Building the Perfect Strip Club Part 6, Business Practices

inno123
Review: I am discussing my ideas about strip club design and management and designing a sample club as an illustration. The parameters are: 4000sf storefront with 10 ft ceilings, lap dances and VIP allowed but no alcohol. Club can run with as few as 3 non-dancers at slow times. The primary design goal is to maximize opportunities for interaction between dancers and customers and thus sell dances.

A great physical club will be terrible if not run well. And running a club well can be blocked by bad or inefficient design. One cannot be far separated from the other.

One of the first big questions is whether the dancers are employees or independent contractors. In some places like California the dancers must be employees by law. Otherwise clubs love to classify the dancers as independent contractors because it gets the club out of payroll taxes, many labor laws, and gives the implication that what the dancers are doing is their own actions over which the club is both ignorant and not responsible. Dancers also frequently prefer it because they can deduct expenses fully on a Schedule C whereas employees must itemize to be able to deduct work expenses and there is a minimum that is nondecuctible. On the downside to the dancers it also means that as independent contractors they need to pay twice the social security and medicare taxes (presuming that they are honest about what they are earning). The classification of dancers as independent contractors also is also a common cause for lawsuits from dancers and former dancers. Not to mention tax penalties for mis-categorizing workers.

Part of the problem is that there is no single test for being an independent contractor, but the big picture is that if you are going to call them independent contractors there must be significant areas over which the dancers really are independent. You can't call them independent contractors and then dictate what they must wear, what hours they must work, what they can and cannot say to the customers, what they can charge, what they can and cannot do with the customer, etc. None of those are automatic disqualifications, but you have to show others areas where they are genuinely independent.

So essentially you can't have both a very tight leash on quality control and independent contractor entertainers.

But if you go the employee route though you have to be sure to get the money to pay the wages and benefits from nonalcoholic drinks and entrance fees.

That leads to the revenue model. Since the door fee is not that big in this kind of club and the revenue from a juice-and-soda service not that high you need a means of getting some of all those singles and twenties being given to the dancers to fund the club's operation and, if the dancers are statutory employees, pay for wages and payroll taxes. And you have to do it in a manner that does not make the dancers feel like victims.

I have seen various combinations of four models:

1. The dancer pays a ‘stage fee' and then keeps all or most all of what they collect after that.

2. Dancers are expected to pay several ‘tip-out' fees at the end of their shift.

3. The club logs all the dances and charges the dancers a specific number of dollars per dance or minute.

4. The club collects all the payments for the dances and then the club pays the dancers on a draw against a percentage of revenue. Variations on this include paying the bartender/security before entering the dance, paying them on the way out, or various types of meters like the Deja-Vu timer poles.

I generally am negative on the first two options. Stage fees puts a lot of stress on the dancers and dancers who are worried about winding up the night in the red might do something against the overall best interests of the club. I also think that the tip-out system, particularly if the dancer is expected to make individual personal tip-outs to security, creates an environment ripe for intimidation and implied extortion. Security is the responsibility of the club, not a kind of protection racket.

When it comes to the overall ‘culture' of the club there are two possible vibes that can settle in:

1. Everybody has a real job in a real business with real customers.

2. This place is a racket where suckers are played on their emotions to trick them out of their money.

Why should the club care which attitude takes hold? Because if the second takes hold everybody will be looking for their angle on their racket and their own suckers. Dancers will be looking to trick other dancers. Security will be looking at how to squeeze money from the dancers, the bartender will be looking at how to skim some sales and worst of all everybody will be looking at how to cheat the club owner. And you do not want everybody looking at how to cheat the club owner because most of them will succeed.

Part of setting the ‘real job' vibe is having a set of ‘real job' benefits like access to group health plan rates (even if mostly paid by the employee) and 401k plans. These things make it easier for the dancer to feel that they are in control of their lives and thus less likely to be taken advantage of by others. In addition being a dancer has plenty of medical problems including injuries and exposure to a lot of people even for ordinary viruses much less STDs.

Also helping the ‘real job' vibe is management having some clear guiding principles. My list would start with the following:

1. You do not cheat the club. Not on big things and not on small things.

2. You do not cheat other dancers or disrespect their persons or possessions.

3. Do not get between a dancer and her trying to sell a customer on a dance.

4. You do not cheat the customers or disrespect their persons or possessions.

5. Do not overpromise. It is better to over-deliver than to under-deliver.

Outside the Club: I imagine that all club managers think performers that go OTC are stealing business from the club. And that feeling is no doubt justified. In addition dancers doing OTC likely are going to miss shifts as a result and make it harder to schedule the club. But how do you stop it in reality? What does our sample club do? If you can't beat them join them. So the club has an affiliate ‘modeling agency' that all OTC must be booked through. In some jurisdictions the license to operate the club prohibits offering escort services so the modeling agency may need to be an entirely separate entity next door. The justification isn't so much the money but the improved ability to schedule and making things safer both for the customer and dancer and promotes the ‘real job' vibe. OTC is risky, either that the dancer might do a rip-off or the guy might do something violent or dishonest. In addition when booking the OTC the right statements and disclaimers will be made to help protect the club from being charged with pimping. The agency will call the OTC ‘modeling', ‘party entertainment', ‘private function attendance', or such. The dancer sets the rate, the customer pays the modeling agency, and the agency then later gives the money to the dancer. The agency percentage on the OTC will be 10%. That seems small, but that puts it in the same league as other talent agencies and thus less likely to get unusual scrutiny. In addition since the agency fee is just 10 percent there is little incentive for the dancer to go behind their back.

I know that for some of you the ‘magic' of getting a girl to go OTC with you is the illusion that you ‘succeeded' in getting her to ‘go on a date'. But who are you really fooling. I realize that much of the ‘magic' of that illusion is lost if is really is just a matter of making an appointment with the booking agency. On the other hand it saves a lot of trouble and uncertainty and potential legal complications

(Note, there are computer renderings that go with these articles. To access them click on my name and select pictures. When viewing one of the renderings you can right click on a picture to download a higher resolution version)

4 comments

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inno123
13 years ago
@Che One of my first statements in the first part of the series is that if you change even one of the presumptions about the club then the entire design of the club changes. It may be that why you don't think the design would work is that the 'rules' where you live are different.

On to the contract issue. An employment contract can specify just about anything that isn't illegal. But the person who signs that contract is an employee. A business to business contract can also specify just about anything that is not illegal, but the people are employees of the subcontracted business. Next the Federal Government is indeed immune from most of its own rules. For example some of the most serious penalties for failing to classify workers propery are TAX penalties, and the Federal Government does not collect income tax on itself! The actual determination of whether a worker can be classified as an independent contractor is tricky and varies state-to-state as well. Simply saying that you can do anything you want if you just hire a good lawyer is naieve. As I said in California you simply cannot get around it. Dancers in clubs have to be employees, period.
inno123
13 years ago
@Che: I am enjoying this discussion. I agree that it is good management practice to have a contract with the performers. But a contract does not make for a contractor. If an auditor or an administrative law judge says "That's an employment contract" then they are employees. The key word in 'independent contractor' is independent, not contractor.

As to the fact that it is a juice bar, that was one of the presumptions. If this was an alcohol bar the design would be almost unrecognizably different. But the pattern is incredibly strong that in locations where it is either nudity or alcohol nudity wins out in club popularity. And it has, or should have a big affect on club design I just came from a brand new nude club that wasted WAY too much floor space on the bar for a juice-only service.

Maybe it is just that I am coming from LA but talent agencies and modeling agencies all work this way. If you are a photographer setting up photo shoot or a planner putting on an event or a party or whatever you contact the modeling agency and they deliver the girls. And if it turns out somebody has sex with one of your models and gives her a little side bonus it wasn't like you had any idea made any promise of that! Having the layer of a modeling agency with defined terms does far more to insulate yourself from accusations that your girls are prostitutes turning tricks in your club when they agree to do OTC.
Ermita_Nights
13 years ago
I too would pass on the juice bar. I have limited business-owning experience but my accountant has more than once warned me that I need to make my contractors into employees. He's got a bunch of arcane criteria for that, including who supplies tools and equipment, and it is for tax reasons.
CaptObtuse
13 years ago
I am an independent contractor. I am a business consultant, not an attorney, so I can't speak with any real authority. But I've had enough dealings with these issues with clients to have some understanding of the law.

It's my understanding that there are a number of factors that contribute to defining the relationship. As Che points out, I am free to accept or decline any contract that is offered. That is, I can refuse service to whomever I wish. It's in my best interest to accept virtually every contract, or the offers may quit coming.

I can work for more than one contractor. I can, and should, be taking work from more than one source so the Dept. of Labor can't define my working relationship as that of an employee. Likewise, a dancer can move from club to club, and many of them do. Some work for more than one club in a single week.

I can set my own schedule. Most clubs allow dancers to set their own schedules, but provide incentives to get them to work when the club needs them. They may have to pay a fee to work during peak periods, but during early shifts on mid-week days they can work for free. Or pay a smaller fee during off-peak times. Some clubs require dancers to work a certain number of off-peak hours in order to work Friday and Saturday nights.

I can chose to follow certain recommended procedures or reject those that don't fit a certain client's needs. Of course, if I don't get the desired result the contractor will not offer anymore contracts. Within the scope of work outlined by the club, a dancer has some latitude as long as she doesn't put the club at risk. She can sell drinks, or not. Give lap dances or not, strip bare (if the law allows) or not remove her g-string on stage. As long as she can tip-out at the end of the night, it's up to her how she makes her money.

As a business consultant, I have some serious reservations about your proposed business model from the ownership perspective. You make the assumption that revenue will always be strong enough to pay wait-staff, security, a DJ, and the dancers - including benefits for all. And that it will still provide a reasonable level of gross profit to cover overhead expenses and leave me as an owner with a reasonable level of net profit to put in my pocket.

Your only real revenue streams are cover charges, non-alcoholic beverages, and lap-dances. Tips on stage are just that, and can't be attached by the club. Beverage purchases will be significantly less in terms of quantity and revenue dollars in a pop-shop. The cover will have to be reasonable for an establishment that doesn't serve alcohol. And as a patron, I'll know that the rules will be more strict as regards "extra-curricular activities" on-site as the club will not be able to distance themselves from the actions of the dancers.

If I want to see the most attractive ladies available, in the nude, with limited contact, I'll sit in my hotel room and surf the Internet. I'm not sure there's enough in your proposal to get me to go to your club.

I'm not saying it couldn't work. Until someone tries it, we won't know. I'm saying I'd need more information on cash flow and some serious market research as a banker before I'd loan a dime to fund such a venture. Or perhaps free lap-dances for life for me and banking regulator buddies. ;)
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