New rule regarding the Fair Labor Standards Act could affect classification for dancers as independent contractors.
Legal News by Larry Kaplan
On January 10, 2024, the U.S. Department of Justice issued a rule addressing worker classification under the Fair Labor Standards Act (FLSA). Effective March 11, 2024, the rule essentially reinstates the “totality of the circumstances” standard. Specifically, the Department of Labor will return to the six-factor test, which includes:
- The opportunity for profit or loss depending on managerial skill;
- Investments by the workers and potential employer;
- The degree of permanence of the work relationship;
- The nature and degree of control over the performance of the work and working relationship;
- The extent to which the work performed is an integral part of the potential employer’s business; and
- The skill and initiative of the worker.
None of these factors are new – in fact, they’ve been the factors used for deciding independent contractor classification for decades. What the rule does is to depart from the 2021 standard that paid particular attention to two of the six elements (i.e., whether or not a worker can control conditions of work and their opportunity for profit and loss).
The new law proclaims that no one factor will be presumed to be more important than another. In addition, the law further defines the “integral part of the business” factor to mean “integral” with work “critical, necessary, or central to the company’s principal business.” Significantly to the adult nightclub industry, this new rule clarification will highlight a dancer’s ability to negotiate his/her rate for services.
Significantly to the adult nightclub industry, this new rule clarification will highlight a dancer’s ability to negotiate his/her rate for services.
ED Magazine Legal Correspondent Larry Kaplan spoke with California labor attorney Devon M. Lyon of Lyon Legal, P.C., who represents the Pony Clubs, Spearmint Rhino and numerous other clubs on labor issues about the rule change’s impact on adult nightclubs.
ED: Does this change render the test closer to the ABC test?
Lyon: The DOJ rule change is a more liberal move towards employee classification analysis but does not challenge the rigorous ABC test.
The ABC test is used in a handful of states – most notably, California – to determine if a worker is an employee or an independent contractor. To establish a worker is an independent contractor under the ABC test, the employer must prove the following:
- The worker is free from the control and direction of the hiring entity in connection with the performance of the work;
- The worker performs work that is outside the usual course of the hiring entity’s business, and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
All three prongs must be satisfied, the most difficult of which is the second prong. The most obvious challenge is arguing that the dancer performs work outside the usual course of the club’s business.
The critical takeaway is that the Department of Labor law change does not raise the “totality of the circumstance” test to the strict requirements of the ABC test because the “totality of the circumstance” test law does not require that each prong be specifically satisfied. On the contrary, the ABC test requires that all three prongs be satisfied to establish an independent relationship.
The ABC test requires that all three prongs be satisfied to establish an independent relationship.
ED: Does this mean clubs can’t classify dancers as independent contractors?
Lyon: This depends on the state in which they do business. If they are in a state like California, which recognizes the ABC test, it is nearly impossible to classify dancers as independent contractors. If it’s a state that follows the Fair Labor Standards Act (FLSA), they need to review the new Department of Justice change to ensure they are complying with the six-factor “totality of the circumstance” test.
If they are in a state like California, which recognizes the ABC test, it is nearly impossible to classify dancers as independent contractors.
ED: In light of this rule change, what changes should a club make to its independent contractor agreement?
Lyon: The biggest change that should be addressed is confirming the dancer has the ability to negotiate their rate of services. Adding language into the independent contractor agreement confirming the dancer negotiated their pay rate will ensure compliance with an element the Department of Justice has further clarified.
See the March 2024 issue of E.D. Magazine for an in-depth analysis of the FLSA rule classification and its potential impact on the adult nightclub industry, and attend the 2024 Expo Legal Panel, August 25-28 in Dallas for more discussion on this and other critical legal issues for your club.
Devon M. Lyon has been an attorney for 20+ years and is the owner and lead attorney at the labor and employment law firm Lyon Legal, P.C. Contact Devon M. Lyon at (562) 216-7382 or email d.lyon@lyon-legal.com.
Larry Kaplan has been the Legal Correspondent for E.D. Publications for 22 years. Mr. Kaplan is a broker in the sale and purchase of adult nightclubs and adult retail stores and the Executive Director of the ACE of Michigan adult nightclub state trade association. Contact Larry Kaplan at 313-815-3311 or email larry@kaplanclubsales.com.
