Salon Workers' Comp: Renters, Tips, Class Codes

Workers' comp for a hair salon or spa is priced on the business your insurer says you are in, not on each person's job, and the final premium is set at audit from your actual payroll. The hard parts for a new owner are deciding who counts as an employee when some stylists rent chairs, handling commissions and tips, and reporting the ownership change so the seller's experience modification factor (the mod, a multiplier that reflects past claims) is applied correctly. This guide is for a buyer who has taken over a salon with its team, payroll provider and claims history.

The short answer

Class codes describe the business, not the job. The insurer assigns the class, and codes vary by state and rating bureau.
Whether a booth renter is an employee depends on the facts and the state. If an audit treats a renter as an employee, that pay can enter the premium base.
Under the North Carolina edition of the National Council on Compensation Insurance (NCCI) manual, commissions count as payroll and optional tips do not. Other states differ.
The seller's experience mod usually follows the business, though a small shop may have none. In NCCI states and several others you must report an ownership change within 90 days.
Texas lets most private employers opt out, Florida sets an employee threshold, and four states sell workers' comp only through a state fund.

Who counts as an employee in a salon or spa?

Salons mix employees, commission staff and people who rent space, and the Bureau of Labor Statistics (BLS) reports that 48 percent of hairdressers are self-employed. So the first job is to sort your team. Burns, strains, skin irritation or breathing complaints after a smoothing service are the kinds of claims that can sit in the mod you inherit.

Salon and spa roles and their workers' comp questions
Role	What the work involves	Payroll and policy question
Stylists, colorists and barbers	Color, chemical texture services, cutting, hot tools, long standing	Are wages, commissions and bonuses all in the payroll the carrier sees?
Nail and skincare staff	Nail chemicals, facials, peels, wax	Are nail and spa services described on the policy, and is each person an employee or a renter?
Massage therapists	Repetitive motion and fatigue from standing, some travel to clients	Employee or contractor, and what does your state require?
Front desk	Scheduling, check-out, register	Does it qualify for a clerical exception, or is it part of the salon class?
Manager or owner	Supervising, ordering, hiring, records	Is the owner's pay counted, excluded or elective? It depends on state and entity type. An owner who also works a chair has a stylist's hands-on exposure, so ask your carrier how that pay is treated
Booth and suite renters	Rent space and keep service income	Are they genuinely independent, and what proof of cover does the carrier accept?

Do you need workers' comp where you operate?

How states set up workers' comp, with examples
Setup	Example	What it means for you
Optional for most private employers	Texas	If the seller opted out, ask what that means for staff injury claims and whether your lease, lender or franchisor requires cover
Employee-count threshold	Florida: four or more employees outside construction	A salon with a few employees and several renters may sit near the threshold, so how renters are treated affects the count
State fund only	North Dakota, Ohio, Washington, Wyoming	Buy from the state fund, ask whether your stylists' commissions and tips are reported the way the fund requires, and ask about stop-gap employers liability
Different rating system	California, Pennsylvania, Delaware, plus independent-bureau states	Do not carry class rules across state lines

Texas lets most private employers opt out, but the Texas Department of Insurance says that, except when gross negligence results in a fatality, coverage limits liability if an employee sues the business for damages. Employers without coverage must report that to the state and report certain work injuries, illnesses and deaths. Leases, lenders and franchise agreements may also require coverage regardless of state law, so check what the seller did and what your contracts require.

Which class code applies to a hair salon or spa?

Your insurer assigns it, and this guide does not name one, because codes vary by state and rating bureau and the insurer decides. What you can control is how well the class fits the work. Whether spa, nail and massage payroll sit in the same class as hair services is a question for your insurer and the manual wording.

Clerical exceptions are narrow. Under the North Carolina edition of the NCCI manual, a clerical class applies only if the business's main class does not already include clerical staff and the clerical work area is separated from operating hazards, so a front desk on the salon floor may not qualify.
Splitting pay needs records. Most businesses have one basic class, so this matters only if your insurer assigns more than one (for example a physically separate operation with its own payroll). Under the North Carolina edition, one employee's pay can then be split between two classes only if records show actual time and pay in each. Percentage estimates are not allowed, and without records all that pay goes to the highest-rated class. Standard exception classes such as clerical cannot be split this way.

Ask your broker for the code on the policy's information page and the manual language behind it. See class code corrections and the class code glossary entry.

Do booth renters go on your payroll?

Sometimes. It depends on how the work really happens and on your state's law, and no guide can settle it for you. Each state decides workers' comp status under its own law, which can differ from the Internal Revenue Service (IRS) test of behavioral control, financial control and the type of relationship, so treat the IRS factors as one lens only. California uses a different test, and its labor agency says an older test for licensed barbers, cosmetologists and estheticians applies only after other conditions are met. Then comes the audit. Under the policy, premium payroll includes the remuneration of others engaged in work that could make the insurer liable, unless proof is given that their employers lawfully secured their own cover. A solo renter may have no employer to show that, so ask your carrier what proof it accepts and how it values a renter's remuneration.

A hypothetical example. A buyer's policy estimates $250,000 of annual payroll. At the first audit, the auditor asks about three people the seller called renters. They work set hours, book through the salon's system and follow the owner's rules. The carrier decides, under state law and the policy, to add an estimated $120,000 for their work to the premium base, and the premium rises. Reviewing how people really work, with counsel, before closing is how to find this out early. See 1099 workers and the audit and inherited wage and hour exposure.

How do commissions, tips and overtime count in payroll?

The table follows Rule 2 of the NCCI Basic Manual as filed in North Carolina. Other states and bureaus may treat these items differently, so ask your carrier to show you its rule.

Pay items in premium payroll (North Carolina edition of NCCI Basic Manual, Rule 2)
Pay item	Treatment	Salon question
Wages, commissions and bonuses	Included	Are service and retail commissions both captured?
Optional tips	Excluded	How are card tips recorded?
Automatic service charges or mandatory gratuities	Included under Rule 2 when the customer cannot reduce the set charge	Does your salon add a set service charge, and is it in payroll?
Premium portion of overtime	Excluded only if records show it separately by employee	Does the payroll provider report overtime by person?

Keep time and pay records by role, because the insurer can audit them during the policy and for up to three years after it ends.

What changes in workers' comp when you buy the salon?

The mod usually follows the business. Under NCCI rules past payroll and claims generally move to the new owner, even in an asset purchase into a new company. Small shops may not qualify for a mod at all, because states set a minimum premium over the experience period and apply a 1.00 factor below it, so ask whether the seller's policy carried one.
Report within 90 days. In NCCI states and several others, the policy requires you to report an ownership change to the insurer within 90 days. Independent bureaus and state funds have their own routes. The rating organization decides the effect, and under current NCCI rules a recalculated mod applies back to the date of the change.
Audit balances. In a stock purchase a later audit can bill pre-closing payroll to the company you now own. In an asset purchase the policy does not transfer without the insurer's written consent, so you need your own cover at closing. Washington and Ohio, which use state funds, have successor rules that can make a buyer answerable for a seller's unpaid premiums, so confirm with counsel.
Records from the seller. Ask the seller's payroll provider for payroll by role and the commission and tip records from the last audit period.
Payroll providers and PEOs. A professional employer organization (PEO) arrangement may not continue for you, so check the PEO agreement and the PEO's carrier. See PEO versus your own workers' comp.

To check the inherited mod, see review the experience mod for errors. For salon cover overall, see insurance after you buy a hair salon or spa. Morrow can help you gather the information for your insurer, but the owner signs the report and the rating organization decides the result.

Keep reading

Frequently asked questions

Do I need workers' comp for a hair salon?

It depends on your state and your number of employees. Texas lets most private employers opt out, but coverage generally limits an employer's liability if an employee sues (with exceptions such as gross negligence causing a death), so opting out has a cost. Florida requires coverage at four or more employees outside construction.

Which workers' comp class code applies to a hair salon or spa?

Your insurer assigns the class based on your operations, and codes vary by state and rating bureau. Ask your broker for the code on your policy's information page and the manual wording behind it.

Are booth renters covered by my workers' comp policy?

It depends on the facts and the state. If your carrier treats a renter as an employee at audit, that pay can enter your premium base. Ask what proof of cover it accepts and speak with an employment lawyer.

Do tips count as payroll for workers' comp?

Under the North Carolina edition of the NCCI manual, optional tips are excluded and commissions are included. Other states may differ, so ask your carrier.

Does the seller's experience mod transfer when I buy a salon?

Usually, though a small shop may have no mod. Under NCCI rules ownership change generally carries the seller's experience to the buyer, and in NCCI states and several others it must be reported within 90 days. The rating organization decides the effect.

References

Just bought a business? Get your insurance reviewed.

Send Morrow the declarations pages, loss runs and key contracts you inherited. Morrow can review them against the business you bought, flag gaps and request quotes where it makes sense. Any new terms depend on carrier underwriting.

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This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.

Workers' Comp, Payroll and Class Codes for a Hair Salon or Spa