Posted 05-09-2013

Some employers say that their workers are independent contractors, thereby dodging responsibility for providing benefits and paying taxes. But unless those workers are truly independent, this practice violates state and federal law.

Penthouse Executive Club, in New York City’s Hell’s Kitchen is paying $8 million to learn that lesson. In 2010, more than 1,200 present and former exotic dancers sued the club and two of its managers, claiming that they were employees who had been misclassified as independent contractors. The strippers’ suit alleged that the club violated state and federal law by failing to pay them minimum wage or overtime, charging them a “house fee” for the privilege of working there, which sometimes exceeded $100 per night, confiscating a percentage of their tips, and refusing to pay for purchasing and cleaning their uniforms (G-strings).

After nearly three years of litigation and multiple mediation sessions, in April, 2013 a proposed settlement was reached, under which the club and its executives will pay $8 million, including more than $2 million in legal fees. The terms of the deal have to be approved by the federal judge handling the case.

In 2012, the club settled another case, this one brought by fully-clothed workers (waiters, bartenders, and kitchen staff), who said they too, had been denied overtime and had a percentage of their tips stolen by management. That case was resolved for $725,000.

What this means to you: Not only employees, but both state and federal governments are aggressively pursuing wage and hour complaints. Businesses that use a lot of independent contractors may face substantial liability not only for unpaid overtime and wage claims but also for unpaid:

  • State and federal withholding taxes
  • State unemployment insurance taxes
  • Workers’ compensation insurance premiums

There might also be violations of federal immigration law. And, the Department of Labor could even revoke the tax exempt status of a scofflaw employer’s 401k plan.

Similarly, organizations that have hourly employees face serious fines and double damages if they do not properly pay overtime wages. Managers can even be held personally liable if they are responsible for the violations. Clearly, not knowing the limits of overtime law could be costly to both your managers and your company.

Information here is correct at the time it is posted. Case decisions cited here may be reversed. Please do not rely on this information without consulting an attorney first.