Are nail salons lousy with the law?

Everyone loves nicely manicured hands and freshly pedicured toes. But at what cost? Last month, the New York Times answered that question by exposing deplorable treatment of New York nail salon workers who were severely underpaid and needlessly exposed to harsh chemicals. Sarah Maslin Nir, "The High Price of Pretty Nails" (May 10). While profiling nail workers who were not even earning minimum wage, the Times raised valuable issues that may foreshadow the next wave of wage and hour class action litigation.

These revelations inspired New York Gov. Andrew Cuomo to spring into action. He announced a statewide investigation into every salon in New York. Among other proposed regulations, Cuomo also released the Nail Salon Workers' Bill of Rights, specifically designed to educate and protect against future nail technician abuse and exploitation.

Now a required posting in every New York nail salon, the bill of rights targets core issues that dominate the industry. It emphasizes that it protects workers "regardless of immigration status." It also lists minimum hourly wages, warns against employer retaliation (i.e., employers should never "punish you in any way for complaining about your wages or working conditions"), and includes the safety and health protections a salon owner must legally provide to their workers (i.e., respirator, gloves and eye protection).

While the Times' expose attracted media attention, most commentators focused on potential health hazards; financial issues were treated as an afterthought. Indeed, shortly after the New York Times article, the LA Times published its own article, "Are California Nail Salons Safe for Workers?" (May 8, 2015), questioning whether California nail salons were safe for workers. But the potential health risks can easily be addressed with proper protective equipment.

For California attorneys, financial issues may become most important. The "shocking" wage practices the Times mentioned seem fairly commonplace within the nail salon world. While there has yet to be a flood of nail salon employment suits or class action litigation, employment attorneys should prepare for what appears inevitable.

As part of the personal services industry, nail technicians are entitled to overtime pay, meal periods, rest breaks and minimum wages. See Wage Order 2-2001. But salon owners are often tempted to shift some risk to the nail technicians. Rather than pay an hourly wage, many salons classify their technicians as "independent contractors" who receive percentage based pay (e.g., 50 percent commission for each service). If customers are not plentiful, nail technicians earn little or nothing, and the owner's labor costs are minimal.

Unfortunately for salon owners, simply attaching an "independent contractor" label and paying commission is not enough to turn an employee into an independent contractor. Improperly classifying employees as "independent contractors" can make Labor Code violations more plentiful than cuticles. No hourly wage means no monitoring required rest breaks or meal periods, and no reason to ensure workers are earning minimum wages.

California nail technicians outnumber New York's 6-to-1. California is home to over 7,000 nail salons and more than 95,000 nail technicians (a quarter of the nail technicians in the U.S.) (See Nails Magazine, 2014-2015 The Big Book, p. 84). Yet, only a handful of nail salon cases have made California news.

In June 2013, the San Mateo County Superior Court approved a $750,000 class action settlement for over 100 nail salon employees. See Tran v. Natalie Salon Inc., CIV 508343, Judgment and Order. The Natalie Nail Salon employees alleged that the salon did not pay minimum or overtime wages, deducted credit card tips, withheld meal periods, and failed to maintain proper pay records.

On the other hand, a month later, the California Court of Appeal recognized one nail salon chain's successful effort to classify its cosmetologists as independent contractors. See Happy Nails & Spa of Fashion Valley v. Su, 217 Cal. App. 4th 1459 (2013).

The salon chain challenged penalties assessed for failing to include itemized deductions on wage statements. With over 50 locations throughout California, Happy Nails explained that in 2001, it had hired a consultant to structure its business to ensure that its cosmetologists were independent contractors. With the consultant's recommendations, Happy Nails argued that it had successfully considered all factors to ensure that its cosmetologists were independent contractors, and not employees.

Ultimately, the Court of Appeal used collateral estoppel to uphold an administrative law judge's original findings that the Happy Nails' cosmetologists were properly classified as independent contractors. Although this was not a challenge by the affected workers themselves, Happy Nails temporarily made independent contractor status for nail technicians seem achievable. Maybe the core workforce could successfully be deemed independent contractors after all. But in November 2013, the California Supreme Court ordered Happy Nails de-published.

The other shoe dropped the following year when the California Supreme Court decided Ayala v. Antelope Valley Newspapers Inc., 59 Cal. 4th 522 (2014). In Ayala, the Supreme Court reaffirmed the importance of control in evaluating an independent contractor vs. employment relationship. The Supreme Court emphasized, what matters "is not how much control a hirer exercises, but how much control the hirer retains the right to exercise."

Attorneys should be ready to counsel salon owner clients on the hourly pay, meal and rest period, and overtime requirements that will probably apply if a salon controls, or merely retains the right to control, its workers. One possible alternative may be a "landlord" model, where individual stations are "rented" and the salon owners take a completely hands-off approach. The landlord approach shifts risk to the workers, and it may even create a valid independent contractor relationship. But being relegated to a landlord status can make it impossible to "manage" a cacophony of "tenants." And the landlord model is likely to be disadvantageous from an overall profitability standpoint.

For two decades, nail salons have "flown under the radar" when it comes to employment litigation. Now, with national attention and Ayala's anti-independent contractor rationale, nail salons may be prime targets for class action and wage and hour litigation.