Legal Panel: What it means to convert entertainers to employees!
The EXPO 2017 Legal Panel featured club owner Joey Bien, who has converted the dancers at four clubs to the “employee” model, as well as two labor attorneys—Rey Velazquez and Howard Davis—who specialize in these conversions.
The single most pondered topic at the Gentlemen’s Club EXPO legal panels has been whether to treat entertainers as non-employees or employees. Each year the industry has witnessed an increasing number of entertainer classification lawsuits. Many clubs have recently converted their entertainers to employee status in an effort to avoid these suits. At this year’s legal panel, rather than answering the employee/non-employee question, the panel focused on what factors a club might consider and what exactly it would do, operationally, if it has already made the decision to convert entertainers to employees.
It’s worth nothing that neither this writer nor ED Publications are taking a position on whether to classify entertainers as employees or non-employees. This is merely a report of a panel that explored such a conversion as well as the benefits and costs.
Panelists included attorneys Howard Davis (filling in for Jeffrey Kimmel due to Hurricane Harvey) and Rey Velazquez, who have advised clubs that have converted to an employee model; as well as Joey Bien, the owner of four adult clubs (Treasure Clubs in North and South Carolina and Virginia) who has recently converted the entertainers at his clubs to employees.
Up first was Joey Bien, who focused on why and how he made the conversion and on what impact it has had on his clubs and his people.
Bien noted that, unlike many other operators, he has never been involved in a dancer classification suit but was concerned with the prospects. Several years ago, Bien walked into one of his clubs and witnessed disinterested entertainers, on their phones and oblivious to customers. When he questioned his manager, he was told, ‘They’re independent contractors, I can’t tell them anything.’ Bien set out to fix the problem. He read up on the profusion of employment suits by dancers and hired Velazquez to work on a remedy. Bien initially rejected Velazquez’ solution of making his dancers employees, as unworkable. Velazquez, with Bien, then designed a program which Bien believed could work. In 2015, Bien converted the entertainers at one of his clubs.
Bien was initially panic-stricken, imagining the loss of all of his entertainers in the transition.
“I cannot begin to tell you how wrong I was,” Bien noted. “Entertainers, for the most part, really, really like it.”
Bien converted another club in 2015 and the other two in 2016. Bien explained that with employee/entertainers, police see tax-paying employees who are now good corporate citizens, which lessens the possibility of police picking on you. He noted that, after converting four clubs, he has only lost a handful of entertainers.
Bien was initially panic-stricken, imagining the loss of all of his entertainers in the transition.
“I cannot begin to tell you how wrong I was,” Bien noted. “Entertainers, for the most part, really, really like [to be employees].”
“This has helped us to get ahold of our entertainers and to put a better product on the floor. They make and follow schedules; there are no cell phones on the floor. They are now real people,” said Bien.
Bien added, “I have big and small clubs; clubs that are the only game in town and others that compete with 15 clubs. It doesn’t matter; it works with them all.”
“Don’t be afraid, this is what’s coming,” cautioned Bien, comparing short-term victories now to the calm before a hurricane. “It’s a nice day now, but you know it will hit you.”
The second panelist, Howard Davis, is a partner in Meister Seelig & Fein, a New York City-based business law firm (Davis was filling in for attorney Jeffrey Kimmel). His practice focuses on employment law and litigation, specifically defending against allegations of wage-and-hour and anti-discrimination law violations. He has defended many adult nightclubs and club owners against class-actions and governmental audits and investigations based on misclassification allegations. Davis represents both clubs that treat entertainers as independent contractors and as employees.
Davis noted a recent lull in the wave of class-action suits for clubs that classify their entertainers as independent contractors but have had them sign arbitration agreements and class waivers. He said the issue of enforceability of waivers is presently before the U.S. Supreme Court which will hopefully make a definitive decision on whether they will hold up. Should waivers be held as enforceable by the High Court, he said some clubs might choose to continue treating their entertainers as contractors.
Davis cautioned that even if an arbitration waiver is helpful in avoiding class-actions, class waivers will not help clubs against individual entertainers pursuing claims or prevent administrative agencies, such as the IRS, state taxing authorities and departments of labor from pursuing clubs for misclassification.
If a club decides to treat entertainers as employees, the club must first look at the nature of entertainers’ work.
“Who are they? What do they do? They’re sales people, they sell time in VIP sections and private rooms and dances.” Mr. Davis explained a commissioned salesperson structure for employee entertainers that his firm has put into practice at a number of clubs.
When classifying entertainers as employees, “minimum wage is one of the issues you’re going to have to consider.” Davis noted that people, inside and outside of the industry, refer to dance fees as tips.
“If that money is a tip, it cannot be used to offset any wage obligations,” said Davis. He explained that in order to use dance money to offset wage obligations, it must be accounted for as sales in the club’s gross receipts.
“That means the money belongs to the club,” explained Davis. “And only then can the club use the money to effectively pay wages.”
Davis cautioned that another significant issue for employers is overtime. While this is generally uncommon, clubs should ensure that when an entertainer works over 40 hours in a week that she is paid 1.5 times the regular rate of hourly pay for those hours over 40. Tracking entertainer hours is essential, even with non-employees, to avoid claims that they worked more than they actually did.
“There is a legal presumption,” explained Davis, “that without business records saying otherwise, however much the worker says she worked is true.”
The commissioned salesperson employee model can be used to address certain issues arising from the traditional industry business model, including reliance on “house fees” and mandatory tip-outs which may conflict with federal and state laws which preclude a business from charging employees to work.
Davis explained that clubs can use a sales target to effectively replace house fees and even tip-outs. You can require entertainers to sell five $20 dances, totaling $100, before earning commissions. And in the event they sell less than five, the club must keep track to ensure they earn at least minimum wage. If entertainers earn more than their sales target with commissions, equal to more than their required minimum wage, those excess commissions can satisfy wage obligations.
Davis explained that this structure can benefit a club by avoiding lawsuits and regulatory agency actions from misclassification issues. It also permits formalized entertainer schedules, which are highly problematic with independent contractors. You can also have entertainers do club promotion and require them to wear branded uniforms. You can have them sign non-compete, confidentiality and non-solicit agreements.
Davis cautioned that you must consider certain state and federal laws before converting, such as the Family Medical Leave Act, Obamacare and COBRA, which may apply if a club exceeds differing thresholds of a certain number of employees.
The final panelist, Rey Velazquez, is a partner with Ford Harrison, a labor and employment law firm. Velazquez’ practice focuses on working with claims management and employment practices insurance companies defending employers against discrimination, harassment and retaliation claims. His wage and hour practice is concentrated on defending gentlemen’s clubs and other hospitality businesses.
Velazquez cautioned that he was neither advising clubs to classify entertainers as employees or contractors, but if a club has decided to convert to employees, they should not execute it based on solely the panel. He urged assembling a team of professionals, including preferably a labor and employment attorney, your accountant and HR person, if you have one, along with your management and GM, to evaluate your particular business and come up with the best way to accomplish the conversion.
Velazquez endorsed using the commission model Howard Davis outlined as that is the closest for the entertainers to how most clubs currently operate.
“The commission model puts entertainers as close as possible to bringing home the same earnings as before a conversion,” explained Velazquez.
He explained that when a club is ensuring that its entertainers are in compliance with minimum wage, they must use the entire amount paid for the dances, VIP rooms and areas, not just what the entertainer is paid. And if they decide to include entertainers’ tips towards satisfying the minimum wage requirement, Velazquez suggested providing tip-credit notice to the entertainers in writing. A labor attorney should draft this notice as the language must be very precise.
Velazquez noted that by paying entertainers under a commission model, a club may be entitled to a 7I exemption from the Fair Labor Standards Act pertaining to overtime. The criteria for the exemption is complex so it’s important to consult a labor attorney.
Velazquez stressed that accurate record keeping, not only of the hours worked but the pay received is crucial to the employee model. Then if you’re audited or challenged legally, you have the records to show the entertainers were properly paid.
“If you do decide to do this but you don’t do it right, you might as well continue doing what you’re doing now.” He explained.
Converting doesn’t immunize you from class-actions and other labor actions. Velazquez explained that you can mitigate these threats. If your dancers are employees, that doesn’t prevent you from having them sign arbitration agreements and class-action waivers. The documents will simply speak from the perspective of employees, not independent contractors.
Sexual harassment is another important consideration. Club management and employees must understand that sexual harassment is absolutely forbidden. Once you convert dancers to employees, the dynamic changes and you must be extremely careful. Velazquez suggests implementing a sexual harassment policy so management and all employees know it is unacceptable. This doesn’t mean sexual harassment of independent contractors is acceptable. In an EEOC or federal court action, it’s very possible they might be deemed employees even if you treat them as independent contractors.
“The days of managers patting entertainers on the butt as they walk by must stop,” Velazquez cautioned. “That can create a serious problem for you.”
Properly communicating the change from independent contractor to employee status to your entertainers is critical. You must notify them at least two and preferably four weeks in advance. And maintain an open-door policy during the transition to discuss how it will affect them so they come to you and not an outside attorney for the information. And you must have a strategy for how you’re going to address the question of why you’re doing it.
This article briefly summarizes extremely complex legal and tax issues and is provided for general information purposes only and is not intended to provide either an exhaustive analysis of these matters or any specific legal advice or recommendation. Laws vary by state and municipality. The positions and opinions expressed by the attorneys and club owner represented here are theirs alone, and do not necessarily reflect those of Larry Kaplan or ED Publications. Club operators and others are strongly encouraged to consult their attorneys and accountants for specific advice on how these issues will affect their businesses and what measures to take. Larry Kaplan and ED Publications do not guarantee the accuracy of this information.