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​A $4.5 million verdict for a class of topless dancers who worked for a Philadelphia club was upheld. The district court correctly determined that the dancers were employees under state and federal wage and hour laws, according to the 3rd U.S. Circuit Court of Appeals.

The plaintiff was a dancer at the Penthouse Club, an adult club in Philadelphia operated by 3001 Castor Inc. As the club's owner and operator, Castor controlled its atmosphere, policies, operations and marketing.

Dancers at the club were classified as "entertainers" and "freelancers." The club required entertainers to commit to working at least four days per week and submit a weekly schedule. Freelancers had no such commitments. Castor required each dancer in both categories to sign an agreement stating that she is an independent contractor.

[SHRM members-only toolkit: Employing Independent Contractors]

Dancers at the club worked in shifts. They could choose among five shifts. A dancer had to rent stage time for each shift she worked. The rates for these rental fees varied depending on the shift, and they were lower for entertainers than for freelancers. Dancers performed in two locations: on the club's main stage and in private dance rooms.

The club did not pay dancers a wage; their compensation consisted entirely of tips they received when dancing on stage or fixed dance fees, at rates established by the club, for private dances. The club also took a fee, called a "room rental fee," for each private dance. Castor also required the dancers to tip the club's disc jockey, the "housemom" and the podium host, for a total of $30 per shift.

The club provided training to the dancers and closely reviewed their attendance, appearance, demeanor and customer service. It also had a strict set of rules the dancers had to follow. When they violated those rules, they were fined amounts ranging from $10 to $100.

In 2013, the plaintiff filed a federal lawsuit against Castor on behalf of herself and similarly situated current and former dancers at the club. She alleged claims for minimum wages and overtime under the Fair Labor Standards Act (FLSA), analogous claims for minimum wages and overtime under the Pennsylvania Minimum Wage Act (PMWA), a claim for nonpayment of wages under the Pennsylvania Wage Payment and Collection Law, and a claim for unjust enrichment under Pennsylvania common law.

The district court entered an order conditionally certifying a collective action under the FLSA comprising current and former dancers of the club during the covered time period. A notice was sent to potential members of the collective action, and 22 dancers filed consent forms to join the action as plaintiffs. The district court also ruled that plaintiffs and the other dancers were employees of Castor under the FLSA and the PMWA.

Before trial, Castor and the plaintiffs settled a portion of the FLSA claims. The remaining claims went to trial. The jury returned a verdict awarding the class $4.5 million: $2.6 million for its minimum wage claims and $1.9 million for its unjust enrichment claims.

On appeal to the 3rd Circuit, Castor argued that the dancers had signed independent-contractor agreements and had substantial control over their work. It asserted that the dancers set their own hours, could opt among different shifts with varying stage-rental fees, decided whether to be entertainers or freelancers, determined whether to stay beyond the end of their shifts to continue working, and chose whether to accept or reject requests for private dances.

But the 3rd Circuit found that the club exerted overwhelming control over the performance of the dancers' work. It established available shift times; had a strict set of rules the dancers had to follow; instructed the dancers on their physical appearance and dress, hair and makeup; determined the songs that played when a dancer was dancing; and set the price and duration of all private dances. The court found that the control factor strongly favored the "employee" status.

The 3rd Circuit also rejected Castor's arguments that it lacked jurisdiction over the state law claims and that the jury award should have been reduced by the amount of money plaintiffs received directly from customers in the form of dance fees. It upheld the verdict for the dancers.

Verma v. 3001 Castor Inc., 3rd Cir., No. 18-2462 (Aug. 30, 2019), petition for panel rehearing denied (Oct. 8, 2019).

Professional Pointer: Even having workers sign independent-contractor agreements will not prevent a court from finding them to be employees. The courts apply an economic realities test that looks behind the labels chosen by the parties and determines who provides the most significant economic benefits to the relationship.

Jeffrey Rhodes is an attorney with Doumar Martin in Arlington, Va.

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