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Nevada Supreme Court Finds Exotic Dancers "Employees" and Adopts "Economic Realities" Test to Determine Whether a Worker Is An "Employee" or "Independent Contractor"

Volume 13, Issue 18
December 9, 2014

In Terry v. Sapphire/Sapphire Gentlemen's Club, No. 59214, the Nevada Supreme Court issued its second significant interpretation this year of Nevada's minimum wage law. In a unanimous decision by the full Court, the justices ruled that exotic dancers at the Sapphire Gentlemen's Club are not independent contractors, as the Club contended, but are "employees" entitled to the Nevada minimum wage. The Court, for the first time, adopted other courts' "economic realities" test as the guide to determine whether a worker is an "employee" versus an "independent contractor." This is the same standard used by the courts to decide who is an employee under the Fair Labor Standards Act (FLSA). Applying this test to the facts involving the Sapphire's dancers, the Court found the dancers to be employees.

Sapphire contended the dancers were independent contractors who pay the Club for the privilege of dancing there. The dancers live mainly off tips; work six-hour minimum shifts unless they advise otherwise "on clock-in;" set their own prices (which must exceed the Club's minimum charge); control the artistic aspects of the dances they perform (although the DJ chooses the music played); and are required to follow house rules.

Given the somewhat vague definitions of "employee" and "employer" in Nevada's minimum wage laws, the Nevada Supreme Court first consulted the dictionary to try to garner the meaning of those terms. The Court then examined the "economic realities" test as a means to determine "employee status," which it observed is used by a number of courts construing other states' laws, and noted the close relationship between Nevada's wage laws and the FLSA. After adopting the economic realities test, the Court applied it to find the dancers were employees.

Applying the "Economic Realities" Test to Sapphire's Dancers

The Court examined the following factors and gave guidance as to how it interpreted each of them:

1. "The degree of the alleged employer's right to control the manner in which the work is to be performed."

The Court found the facts on this factor to be "mixed," noting the lack of a set schedule for the dancers, provided they met the six-hour minimum or received permission to depart early. The justices noted that, while "theoretically," the dancers had "discretion" whether to dance, such discretion may actually be a "false autonomy" that gave dancers "a coercive 'choice' between accruing debt to the club or redrawing the personal boundaries of consent and bodily integrity." (This particular language is more suited to exotic dancers than to most jobs.)

2. "The alleged employee's opportunity for profit or loss depending upon his managerial skills."

3. "The alleged employee's investment in equipment or materials required for the task, or his employment of helpers."

The Court found the dancers had little at risk besides their daily house fees, personal grooming expenditures, costume costs, and their time - with their profit similarly limited. The possibility of increasing income by "hustling" larger tips and additional income was not significant. Comparing this with the outlay by the Club - which provides risk capital, advertising and the facility - the Court concluded the dancers are more akin to wage workers.

4. "Whether the services require a special skill."

Sapphire argued the dancers' ability to "hustle" customers is one of "special skill," as well as the ability to develop and maintain rapport with customers. Noting Sapphire's dancers were not interviewed for the skill it characterized as "their hustling prowess," the Court disagreed.

5. "The degree of permanence of the working relationship."

Although dancers were free to perform at other clubs or in other lines of work, the Court found this does not distinguish them from hourly workers. The ultimate inquiry, the justices noted, is "the nature of the performers' dependence on the club" for work, noting that unless the dancer possesses "specialized and widely-demanded skills, that freedom is hardly the same true economic independence."

6. "Whether the service rendered is an integral part of the alleged employer's business."

Examining whether the dancers' work is "integral" to the business, the Court examined whether exotic dancing is "useful, necessary, or even absolutely indispensable" to the business. The Court was persuaded that the Club's having "bill[ed] itself as the 'World's Largest Strip Club,'" versus a sports bar or nightclub, indicates that "women strip-dancing . . . are useful and indeed necessary to its operation."

General Applicability

This case is the first comprehensive attempt by the Nevada Supreme Court to define "employee" and "employer" under Nevada's minimum wage laws. The "economic realities" approach applies to all Nevada employers who engage a possible contractor to perform any service, and makes clear that the same analysis applies in considering compliance with both the FLSA and Nevada law. Having only one standard for guidance is useful and less likely to lead to inconsistent results. Another advantage is the availability of a large body of legal analysis found in the U.S. Department of Labor's guidance and opinions, and the hundreds of court decisions applying the "economic realities" test.

Employers should be quite cautious and consider these factors thoughtfully, as the consequences of being wrong include more than back wages to an employee the company believes is an independent contractor. Other possible liabilities include:

  • Costs of unpaid employee benefits, such as health insurance, 401(k) plans, or sick/other paid leave, for not allowing the person to participate in the plan.
  • Fines and/or back payments for failure to pay for unemployment benefits or workers compensation, or even having to pay from "dollar one" should the contractor be injured.
  • Damages for failing to offer leave under the Family and Medical Leave Act (FMLA).
  • Unpaid taxes, as an example FICA matching or other taxes.

We recommend the following if your company contracts outside the company for labor, services or consultants:

1. Become educated in the economic realities test. The Wage and Hour Division of the U.S. Department of Labor (DOL) has developed a number of technical assistance tools on the economic realities test.

    • Obtain Fact Sheet #13 on when a worker is an "employee" or "independent contractor"
    • Peruse DOL's opinion letters to find possibly applicable precedent, as these opinion letters may contain guidance on the particular job at issue.

2. Review each of your company's contracts for outside labor, "services," or "consultants" - then, for each contractor, review what these persons actually do for the company and consider the following questions: Is this a "one-shot," or routine or frequent work? How much control does your company have over the details of the work, when is it performed, and how is it performed? Is the contractor required to perform the services on your company's premises? How integral is the contractor's job to the business? Focus on the combination of these factors, the "totality of the circumstances."

3. Recognize that the economic realities test factors are likely to be narrowly interpreted by courts and the Nevada Labor Commissioner.

4. If you have "form" or "template" contracts for independent contractors, consider revising the language. While for a genuine contractor, it is advisable to include language by which the contractor admits such status and that he is not an employee, if in the end the person is actually an employee, this type of provision is of little help. Such language did not help the Club in the Sapphire case.

5. If a person is a true independent contractor, avoid doing anything that could be seen as treating him as an employee. This could result in a determination the person is an employee.

6. If you identify potential issues, carefully plan and implement a solution, which can be tricky as you do not want to inadvertently inform these individuals they might have a wage claim.

7. Where a person is a true independent contractor, revisit the relationship periodically to make sure there have been no changed circumstances.

If you have any questions or would like further information about this legal development, please do not hesitate to call the KZA attorney with whom you regularly work or call our office at (702) 259-8640.

KZA Employer Report articles are for general information only; they are not intended and should not be construed to be legal advice. Reading or replying to such articles does not establish an attorney-client relationship. In addition, because the subject matters and applicable laws discussed in Employer Report articles are often in a state of change and not always applicable to every type of business entity or organization, readers should consult with counsel before making decisions based on the same.