21, 2012, April 8, 2011]. There are many other cases we have not blogged, and a significant number have now been decided by federal courts of appeal. In some respects, the cases reflect the novelty of the issue itself and the defenses raised by the defendants. In others, it reflects the fact that in this industry, most of the venues have used largely the same economic arrangements. In any case, those challenging such arrangements are now reaping significant verdicts, and courts are developing rules that may apply to significantly less controversial subjects.

Most recently, the United States Court of Appeals considered the case of Verma v. 3001 Castor, Inc., d/b/a The Penthouse Club and/or The Penthouse Club@Philly, Case No. 18-2462 (3d Cir. Apr. 17, 2019). The arrangements at issue in the Verma case were fairly typical in theis exotic dance industry. The defendant ran a club and classified its dancers as independent contractors, requiring them to sign contracts acknowledging that status. The dancers were not paid at all by the club, but were compensated solely by tips and by “dance fees” from customers arising from giving “private room dances” in private rooms provided by the club. The dancers were required, however, to pay a set of fees to the club and to various club staff members totaling $30 per shift. While dancers could choose shifts, they could also be fined for tardiness and were subject to the club’s rules as to appearance and music, subject to fines ranging up to $100.

The dancers brought suit under the FLSA for unpaid minimum wages, and under Pennsylvania state law, asserting that they were misclassified as independent contractors and should have been paid both minimum wages and overtime (in addition to not paying the fees and fines required by the club). Early on, the district court granted conditional certification, but there were only 22 opt-ins out of a potential class of over 300 dancers, a participation rate somewhere around 7% or below. Thus, at least numerically speaking, the plaintiffs were far better off pursuing class claims under state law. Those federal claims were resolved (or possibly not – a dispute arose almost immediately) for $109,000. The case thus went to trial solely on the state law claims under the Pennsylvania Minimum Wage Act and a state law unjust enrichment theory. The jury awarded roughly $2.6 million on the minimum wage/overtime claims and over $1.9 million on the unjust enrichment claims.

So why is this case of interest to anyone other than strip club owners? Good question. Two reasons. First, the court had to fashion or apply tests to this unique (to the industry) arrangement that may apply to other atypical arrangements in the gig economy. Second, the defendant made a series of procedural arguments that probably did little to advance its own cause and may provide a lesson to others caught in the same spot.

As to the first issue (employment status), the court applied an economic realities test and found that several factors, such as right of control, the degree of managerial skill required, required investment, and skill, reflected employment status. Interestingly, the court noted the difficult task that lower courts were having in grappling with the application of flexible tests to the new gig economy, but here found no difficulty given the strong indicia of employment status.

As to the second, the defendant raised a series of mostly procedural challenges that probably did more to undercut its credibility than anything else. For example, it argued that the case lacked the $5 million amount in controversy requirement for jurisdiction under CAFA, a difficult case to make given that the verdict itself was $4.5 million. It argued that the claims were preempted by changes in the FLSA’s tip rules in 2018, measures that were enacted to protect employees’ tips, not employers (or contractors). It similarly raised a waived issue regarding an offset for the tips the dancers received from customers as to their unjust enrichment claim. These were not the strongest of arguments, and likely did more to undercut the defendant’s credibility than to advance its cause.

The bottom line: Courts are allowing wage and hour class actions to proceed even in industries with unusual or unique economic practices.