A recent ruling by the California State Supreme Court may spell the end of booth rental salons in the state. In essence, the court found that if a worker is performing essentially the same work as the hiring company, she doesn’t meet the independent contractor standard — meaning that most independent contractors and salon booth renters would be considered employees under this ruling and would be entitled to employee protections and benefits. The intention of the ruling is to address worker misclassification on the part of business owners to avoid following employee and wage laws.
We asked some business-savvy salon owners to weigh in on the ruling and discuss its implications for the future of booth renting.
Do you think this ruling is fair, given the potential to abuse the current system to avoid wage rules and other employee protections?
Gayle Fulbright: Yes. I believe what the State of California is doing is looking out for the employee, not punishing the “employers.” What I have seen over the years could be considered abuse of the employee, by not providing disability benefits, unemployment benefits, paid sick days, social security/retirement benefits, etc. Many workers don’t understand that they deserve these benefits matched by their employer. I see so many “creative” ways salons are paying or not paying their “employees” and many use the excuse that everyone else is doing it and thinking it’s OK.
Mia Rubie: My first reaction upon hearing about the ruling was that it was unfair. I was immediately nervous for myself and for the friends I have in the industry with booth rental business models. We panicked under the assumption that booth renting would no longer be acceptable. But after reading about the ruling further, I now understand why it is happening. It isn’t fair for business owners to misclassify people who should be employees as independent contractors just to avoid wage rules and benefits. It’s shady business practice and actual employees should be protected by laws.
This ruling could have a ripple effect when other states see the millions in tax fines that could be levied.
Renee Borowy: I don’t feel this ruling is fair in that most CPAs and accountants don’t advise their clients correctly due to the gray areas in our laws. I was affected in 1992 and lost thousands of dollars after being set up by a CPA firm that didn’t quite understand the beauty industry. If this is now what is expected, there should be a grace period for all salons to conform, then we would all be on a common playing field and competition would be fair. It is not fair for many salons that are forced to abide by these rules when there are salons right across the street that are interpreting our laws differently.
In the beauty industry, we often use the terms “independent contractor” and “booth renter” interchangeably when they’re not the same. [Owners pay independent contractors, whereas booth renters pay owners a fee as rent.] Do you think this muddying of the waters comes into play in this debate?
Rubie: Yes, I do think the way the terms have been used interchangeably has caused confusion for the industry. Clarifying the two in the law will help independent contractors who are being shorted out of benefits that employees are entitled to.
Fulbright: The way I see the difference between independent contractors and booth rental is: Booth rental is just that. One pays to rent space to a landlord, just like renting a house or room. There is no 1099 issued to renters. An independent contractor is someone who works “independently” in multiple locations and is issued a 1099 by each of their jobs. Many IC “owners” think it’s OK to collect money, charge for products, offer a front desk, and call workers independents. I believe that many of them are trying to avoid matching taxes, social security, paid sick days, and hourly wages.
Karie Bennett: Yes, maybe it’s time to have a consistent term that applies to a worker who is paid in a non-employee way. I would wonder if booth renters don’t understand this ruling applies to them because the compensation method under scrutiny is called independent contractor. Word needs to get out that if you are a booth renter or “renting a chair,” you are an independent contractor for the purposes of this ruling. If you get a 1099, give a 1099, or are in any way not receiving a paycheck that shows taxes, social security, disability, unemployment, and other employer-required contributions, then you need to educate yourself on this ruling, because it applies to your situation.
They’ll have to lower pay scales in order to compensate for paying taxes.
Do you predict we’ll see this type of regulation spreading to other states? Will it be enforced? Will owners comply?
Fulbright: I see this type of regulation is already in some other states — Maryland is one. I do believe this ruling could have a ripple effect when other states see the millions in tax fines that could be levied. This ruling wasn’t about that, but it could wake up the IRS and states to unclaimed dollars.
Bennett: This has been in place as the standard in Massachusetts for years. I think that once California collects some back taxes and penalties, they will be surprised at how much misclassification is out there. Until this ruling, there was no way to shine a light on it. Other states may follow suit once they get an inkling of the tax revenue, unemployment payments, and social security they have been missing out on. As far as enforcement, it’s pretty attractive to plaintiff’s attorneys — think billboards that read, “Are you an independent contractor? Call us!” I understand that the labor commissioner will also be enforcing this.
Business owners may think twice about a booth renter business model if they have even a shred of doubt that they would be legally compliant. It’s really based on their tolerance for risk.
So, bottom line, what does this mean for you as a salon owner or for other owners?
Rubie: I operate a booth rental salon. Each person pays a monthly rent and I do not dictate the way anyone performs their services or runs their business. I feel we are already in compliance with the ruling, but there are some aspects that still seem a bit gray. I am hoping that the state will provide workshops or some kind of further education for salon owners to ask questions and fully understand the extent of the regulations.
Borowy: I do feel that when and if this is enforced properly, many salons will have a difficult time explaining it to their now “employees.” They’ll have to lower pay scales in order to compensate for paying taxes. Booth renters who have been paying double employment taxes as self-employed workers should already understand the cost of doing business, and if not, they soon will. If new regulations are applied consistently, salons will have to charge clients based on the real cost of doing business and you will have a fair cost market with honest competition.
Bennett: The main issue here is to protect workers and provide them with all the benefits of employment. The Professional Beauty Association’s Government Affairs committee is getting calls every day from salon owners asking what they need to do if they are booth rental, and the answer is they have to convert to W-2 (employee). The problem will be that it’s complicated to employ, and there is much to know and learn, so there will be a learning curve and it will take some time for those owners and their staff to adjust.