What Uber and Strippers Have in Common

You might not think that Uber and strippers belong in the same sentence, but all are deeply interested in the great legal question of the sharing economy: who's an independent contractor and who's an employee?

Now a federal appeals court has weighed in with a ruling that strippers are employees. Its reasoning provides an important window into the legal question on which a whole business model depends.

The case arose from a lawsuit brought by exotic dancers working in several Maryland clubs. The dancers weren't paid salaries by the clubs, which insisted that they were independent contractors. Starting in September, 2011, the clubs made the dancers sign an agreement saying that's what they were.

The dancers made their money from tips and from what the court decorously called "performance fees," presumably paid for lap dances. The club also collected what it called a "tip-in" fee from everyone who came into the club, whether dancer or patron.

Written agreements notwithstanding, a group of dancers sued the clubs, saying they were employees and as a result deserved legally mandated minimum wages.

A federal jury found that the dancers were employees and the US Court of Appeals for the Fourth Circuit agreed in an opinion by Judge J. Harvie Wilkinson, a Reagan appointee who used to appear regularly on lists of potential conservative Supreme Court nominees.

Wilkinson analyzed the question of employee versus independent contractor under the Federal Labor Standards Act. The test, he said, was one of "economic reality." A court must ask whether the worker is "economically dependent on the business to which he renders service or is," as a matter of economic reality, "in business for himself."

Since courts are bad at making such abstract determinations without guidance, Wilkinson said he would apply a six-part test derived from Fourth Circuit precedent. But ultimately he focused on one factor, namely how much the clubs controlled the dancers.

The opinion pointed out that the clubs set the dancers' schedules, set guidelines for the workplace and set the fees for private dances. Some dancers were coached on their dancing technique. Wilkinson also mentioned that the clubs set their own hours, did their own advertising and sold food and drink. All this, he said, amounted to more control than one would expect from a client of an independent contractor.

What's fascinating about the opinion is that most of the factors that Wilkinson cited could be applied to Uber drivers. Uber doesn't set drivers' schedules. But it lays down detailed rules and guidelines. It sets fees. It advertises.

One takeaway from this case is therefore that courts may be more likely to call gig workers employees than the existing legal tests would suggest. Wilkinson seems to have proceeded intuitively. The dancers worked in clubs and seemed like employees to him.

The second takeaway is that the "economic reality" test, with its focus on dependence, is wildly insufficient to decide real-world cases in today's economy.

Dancers are certainly dependent on the clubs - but are also in business for themselves. Similarly, Uber drivers couldn't find riders without Uber - but are also in business for themselves.

The relationship of dependence also runs in the other direction. There would be no strip clubs without the dancers. And there would be no Uber without drivers.

Given the practical facts of interdependence, it's hard to see how "economic reality" can tell us the answers to whether gig workers should be treated as employees. What we need is a new way to analyze what the law requires when it comes to nontraditional forms of employment.

We should be asking, "What benefits should working people have?" If we can answer that question, we can embrace disruptive changes without fearing loss of our social support network. And we can assure that the disruption is economically real and productive, not simply an exploitation of a loophole in employment law.

© 2016 Bloomberg L.P.