Nevada Supreme Court Decision Illustrates Risk to Employers of Independent Contractor Misclassification.

By Sutton Hague Law Corporation on November 12, 2014 in Legal Update

Following a national trend in which courts and government agencies are more closely scrutinizing widespread use by employers of independent contractor relationships, the Nevada Supreme Court in a decision announced on October 30, 2014 has now expressly adopted the “economic realities” test—typically used by federal courts in the context of the Fair Labor Standards Act (FLSA)—for determining whether a worker is an “employee” for purposes of Nevada’s minimum wage laws. See Terry v. Sapphire Gentlemen’s Club, 130 Nev. Adv. Op. 87 (2014). Sapphire Gentlemen’s Club contracts with about 6,600 dancers to provide semi-nude entertainment. Because Sapphire classifies its dancers as independent contractors, it pays them no wages, and the performers’ income is wholly dependent on tips and “dancing fees” paid by club patrons. A group of dancers brought a class action suit against Sapphire, alleging they were misclassified as independent contractors and are actually employees entitled to a minimum wage.

Applying the economic realities test, the Court held that Sapphire is an employer and must pay at least minimum wage to its dancers. Even though dancers could determine their own work schedules and choose whether or not to perform during any given shift, the Court opined that Sapphire had set up “a framework of false autonomy.” For example, performers could choose not to dance, but were required to pay an “off-stage fee” to Sapphire as a result. Performers could also refuse to perform private lap dances, but were prohibited from asking a patron to pay with cash, and were required to accept “dance dollars,” from which Sapphire took a percentage.

Furthermore, the dancers’ opportunity for profit was limited in that they were unable to reap greater returns by taking greater economic risks. In fact, “performers risked little more than their daily house fees, personal grooming expenditures, costume costs, and time.” Accordingly, the dancers were “far more closely akin to wage earners toiling for a living, than to independent entrepreneurs seeking a return on their risky capital investments.” Additionally, because the dancers’ work does not require “the initiative demonstrated by one in business for himself or herself,” the Court found that the work does not require “special skill” characteristic of the work typically done by independent contractors. The Court was also persuaded by the fact that dancers are an integral part of Sapphire’s business.

The Nevada Supreme Court’s opinion establishes that Nevada courts will apply the economic realities test to determine whether an employment relationship exists to trigger an employer’s obligation to pay wages. Businesses engaging independent contractors should therefore consider the economic reality of the working relationship, rather than merely its formal or contractual nature, under the factors of that test. For example, has the worker retained control over the manner in which the work is performed? Does the worker have the opportunity for profit or loss depending on his or her own managerial skill? Has the worker invested in the equipment and materials required for the task? Does the worker’s service require special skill? How permanent is the working relationship? Is the worker’s service an integral part of your business?

You can read the Decision here: Terry v. Sapphire Gentlemen’s Club, 130 Nev. Adv. Op. 87 (2014)