Rather than an abstract, we submit the embryo of a Critical Incident. My apologies as I did not find a place to upload the embryo, so I have copied and pasted it here. If this is too much, please let me know and will just submit a paragraph with keywords.
Behind the Spotlight, Stripping Away Ambiguity: Unveiling the legal battle over exotic dancer status
Authors:
Todd Lundquist and Katheryn Zielinski
Contact Information:
Todd Lundquist
Assistant Professor of Business Law
Department of Accounting and Business Law
MH 150
Ph: (507) 469-8602
(507) 389-5429 (office)
e-mail: [email protected]
Katheryn Zielinski
Assistant Professor of Accounting
Department of Accounting and Business Law
MH 150
Minnesota State University - Mankato
Mankato, MN 56002
Ph. (952) 807-2576 (cell)
(507)389- (office)
e-mail: [email protected]
TEACHING NOTE
Case Overview
The issue of the exotic dancer classification has long been contested and debated. Exotic dancers have been classified as either independent contractors or employees of a club. There have been changes to the classifications of exotic dancers and to help explain these changes we update a prior article - we refer to this endeavor as a redux of, “Independent Contractor or Employee: The Exotic Dancer Cases”. Todd Lundquist was a coauthor of that article found in the Journal of Case Studies, 31(2), 77-90. This Critical Incident will delve into the update of the law on the legal relationship between exotic dancers and the business owners where the dancers ply their trade. These types of cases are about contractual relationships where the court may disregard the parties’ written word and determine contractual relationships on court’s interpretation of factors.
Previous successful arguments demonstrating that exotic dancers were independent contactors have become superseded by the courts, regardless of signed lease agreements.
That argument now bears significantly less weight in light of a recent National Labor Relations Board (NLRB) decision with significantly similar facts as the lease used in the above referred to article in the Journal of Case Studies. Second, students will examine the legal and factual issues that arise to determine whether the dancer is an employee or not. There are general common law factors, NLRB decisions that use the factors of the Restatement of Agency, 2nd, and Internal Revenue rules on whether one is an employee. Third, students will evaluate the tax consequences of such relationships. The manner in which exotic dancers are classified have wage, tax, and employment implications for both the exotic dancer and club establishment.
Due to litigation, regulatory characteristics for exotic dancers have changed. These proceedings have resulted in legal descriptions defining exotic dancers to shift from independent contractors to employees.
With classification change of exotic dancers to employees, implications for the club establishment include payroll tax, Social Security, Medicare tax, FICA (includes social security tax & Medicare), and potentially workers’ compensation insurance.
In regard to wages, businesses have legal obligations for employee taxes. Businesses must withhold income tax, social security tax, and Medicare taxes out of the wages of each employee. Additional responsibilities require payment for unemployment tax, both federal & state, and the matching portion of Medicare and social security taxes.
Employers fulfill these obligations by using their EIN, Employer Identification Number, to pay wages to their exotic dancers. This shift in classification means that the club establishments will withhold applicable payroll taxes, including federal, state and possibly local taxes, from the exotic dancer paychecks. Additionally, a club establishment will report the tips that exotic dancers received.
This Critical Incident revisits the characters and storyline providing an updated narrative to equip the students with an interactive learning experience. Many years have passed and the character Ray Thompson has retired with his son Jackson operating the Valley Gentleman’s Club. George Poston, attorney for Valley Gentleman’s Club, informs Jackson that the rules have changed and the Club should consider making changes, too. Understanding the implications, Jackson is in disbelief and only responds with shaking his head in frustration.
Suggested Audiences
The case is designed for undergraduate and graduate business and accounting students to discern, discuss and deliberate on the importance of the legal relationship between the dancer and the club. Club owners, performers, and the government all had an interest in the issue of whether a working person was classified as an employee or independent contractor. Owners prefer to classify these performers as independent contractors because the owners would not be responsible for social security and other payroll taxes, withholding of income taxes, and workman’s compensation payments under that classification.
Also, independent contractors were excluded from employee benefit plans and from the consideration of whether or not those plans discriminated in favor of highly compensated employees. Under independent contractor status, performers were required to pay all (instead of half) of their social security taxes and were responsible for any other payroll taxes or workman’s compensation insurance as self-employed persons. Although self-employed persons were allowed greater deductions under the tax law, the burdens of record keeping were significantly greater for them. Finally, the governmental taxing authorities preferred employee classification because that classification placed the primary burdens of compliance on fewer individuals and entities (the employers), reduced the risk of noncompliance and nonpayment, and reduced the strain on the enforcement resources.
The questions require use of common law criteria and are designed for use in a business law class. Additionally, the questions will help students apply IRC Section 874 - Employee vs. Independent Contractor. Questions will require students to research the cited references in order to understand the controlling concepts.
Learning Objectives
The overall objective of this case is to provide students with an applied exercise for understanding application of facts to the legal factors of various governmental entities. The authors’ individual learning objectives for students are:
1. Outline and describe the substantial shift in the law based on different sets of facts and different legal criteria; and,
2. Describe the factual and legal ramifications to a determination that dancers are employees and not independent contractors.
3. Apply and calculate the tax implications for reclassification of independent contractor to employees.
Questions:
1. How has the law evolved in response to different set of legal criteria for classification of employee & contractor? Identify the key factors that contributed to this shift in interpretation?
2. Identify legal implications of the court’s decision to determine that exotic dancers are employees, rather than independent contractors? Does this reclassification impact the responsibility of the club?
3. What are the tax implications when a worker’s status is reclassified as an employee? Identify the steps to calculate income tax withholdings, payroll taxes, and self-employment taxes.
References
Brennan, P. J., & Lundquist, T. S. (2013). Independent contractor or employee: the exotic dancer cases. Journal of Case Studies, 31(2), 77-90.
Internal Revenue Service. (n.d.). Worker classification 101: Employee or independent contractor? U.S. Department of the Treasury.
American Law Institute. (1958). Restatement (Second) of agency § 220. American Law Institute.
Kikuchi v. Silver Bourbon, Inc., Civil Action 20-2764 (E.D. La. May. 15, 2023).
The Atlanta Opera, 372 NLRB No. 95 (June 13, 2023).
Nolan Enterprises, Inc. d/b/a Centerfold Club, 09-CA-220677 (N.L.R.B-ALJ July 25, 2019).
Hart v. Rick's Cabaret Int'l, Inc., 967 F. Supp. 2d 901 (S.D.N.Y. 2013).
Internal Revenue Code, § 874 (26 U.S.C. § 874).