The Los Angeles Daily Journal (a legal periodical) today reported on a $12.9 million settlement among "exotic" dancers (strippers) and the "gentlemens' clubs" (strip joints) where they plied their trade. (Did you get the pun?) Trauth v. Spearmint Rhino Companies Worldwide, Inc., Case No. EDCV-09-01316, (C.D. Cal., Order filed October 5, 2012). Several of the dancers filed a class action lawsuit contending that they were misclassified as independent contractors instead of employees. On top of that, they claimed their compensation was below the federal minimum wage, and that the businesses wrongfully charged the dancers for certain expenses. (I bet you didn't know it was so expensive to remove your clothing in public. I'm really glad you don't know that!)
Dancers in six states will share about $10 million. The lawyers representing them will receive over $2 million. That is a lot of money. Of course, there are many plaintiffs who must share the $10 million. And there are far fewer lawyers who will split the $2 million.
So why do I tell you about a stripper case in federal district court in Los Angeles? Because it illustrates a very important point. Many businesses attempt to save money on payroll tax obligations, workers' compensation premiums, fringe benefits and other costs by classifying employees as independent contractors.
A business is an employer as opposed to a contracting party if it has the right to control the means and methods of the services provided. I realize this is easier to say than to understand. Many people like to consider some of the IRS questions to help them understand this concept. For example, who provides the tools of the trade? Who determines when the workers perform services? Is the work of the kind that is typically performed by an outside business? Does the worker maintain a business license and workers' compensation insurance?
Except in obvious cases, I would suggest that an employer think very hard before classifying a worker as an independent contractor. The costs associated with a challenge are not worth the risk. $12.9 million in this case.
The issue of misclassification can arise in many ways. For example, a worker may be audited for non-payment of taxes. The worker claims (s)he was an employee and the employer should have withheld the taxes. Perhaps a worker injures him/herself and makes a claim on the workers' compensation policy. Or a worker might claim unemployment insurance.
Email me if you really want to engage a worker as an independent contractor. Yes, I will probably try to talk you out of it. However, if it is a true independent contractor situation, I can help you draft an agreement that can provide some protection for you.
And if you ever get hit with liability for misclassifying a worker, you might consider stripping to help pay the bills. Better yet, become a lawyer and represent the strippers. There is more money on the lawyer's side. And besides, we really don't want to imagine you in the buff swinging those hips around on stage in some seedy club!