Settlement Shows ‘Employee Misclassification’ Can Be an Expensive Mistake

RIVERSIDE, Calif. – A proposed settlement agreement filed in a California federal court late last week demonstrates how expensive a mistake it can be to misclassify employees as independent contractors, with the companies behind the Spearmint Rhino chain of agreeing to pay $3.65 million to settle a class action lawsuit filed back in 2017.

The case took flight in February, 2017, when a woman named Adriana Ortega filed a complaint in which she alleged that the defendants had “misclassified dancers as independent contractors and, in so doing, have violated various provisions of federal and California law by (1) failing to pay dancers minimum wage; (2) taking portions of gratuities left for dancers by patrons; (3) failing to provide dancers with accurate itemized wage statements; (4) failing to reimburse dancers for work-related expenditures; (5) failing to keep accurate payroll and employment records for dancers; and (6) failing to pay dancers’ wages when due.”

After considerable wrangling in court, and despite the defendants continuing to maintain they have “substantial defenses” to the claims filed against them, the companies behind the clubs evidently decided that discretion is the better part of valor and began negotiating a settlement with the plaintiff class.

“Defendants deny each and every one of the Claims that are asserted, that will be asserted in the Second Amended Complaint, or could be asserted by the Plaintiffs in the Actions; including but not limited to misclassification; entitlement to employment wages, benefits or penalties, or other compensation, and any claims of joint employer liability,” the proposed settlement agreement states. “Defendants’ decision to enter into this Agreement and to conditionally consent to class treatment of Plaintiffs’ claims is not and shall not be construed as any form of admission of liability. Rather, all liability is expressly, generally and specifically denied by each and every one of the Defendants.”

Despite the above denial of liability, the Spearmint Rhino companies have agreed to part with a substantial amount of money in this settlement. Not all of this money will go the plaintiff class, of course; $75,000 of the settlement amount is set aside for the California Labor and Workforce Development Agency to address the complaint’s California Labor Code Section 2699 claim, while up to $912,000 plus “reasonable costs” will go to the attorneys representing the plaintiffs/Class.

The good news for the Spearmint Rhino companies, assuming the proposed settlement agreement is certified as it is currently written, is that there should be no ‘surprise’ additional costs beyond those they have already agreed to pay in the “gross settlement fund.”

“Except as provided in this Agreement, Defendants shall not bear any other expenses, costs, damages, or fees incurred by the Class Representatives, by any Member of the Settlement Classes, or by Class Counsel and their experts, advisors, agents, class administrators or representatives,” the settlement states. “Any  award of attorneys’ fees and costs payable hereunder and approved by the Court shall be in complete satisfaction of any and all claims for such attorneys’ fees and costs under state or federal law which the Class Representatives, the Settlement Classes, or Class Counsel have or may have against the Released Persons arising out of or in connection with the Actions and this Settlement, including, but not limited to, any claims for attorneys’ fees and costs involved in litigating the Actions and negotiating and implementing this Agreement, including attorneys’ fees and costs incurred through and after the final disposition and termination of the Actions.”

While the agreement is a settlement and not an award of damages following complete adjudication of the claims, you can safely bet that if the Spearmint Rhino companies and their attorneys thought it likely that defending themselves would cost less than the amount at issue in this settlement, they would not have agreed to the settlement sum.

In any event, the situation stands as a warning of sorts for adult entertainment companies, whether they be strip clubs, porn studios, webcam companies or any other entity which may be misclassifying employees as independent contractors: If you’re wrong in that assessment, the costs of such misclassification may come to substantially outweigh any short-term benefits it offers your company.