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Compensation Laws Forcing Change on Salon & Spa Compensation
May 14, 2018 | By Neil Ducoff | 1 Comment
California is leading the charge on protecting employee wage rights.
Why should payroll tax laws in California matter to you? Simple, it’s more important than ever for all salon/spa owners to understand and comply with state and federal laws — especially when it comes to classifying workers who are independent contractors.
DISCLAIMER: We can’t decipher the law for you. We’re not authorized legal representatives. However, we’ve done our best to break down a complex topic to give you a better understanding of how it may affect you and our company. Please consult your legal advisor.
What’s happening in California:
In January 2016, salons and spas in California were wrestling with Bill 1513 that made the traditional commission model no longer compliant in California.
As per the Labor Code, compensation for salon/spa services was technically labeled as “piece-rate” work, and not commission.
Effective January 2016, all “piece-rate” California salons and spas must track, report and pay their stylists or massage therapists for “non-productive” and “rest/recovery” time.
“Non-productive time” is defined as the time employees are required to be at work but not actively servicing clients. This includes time:
- Waiting for the next client to arrive
- Folding towels
- Sweeping the floor
- Assisting at the front desk
- Attending meetings
- Technical trainings
“Rest/recovery times” is defined as time on break and meals. In other words, every minute that service providers are in the salon/spa and are not either servicing a client or on break, needs to be tracked, reported and compensated for.
The law states compensation for “non-productive” and “rest/recovery” time must be a separate pay rate from the rate paid for when services are being produced.
This means you are no longer allowed to average the total dollars paid by the total hours worked and let that cover both “productive” and “non-productive/rest” hours.
Previously, as long as the average hourly rate equaled or surpassed minimum wage, all was good. This is no longer the case.
Then came California Senate Bill 490
SB 490 allows beauty salon employers and employees to agree to a percentage or flat sum commission in addition to a base hourly rate if the following requirements are met:
- The employee is licensed pursuant to the Barbering and Cosmetology Act and is paid for providing services where a license is required
- The employee’s base hourly rate is at least two times the state minimum wage rate in addition to commissions paid; and
- The employee’s wages are paid at least twice during each calendar month on a day designated in advance by the employer as the regular payday.
Hourly pay and the commission are independent and must be shown separately on the wage statement as follows:
- 8 hours @ $22/hr. (minimum wage x 2) = $176
- Commission @ 20% = $150
Forcing salons/spas to pay at least two times the current minimum wage means commission rates have to be slashed to keep service payroll costs sustainable.
And now … are they “Employees” or “Independent Contractors”
California has now followed Massachusetts and New Jersey in restricting the ability of employers to call workers independent contractors.
To classify someone as an independent contractor, the court said, businesses must show that the worker is free from the control and direction of the employer; performs work that is outside the hirer’s core business; and customarily engages in “an independently established trade, occupation or business.”
California’s Department of Industrial Relations website states, “Employers often times improperly classify their employees as independent contractors so that they, the employer, do not have to pay payroll taxes, the minimum wage, overtime, comply with other wage and hour law requirements, such as providing meal periods and rest breaks, or reimburse their workers for business expenses incurred in performing their jobs. Additionally, employers do not have to cover independent contractors under workers’ compensation insurance, and are not liable for payments under unemployment insurance, disability insurance, or social security.”
What does all of this mean to salons and spas in California and beyond?
State and federal governments are fighting deficits and are continually seeking out ways to generate additional tax revenues. If more states follow California’s lead, many longstanding salon/spa industry practices can and will be challenged.
The tightening at the state and federal level of what defines an independent contractor versus an employee is long overdue. Why? Because too many naive owners think pushing the tax burden on employees is as simple as classifying them as 1099 independent contractors. They don’t want to be bothered with collecting or depositing employee withholding tax and paying the employer’s required payroll taxes.
If it were that easy for a business to avoid payroll taxes – no company would have employees. FACT: It’s not that easy.
Didn’t know. Didn’t care. Followed bad advice. These excuses are not a viable defense if IRS determines that you misclassified W2 employees as 1099 independent contractors. If the salon/spa owner has any degree of control over workers with respect to supervision, schedules, performance standards, training, products used to do the work, dress code, etc. … the workers are W2 employees.
Keep the following in mind:
- The laws enacted by California are primarily aimed at large companies to protect employees and ensure that they are compensated fairly. What legislators don’t understand is how these laws create hardships for small employee-based businesses like salons and spas.
- When compliance forces a salon/spa to drastically change its method and rate of pay, services providers can easily reject the change. They can take “their clients” and go rent a booth or suite, leaving the business financially devastated.
- There’s a fine line between protecting worker’s rights and the need to generate more income tax revenue at both the state and federal level.
Here’s my challenge to you: When it comes to fair and proper wages for time worked, whether that time is delivering services or down time, the best way to protect your company is to be fully compliant with state and federal tax law. Take the time to understand state and federal laws.
Compliance includes the proper reporting of tip income, which the IRS defines as “income earned at work and taxable.” The widespread practice of only reporting tips on credit cards and not cash tips is still tax evasion. Ultimately, the company will bear the burden of paying taxes and penalties on unreported tip income.
Lastly, misclassifying employees as 1099 independent contractors to avoid withholding and other taxes is like having a ticking time bomb in your business.
The more tax compliant your business is, the easier it will be to adjust to new laws designed to protect worker’s rights — and increase tax revenues.
Categories: Business Builders