The Federal Fair Labor Standards Act requires that employers, including New Jersey employers, pay their non-exempt employees minimum wage and overtime (the vast majority of employees are not subject to an exemptions; the major exemptions are for executive, administrative and professional employees, and outside sales). Independent contractors, however, are not protected by the Fair Labor Standards Act. Claims of misclassification of employees have recently led to significant amounts of litigation.
The United States Third Circuit Court of Appeals recently issued an opinion on misclassification of workers in the case of Priya Verma v. 3001 Castor, Inc., which found that adult dancers were employees entitled to the protection of the Federal Fair Labor Standards Act. While the case arose in Pennsylvania Federal Court, the Third Circuit rules on appeals from federal courts in New Jersey, Pennsylvania, Delaware and the United States Virgin Islands, so it’s decisions determine how federal law, including the Fair Labor Standards Act, will be applied are binding in New Jersey.
Priya Verma was an adult dancer at the Penthouse Club in Philadelphia. The Club was owned and operated by 3001 Castor, Inc. (“Castor”). Verma sued Castor on behalf of herself and other similarly situated dancers in a collective action under the Fair Labor Standards Act for unpaid wages and overtime. Castor classified the dancers as independent contractors, not employees, and argued they were therefore not covered by the FLSA. The trial judge found that as a matter of “economic reality” the dancers were Castor’s employees, not contractors, and thus entitled to the FLSA’s protection.
The dancers were classified as either “Entertainers” or “Freelancers.” Entertainers got better shifts, but had to commit to work at least four shifts per week. Castor scheduled the hours of the five shifts. The dancers were not paid any wage at all. Their entire compensation was tips and a flat “dance fee” for private dances in private dancing rooms. The dancers were required to rent stage time entertainers paid a lower rate than freelancers. The dancers also had to pay a “room rental fee” when giving the private dances in the private rooms. The dancers were also required to pay “tip out” fees to the disc jockey, the “house mom,” and podium host; the tip fees were set by Castor and were required regardless of how much the dancers did or did not make. Castor had strict rules regarding the dancers’ attendance, appearance, demeanor and customer service, and provided the dancers with training on these rules; the dancers were fined for violations.
The trial court ruled that the dancers were employees, and the jury entered a verdict in favor of the dancers for more than 4.5 million dollars. Castor appealed.
The Third Circuit Ruling: Independent Contractors Versus Employees
The court ruled that the dancers were employees, not contractors, and that they were entitled to the overtime and minimum wage protections of the Fair Labor Standards Act.
The Court applied the six factor test it had earlier adopted in the case of Martin v. Selker Brothers. These factors are:
(1) the degree of the alleged employer’s right to control the manner in which the work is to be performed;
(2) the alleged employee’s opportunity for profit or loss depending upon her managerial skill;
(3) the alleged employee’s investment in equipment or materials required for her task, or her employment of helpers;
(4) whether the service rendered requires a special skill;
(5) the degree of permanence of the working relationship; and
(6) whether the service rendered is an integral part of the alleged employer’s business.
The court noted that none of the factors included whether the workers signed a contract or whether they were called a contractor or employee. Reviewing the facts of the case, the court found that only one weighed in favor of Castor – the dancers tended to be transient, and thus there was a lesser degree of permanence. However, no single factor in the test is required or dispositive, and the remaining factors overwhelmingly indicated that the dancers were employees. For instance, while the dancers could profit off their work, adult dancing is hardly “managerial skill.”
The Court thus concluded that the dancers’ dependence on their jobs made the economic reality that they were employees.
It is tempting for businesses to classify workers as independent contractors rather than employees for the simple reason that it’s cheaper. There are no minimum wage or overtime requirements for contractors. Contractors don’t get health insurance, paid vacation or other benefits. Employers don’t need to pay payroll taxes for contractors.
However, if it is a close call, employers should classify their workers as employees. The consequences are draconian. The Fair Labor Standards Act requires employers to pay the employees’ attorneys fees in successful suits, in addition to double damages for willful violations. There are significant regulatory issues and penalties. Indeed, in the construction industry, misclassification of workers can actually lead to prison time for the employer’s key employees.
For employees, there are avenues for relief if your employer is misclassifying you. Under the Fair Labor Standards Act employees can recover their lost pay – in fact, double their lost pay if the violation was “willful” – as well as their attorneys fees. Moreover, the Fair Labor Standards Act makes it illegal for an employer to retaliate against an employee for making a claim for violations of the FLSA. The key is to document everything.
Our New Jersey employment law attorneys represent employees and employers in claims under the Fair Labor Standards Act, as well as New Jersey’s wage and Hour Law and New Jersey’s Wage Payment Law. Call us at (973) 890-0004 or fill out the contact form on this page. We can help.