While I dig back out from vacation, my colleague Jon Orleans forwarded this update on a recent case in the Second Circuit. While the case is from New York, it may ultimately have some implications in Connecticut if it is appealed.  

A recent decision from the Southern District of New York certifies an FLSA collective  class of exotic dancers (“entertainers”) who claim that they were improperly classified as independent contractors rather than employees. 

If you only read the first couple of paragraphs of the typical news story about the decision, you probably chuckled at the reference to instructions given to the women by the club where they work – Rick’s Cabaret in New York – on how to strip. 

Maybe an image of Humphrey Bogart flashed through your mind. (Ed. note: You’ll thank me for a link to the Casablanca version, not the actual "Rick’s Cabaret"). 

But for an employment lawyer, the more important (if not more interesting) part of the decision is its discussion of the “joint employer” doctrine and the liability of a parent corporation for the actions of its subsidiary.

The issue arose on the defendants’ motion to dismiss, so of course the court assumed the truth of the facts pled by the plaintiffs. 

Plaintiffs alleged that they were employed at Rick’s Cabaret by its owner RCI Entertainment (New York) Inc. (“RCI NY”), a subsidiary of Rick’s Cabaret International, Inc. (“RCII”). After discussing the Twombly and Iqbal standards for evaluating complaints on motions to dismiss, the court observed that the term “employee” is defined quite broadly under both federal and New York law. 

Then the court applied the “economic reality” theory – looking to the totality of the facts and circumstances – to determine whether the plaintiffs had alleged sufficient facts to permit an inference that RCII was a joint employer with RCI NY. Plaintiffs had alleged that RCII employs regional managers who oversee the operations of the subsidiary clubs; that the regional managers hire the general managers who work at the clubs; that the general and regional managers report to the CEO of RCII, who is also president of each of the subsidiaries; and that RCII distributes the rules and guidelines the entertainers are required to follow, and enforces them through its agents the regional and general managers. 

Plaintiffs further alleged that the decision to classify them as independent contractors rather than employees was made by the CEO of  the parent company.

The court found these allegations sufficient to state a claim for joint employer liability, and went on to certify a class under Fed.R.Civ.P. 23(b)(3), holding among other things that the need for individualized damage calculations did not defeat the requirement that common questions of law and fact predominate over questions affecting only individual members. 

What’s the Bottom Line for Employers?

The lesson here for employers is that attempts to insulate a parent entity from liability under the FLSA by creating operating subsidiaries may well fail if the parent exercises any significant degree of control over the employment policies of the subsidiary.

The case is Sabrina Hart, et al. v. Rick’s Cabaret Int’l Inc., et al., No. 09 Civ. 3043, slip op. (SDNY December 20, 2010) (Koetl, J.). A copy of the opinion may be downloaded here.