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Beauty & The Law 5. You hire, supervise and pay the worker's assistants. 6. You have long-term relationships with workers. 7. You set the working hours. 8. You require that the worker work substantially full time for the business instead of coming and going as the worker chooses. 9. You require that the work be performed at your premises. 10. You establish the order or sequence of performing tasks. 11. You require oral or written reports. 12. You pay by the hour, week or month, rather than by the job or on a straight commission. 13. You pay business and travel expenses. 14. You supply tools and materials. 15. The worker doesn't have a significant investment. 16. The worker doesn't have an opportunity to realize a profit or the risk of suffering a loss. 17. The worker is working for no more than one firm at a time. 18. The worker isn't making services available to the general public on a regular and consistent basis. 19. Your business has a right to discharge the worker. 20. The worker can terminate the relationship without incurring liability. The IRS will make a determination if you submit Form SS-8, available through irs.gov. Form SS-8 lists the factors that the IRS weighs in reaching a decision and is a useful reference even if you don't request IRS action. Professional models or salespeople may be classified by law as employees depending on the state where your business is located. THE ABC TEST Some states use slight variations of the IRS's 20-factor test to determine if your business needs to pay unemployment taxes on workers, but most states use a much simpler test called the "ABC test." In these states, most workers are classified as employees and the business then must pay unemployment taxes. Under the ABC test a worker is an independent contractor if two or three of these factors are present: • The worker is free from control or direction concerning how the work is performed. • The work is outside of the usual course of the business' work and is performed off of the business' premises. • The worker has an independent trade, occupation, profession or business. Because different government programs use different definitions of employment, a worker can be classified as an independent contractor for one purpose and an employee for other purposes. For example, a worker who provides nail-technician services in a salon using the salon's signature process will be an employee under the ABC test, but could easily be an independent contractor for federal tax purposes if enough other indications of independence are present. The labor departments in many states will give you a determination if you request it. OUTSIDE VENDORS Most outside vendors will meet all the tests of independence and be classified as independent contractors. For example, your accountant probably works for an accounting firm and provides services to many clients. The same is probably true for your air-conditioning maintenance service. Employee-leasing firms are usually careful to meet the tests for independent contractors, but you should discuss this issue in detail with them before leasing staff and get a promise from them to cover your damages if their analysis is wrong. Cleaning agencies are usually independent contractors, but if you hire a person to clean your store or salon and you provide all the supplies and set the hours you may well have an employee. federal employment taxes on hairstylists because the stylists were its employees. The business had both a wig business and a beauty salon at the same location, and treated the receptionists and janitor as employees but it treated the stylists as independent contractors. The business took a percentage of the stylists' gross revenue and assigned each stylist her own booth. Each stylist handled her own customers and used her own tools and equipment. The business provided one specific shampoo and some other chemicals, but not peroxide, conditioner, hair spray or specialty shampoos. Each stylist had her own key to the salon and set her own prices and hours. The receptionists on the business' payroll made appointments for all the stylists Determining whether you have an employee or an independent contractor can be more of an art than a science. THE ECONOMIC-REALITY TEST Federal minimum wage and overtime laws apply to workers who are classified as employees under the "economic reality" test. This test evaluates whether the worker is dependent on the business and looks as factors such as whether the services are an integral part of the business, whether the relationship is long-term, the worker's investment in equipment and supplies, the nature and degree of control over the work, the worker's opportunity for profit and loss, whether the worker's success depends on his or her own initiative, and whether the worker has an independent business or operation. Notably, some of the factors the IRS considers are irrelevant to the economic-reality test such as where the work is performed, whether there is a written agreement and whether the worker is independently licensed. It is important to evaluate your workers under all of the tests that apply in the state where you have your beauty store to be certain that you are complying with all the laws that apply to your business. 100 August 2013 | beautystorebusiness.com BOOTH RENTERS Booth renters are usually independent contractors, but the correct classification as either employees, independent contractors or simply tenants can be very hard to make. In a typical booth rental, the beauty store permits a booth renter to use space in a store or in a salon in return for a fixed rent. This is the basic concept, but many variations are possible—including payment of a portion of the booth renter's gross receipts instead of a fixed rental. In one model, the beauty store will process credit-card payments for the booth renter's services and then pay the booth renter. Here the business typically must file the same tax form (Form 1099) to report booth renter's income as it would for most independent contractors. Two court decisions illustrate how difficult it can be to decide if a booth renter is an employee or an independent contractor. In the first case, a federal trial court held that a beauty business should have withheld federal income taxes and paid and collected payments from their customers. If a customer's check bounced, the stylist was responsible. The business did not provide either supervision or training. The beauty business appealed the decision, and the appellate court wrote that it considered the call to be a close one, and had "some trouble with the result reached by the district court" but could not find the trial judge's decision to be clearly erroneous so it upheld the trial judge's decision that the workers were employees. In the second case, the federal tax court found that a spa operator was not the employer of booth renters. The spa had 12 massage rooms and workstations for massage therapists, cosmetologists and nail technicians. Many facts supported classification of the service providers as independent contractors—including that that they had no salary or benefits. The spa charged them the greater of $80 per week or 25% of their gross revenue even though it sometimes forgave the payments. The service providers set