It is the Krusty Krab but the sign says "The Krusty Lair" instead of "The Krusty Krab." The inside contains a set with a tub of boiling oil and a lookout for the villains.
Role in episode
At the end of the episode, Mermaid Pants and Barnacle Star are put at their doom by Doctor Negative and Captain Tightwad by being trapped in a cage above boiling oil. Mermaid Pants says that what Captain Tightwad and Doctor Negative are doing is a crime, so they can actually fight right after they get let out. However, Doctor Negative wants to do more than just that, and tries to bring them down to the boiling oil so they can get defeated.
The duo however has a plan and bumps into the cage so the contraption tips over and the villains end up in the boiling oil as a result, as well as the Krusty Lair getting destroyed in the process.
When the Krusty Lair is cracking and about to get destroyed, the sign reads "The Krusty Krab" instead of "The Krusty Lair."