The Covering Beauty Blog

Everything you need to know about insurance for your beauty business.

Booth Renters: One or the Other

Posted March 5th, 2012 by Jeff Pulford

Jan left early Friday night to do final preparations for a large wedding her salon was working the following day. She was is a reflective mood, noting it was just seven years since she graduated from Stockton High, attended a great beauty college in Southern California, put in her time as a stylist and then opened her own salon, specializing in hair replacement. Jan had always been determined to be successful and spent her precious off time attending management schools, conferences and trade shows. She was extremely frustrated by so many changes in the world. She hardly knew what to expect any more but knew she needed to learn the new rules or pay the price.

She had recently read articles in Stylist magazine about SB 459, a new California law that demanded severe penalties for those who misclassify workers as independent. Then she noted the IRS offering a ‘window of opportunity’ to those who treat employees as independent contractors. Finally, an article in the local newspaper outlined how the federal government, through three of its largest regulatory bodies, including OSHA was going to crack down on the “Underground Economy”! Did this include her salon and the three booth renters that worked there? Jan, determined as usual, called her favorite business consultant to review. He told her that all government sectors need additional taxes and feel that improperly classified contractors offer less revenue than employees. The common and far too often ‘loose’ business practices of the beauty industry, especially with regards to booth renters can now be scrutinized. He even explained that a booth renter could legally be independent with regard to tax law but still be considered an employee for Worker Compensation. Jan understood that she, the salon owner, would be the one finally responsible for all problems.

She then asked for help from the Professional Beauty Federation of California and her favorite association, “The American Hair Loss Council” and found they had done substantial work on defining the different categories of workers used in the beauty industry.

Owner-Operator           This person can be a one person shop or the owner of a multiple-station salon. He/she is solely responsible for all their beauty services and activities. They carry their own professional and general liability, comply with any lease requirements but are not eligible for workers compensation insurance as they are not employees. They are eligible for any state run disability programs and must file income tax returns disclosing business income and expenses.

Employee                   An employee works for, is paid by and is the responsibility of the salon owner. Local, state and federal Human Resource laws and regulations demand many controls and mandates of the employer. The salon is responsible for offering general and professional liability insurance as well as worker compensation for all employees. Payroll taxes (social security and Medicare), while shared with the employee are the responsibility of the employer. Employees must carry their own beauty license, conform to the laws and regulations governing beauty services but the employer will be ultimately responsible for the technicians work.

Booth Renter              This is a legal term, offered by the IRS and unique to the beauty business. The term identifies a properly licensed beauty worker, operating under an executed contract with an establishment, the right to provide services within a salon but not as an employee. The responsibilities and obligations of the booth renter and the salon are spelled out in the agreement, including fees or rent charged for the use of shared facilities, equipment and other resources provided by the establishment. Salons usually provide general liability and property insurance while the booth renter is asked to provide their own professional liability. Many salons even provide the professional liability. Booth renters follow SOME of the rules which define an independent contractor but rarely do they qualify as an independent business. This leads to confusion and opens the door for many expensive problems. The IRS guidelines, which have been loosely interpreted, seemed poised for a change, especially as they want to collect payroll taxes. They are determined to receive these funds, think booth renters are ‘frequent non filers’ (do not file tax returns and pay the self- employment tax) and can put pressure on salons to ‘properly classify’ the workers.  Worker Compensation insurance is federally mandated and administered by the states. Salon owners do not want to pay the annual premium of about $300 per booth renter. They believe that because the booth renter pays them ‘rent’ that there is no work comp exposure. However, without following the strict rules demanded to qualify workers as independent contractors they find that they are liable and also guilty of allowing ‘misclassified employees’. Whether a person is called a booth renter or an independent contractor is irrelevant. The IRS and the worker comp system demand a worker be either an employee or a true business owner, an independent contractor.

Independent Contractor                An independent Contractor operates as a stand-alone business, usually under a fictitious name, (Ashley Temple, DBA “Ashley’s Temple of Hair”). This contractor-business receives and posts its own state licenses and municipal business permits to distinguish itself from the establishment in which the contractor operates. They must carry their own General and Professional Liability Insurance and name the salon as an additional insured. They must be responsible for their own tools, equipment and supplies. The salon’s Worker Compensation policy cannot cover Independent Contractors for work related injury as there is no employer/employee relationship. A stand-alone business person must be responsible for themself and procure their own disability and medical insurance.     The Independent Contractor enters into a contract with the establishment which outlines duties, responsibilities and obligations for each party. This needs to be reviewed carefully prior to signing as a salon CAN make many demands of the Booth Renters (Independent Contractors) they allow to work on their premises. An independent worker must maintain their own bookkeeping system, payments (Credit Cards), accounting and janitorial services. However, if these services are specifically ‘contracted with the salon’ and a specific, fair fee is charged for each item, it is possible to have the salon accept responsibility for them.  A contractor advertises his/her own business. An accurate income tax return must be filed showing business income and expenses. Self-employment taxes must be paid.

Jan became mad and confused as she tried to understand all the implications of the possible “Underground Economy”.   However, it was apparent that these were not new rules and the government bodies were going to start enforcing them. Determined as ever to properly manage her salon, she planned speak with ‘her’ booth renters, explain the facts and let them decide if they wanted to be true Independent Contractors or employees. It must be one way or the other.

Jeff Pulford   CIC

For more info on Independent Contractor insurance, click www.insurebeauty.com/get-quote/stylists/.



One Response to “Booth Renters: One or the Other”

  1. [...] or true employee, I'd find employment elsewhere. http://www.irs.gov/pub/irs-pdf/p4902.pdf Salon/Spa Booth Renters: Employees or Independent Contractors – SB 459 Covering Beauty – The B… PBA Progress | The IRS and You: Independent Worker [...]

Leave a Reply