Jessica M. Karmasek Feb. 8, 2013, 1:00pm

TOPEKA, Kan. (Legal Newsline) -- The Kansas Supreme Court last week sided with the state Department of Labor in determining that exotic dancers are employees, rather than independent contractors, for purposes of unemployment insurance.

In July 2002, appellant Milano's Inc. purchased Club Orleans.

In 2004, after contacting the state Department of Revenue, club president John Samples began treating his dancers as independent contractors.

From that point forward, the dancers were no longer paid a nominal weekly wage, instead earning only tips paid by customers.

In 2005, in response to an unemployment claim filed by a Club Orleans dancer, the Unemployment Tax Contributions Unit of the Kansas Department of Labor investigated.

The unit auditor assigned to the investigation determined that the dancers were employees under K.S.A. 44-703(i)(3)(D).

In particular, the department argued that minimum rates for certain dances and rules regarding interactions with the customers could be viewed as rules for employees.

Milano's challenged the determination, and a labor department hearing officer heard testimony from Samples, Club Orleans manager Becky Kerley, two dancers, the unit auditor and three other department employees.

The hearing officer concluded that, despite the club's "creative assertion that a gentlemen's club is merely a place with good atmosphere, good lighting and good food," the facts reflected that the atmosphere was "largely derived" from the presence of its semi-nude dancers.

And because the officer determined that the dancers received wages for services as defined by K.S.A. 44-703(i)(3)(D), and that K.S.A. 44-703(i)(3)(D)(i) and (ii) did not apply, he concluded that the dancers were employees under the Kansas Employment Security Law.

He ordered prospective relief, requiring Milano's to develop and use an internal procedure for reporting its dancers' tips and to further report the tips to the labor department for purposes of paying its unemployment insurance contributions.

Milano's filed a petition for judicial review, claiming that the hearing officer made findings of fact not supported by substantial competent evidence and disregarded undisputed facts, and that he incorrectly interpreted K.S.A. 44-703(i)(3)(D).

A district court judge agreed with the findings and conclusions of the hearing officer, ruling that tips were wages under the plain language of K.S.A. 44-703(o).

And in response to the club's argument that a contract of hire must exist before the dancers could be classified as employees, the judge concluded that such a contract existed because the dancers had to complete an application in which they agreed to abide by the house rules.

The judge also ruled that Milano's maintained a right to control the dancers and that their services were provided in the ordinary course of Milano's business -- noting that it provided a place to perform; that the dancers' customers were customers of Club Orleans from whom it received a cover charge; that Milano's instituted a minimum tip policy without input from the dancers; that the dancers were required to accept drinks from customers; and that Milano's provided some supplies to the dancers.

Milano's appealed to the state Court of Appeals, which affirmed the decision of the district judge.

The state high court subsequently granted Milano's petition for review.

Though it "traveled to the result by a route different from that followed below," the Court affirmed the judgments of the hearing officer and the district court. It also affirmed the decision of the appeals court.

Justice Carol Beier, who wrote the Court's 10-page opinion, noted that the "critical common-law factor" is the employer's right of control over the employee and his or her work.

"Ample substantial competent evidence in the record before us, as echoed in the factual findings below, demonstrates that Milano's possessed such a right of control over the dancers at Club Orleans," she wrote in the Court's Feb. 1 ruling.

"Most telling, the house set various rules, and dancers' violations of those rules were punishable by fines and termination."

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