There are a few industries in which employees are often misclassified as independent contractors, and salons are one of the big ones. Most salon workers should be employees but are often classified incorrectly. It’s a widespread problem – a problem which costs workers money and, if they’re caught, costs employers a huge amount of money.
Reasons Why Misclassification Is a Common Problem
- Employers and employees don’t know any better. The employer’s peers may advise them to do the same thing they do, spreading the incorrect practice like an illness. Employees often don’t know one way or the other about employment laws.
- Employers don’t want to pay payroll taxes. Some employers know exactly what they’re doing and consider the money they’re saving on quarterly taxes to be worth the risk of getting caught.
- Employers want to avoid the hassle of filing payroll taxes. The administrative side of running a business can definitely be a hassle. Those that can’t be bothered by the stuff should hire a personal assistant at least.
- Employees like getting a bigger paycheck that doesn’t have taxes taken out. They like it until tax time when they owe self-employment taxes big time. The allure of a tax free paycheck ends abruptly when an employee does their taxes.
- Employees fear that if they say something, they’ll lose their job. This is an issue in any industry. Employees sometimes know they’re being taken advantage of but keep the status quo for fear of the consequences.
Employees don’t always know it but they have a lot of rights. They have a right to be paid minimum wage, to be paid on time, to make overtime, etc.
Workers that are not employees but rather, independent contractors, have different rights, like the right to make their own hours, use their own products, dress how they want, make their own rates, take customers with them when they leave, etc.
This is one of the reasons why it’s important to classify workers correctly. When employees are classified incorrectly, their rights get muddled, which gives the Department of Labor reason to meddle in your business.
Let’s look at the difference between a salon employee and an independent contractor at a salon.
Salon Employee Vs. Independent Contractor
Employees must follow the employer’s directives. Typically, employees must:
- Adhere to the salon’s dress code
- Honor the salon’s discounts and coupons
- Charge clients the salon’s rates
- Work within the salon’s hours of operation
- Use the salon’s preferred products
- Share a percentage of client payments
- Sign non-compete agreements
An independent contractor in the salon, on the other hand, rents a booth from the salon and takes care of all the details of the business on her own.
The above list is a helpful guide for determining if you are employing employees or independent contractors but, if it’s still not clear, take a look at the DOL’s economic dependencies test. For an even more detailed breakdown of the rules, clarified for the beauty industry, take a look at this post from This Ugly Beauty Business.
What the Salon Owner Wants
A salon full of independent contractors is actually fairly uncommon. Typically, a salon owner wants to have some control over their workers so that they can provide a consistent service and ensure a steady flow of customers.
While there is nothing wrong with having a shop full of autonomous workers, it’s not usually in the salon owner’s best interest. They usually want some uniformity in the services they provide. Hiring a bunch of booth renters may not be the way to achieve that.
Salon owners often mix these roles by hiring booth renters – because that’s what is done in the industry – and then expecting them to adhere to their rules, like employees do. This is not a legal practice and salon owners may need to rethink their business model in order to comply with the Department of Labor. A worker is either an employee or an independent contractor, not both.
Evading payroll taxes is like evading any other taxes; it means ticking off the IRS, and that’s not something you want to do. Payroll taxes are a little complicated but they’re required. Here is what the IRS expects to see from every business owner:
- Federal income tax withholding (based on withholding tables)
- Medicare tax withholding
- Additional Medicare tax (for employees earning over $200,000)
- Social Security tax withholding
- State income tax withholding
- Local tax withholding (city, county, school district, state disability, unemployment insurance)
Most salon owners that have 1099 workers should re-evaluate if they are classified correctly. Lawsuits are expensive and, while they don’t happen to everyone, when they do happen they can mean the end of your business.
Employees need to track their time.