ED Legal News by Larry Kaplan
In continuation of a previous story on ExoticDancer.com, and in conversation with California labor attorney Devon M. Lyon of Lyon Legal, P.C, ED’s Legal Correspondent, Larry Kaplan, provides timely news updates on the evolving Fair Labor Standards Act.
(NOTE: This story appears in the March 2024 issue of ED Magazine.)
O
n January 10, 2024, the U.S. Department of Justice issued a “final rule” addressing worker classification under the Fair Labor Standards Act (FLSA), which could significantly impact the adult nightclub industry and its relationship with club entertainers. This final rule (which becomes effective March 11, 2024) rescinds a 2021 rule defining an “independent contractor.” It adopts a six-factor test focused on the “economic reality” of the relationship between a business and a worker.
Until 2021, the Department of Labor (“DOL”) had never specifically defined what is an “independent contractor.” Instead, it directed businesses to a DOL Fact Sheet (Fact Sheet 13), providing informal guidance that was not very instructive or definitive. To this end, in 2020, the DOL proposed a five-factor test focusing on two questions: the principal’s right to control and the worker’s opportunity for profit and loss. If the answers to both those factors were the same, the analysis ended, but if the answers were split, the rule considered three other guidelines (the relationship length, the worker’s unique skills and the work’s integration in the principal operations of the business). In 2022, the DOL published a new six-factor test and clarified that none of the factors were deemed exhaustive or independent – hence the name “totality of the circumstances.”
The new 2024 rule uses the same six-factor “totality of the circumstances” approach but adjusts some of the specifics. The six-factor test includes:
1. The opportunity for profit or loss depending on managerial skill.
Indications of Independence: Evidence that the worker negotiates his/her fee; has the ability to freely accept/reject work proposals (without fear of retaliation); engages in efforts to market his/her trade; and provides his/her own supplies, workspace, materials and equipment.
2. Investments by the worker and potential employer.
Indications of Independence: Evidence of entrepreneurial investments that would expand work opportunities or increase visibility. This does not include a business’ unilateral requirement for the worker to purchase equipment or supplies for a specific job.
3. The degree of permanence of the work relationship.
Indications of Independence: Evidence that the work relationship is non-exclusive and not definite in duration.
4. The nature and degree of control over the performance of the work and working relationship.
Indications of Independence: Evidence that the work relationship is free of control, including no supervision, scheduling or setting rates for services. Any evidence of discipline, limitations on work conditions or demands or restrictions on work location could evidence classification as an employee.
5. The extent to which the work performed is an integral part of the business.
Indications of Independence: Evidence that the work performed by the worker is not critical, necessary or central to the business’ essential purpose.
6. The skill and initiative of the worker.
Indications of Independence: The worker exhibits specialized skills to perform the work for which they are contracted.
KAPLAN: So, what specifically did this final rule change?
LYON: None of these factors are new – in fact, they’ve been used for deciding independent contractor classification for years. The rule departs 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 most significant change is to factor four, or the “nature and degree of control.” The 2021 rule provided that “control” for purposes of determining employment status could be proven by showing that the business exercised control over a worker to comply with state, federal or local laws. The new rule allows businesses to exert control over a worker to comply with laws without affecting a worker’s classification. For example, this change will allow a business to exert control over a worker to ensure they do not engage in illegal conduct.
Another change defines what a “relative investment” is, which will examine whether the worker is making “similar types of investments” as the business which “suggests the worker is operating independently” from the business. This analysis does not boil down to a dollar-for-dollar comparison, but instead considers the business’ size and the types of investments the business and the worker are making. Likewise, the change will look critically at businesses that “unilaterally impose” upon a worker the requirement to purchase specific equipment to perform work for the business. For example, if a club requires a worker to purchase her own costumes to perform work at the business, that does not necessarily favor independence.
Another change is the DOL’s view of profit or loss, which provides that it is not considered “entrepreneurial” for a worker to earn more by working more. For example, telling a worker the more they work, the more they earn does not favor independence.
Finally, the DOL provided guidance on the relevance of “specialized skill” to be whether the worker uses such skill “in connection with business-like initiative.”
“Having competent counsel who can provide and/or update clubs with compliant paperwork and/or representation is worth the investment because the stakes can be big, especially if your club gets hit with a collective or class action claim.”
– Devon M. Lyon
ED: What states does this law impact?
LYON: The FLSA applies to any state, district or territory in the United States, but if your state has enacted its own labor laws that are more restrictive than the FLSA, that will likely be the controlling law. For example, California has adopted the ABC test, which requires a finding of all three prongs, which includes:
1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work;
2. The worker performs work that is outside the usual course of the hiring entity’s business; and
3. The worker is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.
Laws like the ABC test render it nearly impossible to classify adult nightclub dancers as independent contractors.
ED: Will this be the law forever?
LYON: Probably not – independent contractor classification is often dictated by the political views of the current administration controlling the government department (including the DOL, the National Labor Relations Board (NLRB) and other state and local regulatory agencies). There is also a lawsuit with the U.S. Court of Appeals for the Fifth Circuit that has been pending the DOL’s issuance of this new rule. It is likely that the case will reopen and may be remanded to the Eastern District of Texas to consider the legality of the DOL’s rule changes. Nevertheless, this new rule goes into effect on March 11, 2024. It will likely be the standard for compliance, so it’s essential that adult nightclubs review their policies and practices regarding the retention of independent contractors.
ED: What can a club or club group do to protect itself now and prepare for the rule change?
LYON: Select an attorney who specializes in labor and employment law (ideally one familiar with adult nightclub contracts), review your independent contractor agreement and ensure that your club managers are treating independent contractors consistent with the rule changes. With the new law change, you want to focus on allowing your independent contractors to negotiate their own rates. For example, it’s not advisable to provide a rate sheet to your contractors that is not negotiable. Also, ensure that you have a legally binding arbitration agreement included in the independent contractor paperwork that contains a “class waiver” so that you can combat any complaints filed on a class-wide basis, which could result in your having to defend a claim against hundreds of plaintiffs instead of just one.
ED: What would you say to club owners that don’t have access to specialized labor and employment counsel by virtue of their size or location?
LYON: Having competent counsel who can provide and/or update clubs with compliant paperwork and/or representation is worth the investment because the stakes can be big, especially if your club gets hit with a collective or class action claim.
Be sure to attend the 2024 Expo Legal Panel, August 25-28 in Dallas (theedexpo.com) for more discussion on the FLSA rule classification and its potential impact on the adult nightclub industry, 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.
