To the average hairdresser the idea of being self employed can be tempting, being your own boss, working when you want, no one to answer to but yourself, oh and of course you’ll make loads more money…
The problem is it does not always work out like this and many hairdressers who leave fully employed roles, in well established hair salons, have found to their detriment that life as a self employed hairdresser is not as rosy as at first glance. So let’s look at what motivates a salon owner to work in this way and what this means in reality to the hairdresser who rents a chair.
Why salon owners rent chairs rather than employing staff
The most obvious motivation for not employing staff is money. Having staff rent chairs means that a salon owner can operate often without paying any VAT, this means that they can charge less for their services although in reality this 20% saving rarely gets passed onto their clients or used for training etc. Instead it just increases the earnings of the salon owner. Salon owners won’t be responsible for paying any salaries, which means that what the stylist earns, is theirs to keep (after the salon owner takes their cut). Also as the salon is not employing them directly and not paying their salary, they also don’t have to worry about National Insurance tax, sickness pay, maternity pay and holiday pay – all things that can be costly for an employer.
There’s also the benefit of not being legally bound by employment law if a salon rents a chair to a self-employed hairdresser. As they’re not their employer, they don’t have to worry about things like the legal dismissal procedure, maternity rights and holiday entitlement. If things don’t work out with the stylist the salon has rented to, they’re able to make a straightforward decision about the arrangement in the best interests of their business. This means that if things turn sour, salons owners can quite easily cut chair renters loose at their discretion.
Summary of the benefits to the salon owner
Salons that rent chairs are often on the smaller side. This means that to reach he £85,000 threshold to have to pay VAT means they themselves can earn up to £85,000 from their own clients and from their chair renters. It also means that they can charge 20% less than their competitors.
No Employers National Insurance Contributions
By not employing staff salons who rent chairs do not have to pay employers national insurance currently at 13.8%
No Pension Contributions
If you don’t employ anyone you don’t have to contribute to their retirement fund a saving 1% rising to 3%
No Training Costs
Every hairdresser wants training, how will they keep up with trends and not get caught up in the blue rinse brigade crowd without ongoing training? Rent a chair salons don’t really care as they don’t have to pay for it, if you are not up to scratch they can just stop your contract and get someone else.
No Holiday Pay
Why pay someone when they are not working if you don’t have to. Salon owners who rent chairs do not have to pay anything for holidays, another big financial saving
No maternity pay /PATERNITY leave
This is a bigger problem that you may think. Since many hairdressers that rent chairs are not yet parents this loss of benefits is huge and can make a significant difference in a young person’s future.
No Employment contracts, tribunals, adhering to working time directives etc. etc
Employing people is not easy, their is a great deal of legislation to adhere to, employees need to be treated fairly and they have rights. So wouldn’t it be nice to have someone work for you, make you money but not extend them any of the employment rights that others enjoy and which are designed to protect staff. Also, if a stylist is simply not working out, their contract can be terminated in an instant with no recourse by the chair renter under UK employment legislation.
The myths around renting chairs for the Hairdresser
Hairdressers are swooned by the thought of working when they want, being in charge of their own destiny & making their own money however the grass is definitely NOT always greener on the other side of the chair, here’s why.
All of the positives mentioned above in favour of the salon owner are usually big negatives for the chair renter. Firstly you might think you work for yourself but can you really do what you want, for instance let’s say you wake up one day and call the salon owner and say, “I’ve decided not to work today, see you tomorrow” do you really think they will be happy about that? of course not, in fact the reality is that you are just a tied down to work as you were whilst being employed, the difference is you now have no rights at all so it’s even less likely you can do what you want.
National insurance is a big thing too, when you are self employed you will likely pay less national insurance than you were getting as an employee and this will affect your retirement pension, for many this may seem a long way off but the decision you make now can have far reaching effects in the future. Furthermore, the salon owner will not be paying into a pension for you under the new pension regulations. Again in reality neither will you, 1. because you forget and don’t know how to organise it and 2. because you won’t be able to, as in most cases you will earn less working self employed and simply won’t be able to afford it.
Often the thought of earning more money is a motivator for hairdressers to rent a chair however they rarely earn as much as being employed when everything is considered. Tax still needs to be paid to the inland revenue each year at the same rate you were paying when employed and you also get no holiday pay. At least a months earnings will be lost every year even if you only take 4 weeks off, if you take home £1200 a month thats £100 less each month you have straight away. Also consider training. How will you maintain your skills and keep up with trends? If you work in a salon that invests in training staff not only do they pay for the training but they also usually pay for the time off to have the training, not anymore, now YOU have to pay for the training and YOU lose out on the day that you are not working. One of the big considerations is your rights as an employee when you decide to go self employed. Essentially you have no rights, your role is not secure at all and if the salon owner can get rid of you for whatever they like and whenever they like, this is not a pleasant position to be in for any young person.
In reality renting a chair means you must:
- Cope with a lack of job security.
- Compete with other hairdressers in the same salon.
- Make less money during slow seasons .
- Advertising for new customers is costly and time consuming
- Pay for your own education.
- Do your own bookwork, including filing and paying taxes
- Pay the “employer’s” half of your national insurance contributions. Your retirement from national insurance will be affected.
- Sometimes work in a negative and unprofessional salon environment.
- Pay an ever-increasing chair rental fee.
- Purchase your own supplies and equipment.
- you receive no mentoring or educational guidance
- many salons are not employing hairdressers who have a history of chair rental
- Who will do your tax return? If you have to pay someone that’s an additional cost
- Who will advertise to get you new clients? not the salon owner, again YOU will have to find your own clients
- How will you pay your bills in the months of January and February when the income drops by some 40 – 50?
- How will you gain promotion, further your career?
- Who will look after your rights as a working person?
- As an independent contractor you will not qualify for full disability or unemployment payments if times get tough.
- If you declare all your earnings which legally you should you will often be financially worse off than being employed
- if you do not declare all your earnings you will be breaking the law and when applying for finance you will have to state your declared earnings maning your borrowing power and credit rating is reduced
A drawback of renting a chair out within your salon is that you can lose control, including your brand, your culture and, of course, the experience that your clients receive when they walk through the door. If these things are important to you, then renting a chair perhaps ins’t the best option for you.
Another reason that some salon owners are put off of the idea of renting out a chair is that they may be concerned that their self-employed stylist won’t keep to the opening hours of the salon, or perhaps just won’t come to work at all. They may also be worried that these stylists will even try to poach clients and then end the arrangement with a list of potential people to contact. without recourse.
The negative side of this business model is that you are in effect just a landlord. Which means that as the salon owner you must deal with:
- Minimal or non-existent business growth, as you are dependent on rental income and working long hours behind the chair yourself.
- High staff turnover caused by staff moving to other chair rental salon with better rates. Because no business can continue to grow with a constant merry-go- round of staff turnover, this in turn leads to business instability.
- The inability to manage and educate staff, and to create and promote a well-managed business with a professional and positive environment.
- Quality control standards and procedures are almost impossible to maintain when renting chairs which in turn can have a negative effect on your salon’s reputation.
- Lack of teamwork and negative competition between stylists as your they compete against each other for customers.
- Exposure to audits by HMRC, which are currently targeting the hairdressing profession.
- The inability to sell other salon services or products for which the chair rentals gain no benefit again stunting growth
- A temptation for some hairdressers to not report all their earnings to HMRC.
A recent government report showed that 95% of all business failures are due to a lack of management skills. By choosing to be a “landlord” rather than a “business manager” you are putting the success or failure of your salon in the hands of your tenants. However, because each of your independent contractor tenants views themselves as business owners, too, their decisions will be motivated by their own needs and goals, not yours.
Since November 2007, HMRC have benefited from a helpful High Court decision . The Court held that the salon owner in fact supplied to the stylists ‘all the facilities requisite for the carrying on by him or her of the business of a hairdresser.’ The supply was therefore standard rated. (The taxpayer owed over £80,000 of VAT, having registered for VAT 9 years late!) The NHF are backing calls for VAT reform which could reduce the VAT threshold to £26,000. This would almost certainly mean that nearly all salon owners who rent chairs and many of the chair renter themselves would have to start paying VAT at 20%.
For many years salon owners have allowed self-employed stylists to rent a chair, with a wash basin, and the surrounding area, arguing that it is a licence to occupy land, and therefore VAT-exempt. In many cases, this allowed the salon owner not to register for VAT. The HMRC Budget guidance can be seen here
Real World Example
Below is a real example of what a stylist would earn if working with us since we started on a self employed basis compared to what they actually earned by being employed. This is based on a stylist looking after on average 20 clients per week at an average value per client of £43. In reality many stylists in small local salons will be dealing with less clients than this on average.
- 60:40 split in favour of Salon owner: Earnings after Tax & NI – £1100
- 50:50 split: Earnings after Tax & NI – £1290
- 40:60 split in favour of chair renter: Earnings after Tax & NI – £1500pm
- Actual average salary after deductions was £1380
So based on these real world figures of a stylist working in a relatively busy salon would only be better off renting a chair if they were on a 60/40 split of revenue. Even at 60/40 though the stylist still gets no training paid for, no holiday pay, no maternity pay, no pension and no employment rights and on top of the figures most would pay someone to do their tax return adding additional costs to working self employed.
Our Opinion here at H&Co
In our opinion, whilst as a businesses we would be financially better off renting chairs in the short term we believe that chair rental is creating a temptation for dishonesty and an underground economy in the hairdressing industry. It creates an unequal playing field, and division among salon owners. We believe that in the UK there are too many hairdressers for the demand. In Torquay for instance there are 67,000 people, 50% are ladies giving the female market a size of around 34,000. If you consider there are over 70 hair salons in Torquay alone there is on average 485 ladies per salon. If each lady visits a salon 8 times each year this gives each salon a potential average of 3880 appointments per year. When you consider that at a rate of 8 appointments per day a single stylist could look after over 2000 appointments per year there is barely enough to cover an average of 2 stylists per salon. What this ultimately means is that the salons that invest in training, marketing, promotion, client experience and their employees will be the ones that win most of the business and the smaller salons that can do nothing other than rent a chair will not increase their market share as much as they do not invest in these fundamental business requirements of a successful hair salon.
Here at H&Co we employ all of our staff, do not rent chairs. We believe it’s detrimental to long term business growth, detrimental to the young hairdressers that are tempted by this route and ultimately detrimental to the Hairdressing industry as a whole by increasing salons without an increase in demand.