Who counts as an employee in the gig economy?

On Wednesday, a US Appeals Court upheld a ruling that exotic dancers from two strip clubs in Maryland, USA, were club employees, not independent contractors as the defending clubs claimed.

The dancers’ earnings were limited to “performance fees” and direct tips from patrons; the clubs did not pay them a salary, insisting that they sign a contract to say they were independent contractors rather than employees. The dancers, alternatively, said they were employees and as a result deserved legally mandated minimum wages.

The first ruling for the case—from the US District Court for the District of Maryland at Greenbelt—found that the entertainers were employees, meaning that the strip clubs should have been paying them at least the minimum wage.

At the US Court of Appeals for the Fourth Circuit, Judge J. Harvie Wilkinson analyzed the question of employee versus independent contractor under the Federal Labor Standards Act. The test, he said, was one of “economic reality.” Is the worker “economically dependent on the business to which he renders service or,” as a matter of economic reality, “in business for himself.”

The courts looked at the relationship between the dancers and the strip clubs in determining their ruling and while the defending clubs portrayed the dancers as “free agents” and claimed the relationship just involved the clubs providing a rented space for performances, the dancers claimed that the clubs closely regulated their schedules, earnings, and workplace behavior.

Wilkinson upheld the lower court ruling, stating that the clubs’ actions amounted to more control than one would expect from a client of an independent contractor.

In his BloombergView column about the issue, Noah Feldman, a professor of constitutional and international law at Harvard University, highlights that “[w]hat we need is a new way to analyze what the law requires when it comes to nontraditional forms of employment.” He believes the question we should be asking is: “What benefits should working people have?”

The growth in independent work in the US and Europe is partly fuelled by the “gig economy” (or “sharing economy”), a model made famous most recently by online platforms such as Airbnb and Uber. This model has, however, been criticized by some as it does not offer workers the same protections as those of traditional employees.

The on-demand business model typically relies on independent contractors, which means that workers gain flexibility, but do not qualify for health insurance, payroll deductions, or welfare benefits, and they can face economic isolation in an increasingly unequal economy with stagnating wages.

Analyzing the effect of lowering employment protections on worker wages, IZA World of Labor author Stefano Scarpetta acknowledges that while workers mostly benefit from a more efficient allocation of labor, some experience lower wages as a result.

On-demand companies such as Uber minimize labor costs by classifying their workers as independent contractors. Daniel S. Hamermesh has written that higher labor costs reduce companies’ demand for labor. Whilst the debate over whether Uber drivers are employees or contractors rages on.

Related articles:
Employment protection by Stefano Scarpetta
Do labor costs affect companies’ demand for labor? by Daniel S. Hamermesh
Employment effects of minimum wages by David Neumark