Originally posted here by Eric Ducoff
Note: Although CA employment attorneys were consulted when researching this article, we highly recommend that you contact a legal representative to discuss your rights and responsibilities on this topic. Strategies is not a legal councel and the contents of this article should not be considered as such. We will be updating this post as more information is presented to us.
Commission salons and spas in California were just given the ultimate “Bad Hair Day”.
With the passage of California Bill 1513 “piece-rate legislation”, the rules have completely changed on how salon and spa owners can compensate their stylists and massage therapists.
For all intents and purposes, the traditional commission model is no longer compliant in California. Strict new laws now require salons and spas to drastically alter they way they compensate their commissioned employees.
And unfortunately, the potential financial impact of Bill 1513 on many salons and spas could be catastrophic. See the full bill here.
What you need to know
Piece-rate vs. commission compensation:
As per the Labor Code, compensation for salon/spa services is technically labeled as “piece-rate” work, and not commission. Confused? Let’s look at the Labor Code’s definition of each classification:
- Piece-rate is defined as pay “based upon an ascertainable figure paid for completing a particular task or making a particular piece of goods.”
- Commission employees are defined as anyone “involved principally in selling a product or service, not making the product or rendering the service, and their compensation must be a percent of the price of the product or service.”
Because stylists and massage therapist are rendering services and not just selling them, their work is considered “piece-rate.” Why does this labeling matter? Because Bill 1513 only applies to piece-rate work and not commission work. But again, the Labor Code’s definition of commission is not the same as the salon/spa industry’s.
Big game changer #1…
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 are 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 services 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 “non-productive” and “rest/recovery” pay rates must be at least the California minimum wage.
Big game changer #2…
And it’s a biggie…
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 averaged hourly rate equaled or surpassed minimum wage, all was good.
This is no longer the case.
Big game changer #3…
In addition to aforementioned restrictions, Bill 1513 also contains one final crippling blow for California-based commission salons and spas:
- Employers are required to calculate and pay back wages for all “non-productive” and “rest/recovery” hours worked dating back to July 1, 2012. And yes, employees have started filing lawsuits demanding back wages for this time period.
- Or… choose the Safe Harbor option: Valid until July 1, 2016, Employers may choose to pay each employee 4% of their total earnings dating back to July 1, 2012. The state must be notified by July 1, 2016 that this option is being pursued, and full payment would be due by December 15, 2016. Doing so will also make them immune from any future employee lawsuits specifically related to Bill 1513.
An Example…Salon Sacramento
- Open since 2006
- $800,000 in gross service sales every year
- 10 full-time stylists, each paid 50% commission
- Each stylist works 40 per week, and is 75% productive.
- California minimum wage as of 1/1/16: $10.00 per hour
Now let’s do some math…
- $800,000 / 10 stylists = $80,000/yr gross revenue generated per stylist
- $80,000 @ 50% commission = $40,000/yr gross pay for each stylist
- If each stylist works 40 hour per week and is 75% productive, this means that 30 hours are spent servicing clients, and 10 hours are “non-productive” or “rest/recovery” hours.
- 10 “non-productive” hours per week for 52 weeks is 520 “non-productive” hours for per year, per stylist
How this scenario would look under Bill 1513…
- In addition to the $40,000 paid to each stylist for their commissions on services, they would each be due an additional $5,200 in compensation for their 520 “non-productive” hours worked at the minimum wage rate of $10 per hour.
- This brings each stylist’s pay to $45,200/yr, the equivalent of 56% commission.
- Multiplied by 10 stylists, this is a $52,200 increase in total salon payroll.
Salon Sacramento’s back wages due on all “non-productive” hours since July 1, 2012
- We’re going to round our numbers to 3 years for clarity-sake
- $52,200 x 3 = $156,600 due to employees if paid in full without using the Safe Harbor Clause
- Or, if Salon Sacramento chooses to use the Safe Harbor Clause and pay the 4% penalty on all wages paid since 7/1/12, the amount due by December 15, 2016 would be as follows:
- $40,000/yr x 10 stylists x 3 years = 1,200,000 / .04 = $48,000
Compensation alternatives for California salons & spas
So where do commission-based California salons and spas go from here? One thing is clear, the days of easily calculating 50% for them and 50% for the house are gone.
Here are four employee-based compensation structures for California salons and spas moving forward:
- Continue to pay commission/piece-work. The big challenge presented here is how will salons and spas be able to afford paying for “non-productive” and “rest/recovery” hours on top of the commission rates they are already paying? Yes, commission rates that fluctuate or are averaged based on weekly sales could be used, but these methods would also introduce substantial increases in bookkeeping responsibilities. They also may spawn confusion and resentment from service providers.
- Hourly pay: Putting service providers on a fixed hourly rate is a sure-fire way to meet all California compensation requirements, as long as the hourly rate is at minimum wage or higher. However, if salons and spas don’t have the systems and leadership to drive sales and keep staff motivated, issues may arise.
- Hourly plus commission: Keeping close to the current commission structure, employers could elect to pay service providers a set hourly wage (such as minimum wage), and then add a reduced-rate commission for each service rendered.
- Team-Based Pay: Converting to a Team-Based Pay (TBP) structure not only meets all Bill 1513 requirements, but also offers growth and cultural benefits far beyond traditional salon/spa compensation models. TBP is an hourly and/or salary program with a team bonus that is tied the achievement of critical numbers (e.g., revenue, gross margin, client retention, productivity, pre-booking, retailing, net profit). Individual growth is tied to overall performance – not just the employee’s ability to generate revenue. A TBP system is designed to reward the right behaviors and performance – those that support the business’s goals and culture. RELATED: To learn more about the benefits and structure of Team-Based Pay, download Strategies’ free Team-Based Pay white paper report here.
As counter-intuitive and debilitating Bill 1513 is to the California salon/spa landscape, it is not something not to be taken lightly. If you are not pro-active in making the necessary changes now, you could be facing state fines, employee lawsuits for back wages or both.
Where can you get help?
Your first step should be to talk to a legal representative to learn what your legal rights and responsibilities are with Bill 1513. They will also have a very firm understanding of the bill as more details and cases are presented.
Your next step should be to restructure your pay structure to meet all compliance standards. If you would like one-on-one help from our team of Certified Strategies Coaches to quickly execute the restructuring of your compensation system to Team-Based Pay, click the link below. Not only will we ensure you meet all Bill 1513 guidelines, we will help you implement a pay program that can increases sales and profits, motivate your staff to grow the business, and provide world-class customer service.
Note: We highly recommend that you contact a legal representative to discuss your rights and responsibilities on this topic. Neither Strategies nor ShearShare, Inc., is a legal counsel and the contents of this article should not be considered as such. Strategies will be updating the original post as more information is presented.