JAIME: Welcome to Outgrowth: A Slice of Pro Beauty with your hosts Jaime Schrabeck.

ASHLEY: And Ashley Gregory. In a perfect world, we’d consult an attorney before making major decisions for our beauty businesses, like choosing a legal entity, signing a lease, or hiring employees.

JAIME: If you’ve ever needed an attorney but thought you couldn’t afford one, our guest, Amy Toepper, the founder and CEO of Legal In A Box, will explain how expert advice can be accessible and affordable. Let’s grow together.

ASHLEY: Owning a beauty business has never been more complicated legally and financially.   That’s why we’re so grateful to have attorney Amy Toepper with us today. Welcome, Amy.

AMY: Thank you so much for having me. I’m happy to be here.

ASHLEY: Well, we’re happy to have you. We have lots of questions for you as we know our listeners have a lot of legal questions and as we transition into this new time in our industry,   I’m sure there’s just going to be more and more so we’re really excited to have you with us. Amy, would you explain the different legal entities and what impact that choice has on a beauty business? The different ways you can organize or the different ways that you can create your business essentially.

AMY: Absolutely, and this will vary by the individual state in which you’re operating, but generally speaking, what folks come to me looking for are entity formations that typically fall in the category of LLC or corporation. And as a general matter, kind of a, from a broad overview,   we as attorneys set up these entities for folks to protect and insulate them from legal liability. So if someone comes onto your property and slips and falls, or has a bad reaction to a particular lotion or a hair chemical that you’re using, and they decide to sue you, they can only come after the assets that are part of your business. So either an LLC or a corporation shelters you, and your business, from anyone coming after your personal assets like a house or cars or savings account and that sort of thing. So that’s really the main important legal reason why we’ve had folks set up as an LLC or corporation. The second piece of it too is tax benefits, which CPAs can certainly speak to but it also affords you the ability to take business deductions and things like that that sort of lower your overall gross income. From a legal perspective, the LLC and the corporation both serve the purpose of sheltering you from legal liability. However, in most states, the LLC provides a little bit more flexibility, especially for small business owners so that they don’t have to have a board of directors. There isn’t a requirement for an annual shareholders meeting. You don’t have to take minute notes at a meeting. There’s a little bit more flexibility with the LLC compared to a corporation that issues shares and requires by law a little bit more formality. So those are the two primary vehicles that we see. For beauty salons, I would probably say the majority of them would do fine with an LLC. Corporations are typically choices we make when people are looking to start up a tech company or get some investments or some things like that but those are really the two main differences. The LLC provides a bit more flexibility with small businesses.

JAIME: As a follow up, Amy, many in our industry work alone and I have judged by some of the comments I’ve seen on Facebook that there’s some confusion between being an independent contractor and being a sole proprietor, as if being a sole proprietor means that you work alone and can’t have employees.

AMY: So to answer that question, sole proprietor is really just the default entity. When you don’t take any steps to do anything different with your business, a sole proprietor is just what you’re called. And, again, the sole proprietor formation, or default formation, doesn’t give any business owners any kind of legal protection. So if something happens, and people want to sue, even though, you know, the lawsuits might be frivolous, as a sole proprietor, you still open yourself up to liability. You’re essentially mixing your business and your personal assets together. Independent contractors, really legally, are sort of defined as something different. As an owner of any salon or any beauty establishment, even if you’re the only one providing services, I still would highly recommend setting yourself up as an LLC. It really is relatively low in cost to do it in each individual state. We do it in every state at Legal In A Box, and it just gives you a huge amount of protection, making sure that you’re acting as a LLC in a business for a little bit of investment. So I think that’s really important for anyone operating a business to insulate themselves a bit.

JAIME: My business is in California and it’s my understanding that as the service provider, I’m not allowed to form an LLC in my particular state.

AMY: Yeah, it definitely varies state to state. So here I sit in Illinois and you can set up a single member LLC without an issue. California is a state with laws unto themselves, and I would definitely defer to a California-licensed attorney because the laws there in California are so very specific and sometimes very different from other states. But generally speaking, most states do allow for single member LLCs, even if you’re just working alone or, even if you’re working alone and owning the business, but do hire independent contractors. I guess my overall point that I want to make here is, when people are trying to determine what’s the best entity for them, you have to do sort of an individual analysis of what state you’re located in, but also sort of look at it from a legal perspective and then a tax perspective as well, to get yourself set up and be most protected.

ASHLEY: I’ve even seen the term sole proprietor used interchangeably as the person in charge, meaning, I have a partnership, I’m opening a salon with my friend, and she’ll be the sole proprietor, as if it’s the Highlander, and there can only be one. And I guess, do you have like, I don’t even know if there would be like a mnemonic device or something that we can use that really simply breaks down the differences between a sole proprietor, as you said, the default, meaning you don’t have a separate tax ID number. You do all of your business under your social security number. And if something were to happen, they could take your car and your house. Versus an LLC, versus an LLC that’s taxed as an S-corp like, I know, it just gets so jumbly. And when we’re put in that situation, like in a Facebook group or somebody talking about it in an Instagram caption, it can be really hard to type all of that out. 

AMY: Yes.

ASHLEY: Do you have an easy way to kind of just like say, this is this, and this is that?

AMY: So, I think you’re absolutely right. All of the words and phrases and references get jumbled and people use them interchangeably when they aren’t necessarily meant for that. And people kind of use proprietor as sort of an old timey way of referring to someone who owns the business. Yes, he’s the proprietor of that establishment. But you have to kind of think about it. What are the legal connotations that are associated with that? Where have I found out that information? There’s certainly a lot of misinformation, unfortunately, that comes along with that. But again, I kind of urge people to look at it from a legal perspective and a tax perspective. And I guess if I were to make a simple overarching rule, if you don’t do anything, you will be a sole proprietor and no way limit your exposure to problems. If you take active steps to do something legally to set up your business, then that is what gives you a little bit of the legal shield, whether it’s an LLC or a corporation or an LLC treated as a corporation. I can certainly go into LLCs treated as an S corporation but I don’t want to put anyone to sleep, but I certainly am happy to answer that question. But if you don’t do anything, sort of think of sole proprietor personal exposure. So if I want to do something to protect myself, I have to take some kind of active steps to do that. And, you know, let’s figure out on a case by case basis, what works for you the best.

JAIME: Knowing that you’re a legal expert and not necessarily a financial expert, could you just briefly explain how the entity that we choose affects how we pay ourselves as beauty professionals? Just to give us some ideas so that when we do interact with our tax experts, we know what we’re getting ourselves into.

AMY: Yeah. And you know, quite frankly, I’ve seen this come up quite a bit now with small businesses applying for the different loan programs out there through the federal government under the CARES Act. And I think what it’s done is it’s sort of forced a lot of small business owners to ask themselves, who am I? What am I? What box do I check? Can these loans be forgiven? If so, how? How am I paying myself? So you can do one of two things, for example as an LLC, you can take money out of the LLC, sort of as a draw or as a contribution, and pay yourself that way. Or you can make yourself an employee of the LLC, and that’s typically why you’ll see LLCs treated as S corporations. And so then you’ll take part of your money as wages for working in the business, and then the other part as distributions for a partner working in the business, but who owns the business. That has some positive tax implications that a lot of people choose, and that’s why you’ll hear so much LLC treated as an S-corp. So with the LLC, you still have the flexibility and the legal protection, but in the eyes of the IRS, you’re looked upon as a corporation, which means you can take advantage of some of the tax breaks that corporations receive, particularly S corporations. People, I think, hesitate to make themselves employees or make other people employees because, quite frankly, it can be overwhelming as far as reporting with the state and how to set things up, and which payroll system to use. But if you’re hitting a certain dollar amount per year, I think that there really could be some significant tax savings by paying yourself as an employee under an S corporation.

ASHLEY: Okay. Switching gears ever so slightly, we love horror stories and teachable moments through learning about, I guess the schadenfreude of other people’s misfortunes but, what aspects of opening a business, or a salon, or transitioning into a salon suite, should really be completed by an attorney every time?

AMY: I would probably say, aside from the initial legal setup, and like I said, we offer low prices to do that and it’s done right, and it’s done right for your individual state. I think that’s really the first step, just to get a little bit of help with setting that up. Once it’s set up, I would probably say the next step that I tell all of my clients is, please, please get something in writing. Please put something in a contract. And if you don’t want an attorney to do that, then that’s fine. Pull up a document. It doesn’t have to be written in Latin, but at a minimum, you know, identify who it is you’re contracting with, the name of the parties, what you’ve both decided to agree upon and the prices and the services and all that kind of thing. Because just like a game of telephone, I tell folks, even with two well-intentioned individuals entering into a contract, it still sometimes works like a game of telephone. And if you don’t memorialize it before the engagement begins or before the work begins, then everything just gets, the waters get so muddied after the fact. So I know people don’t want to take the time to pay an attorney to do it. We offer forms on our website so that you can download and do it yourself that have been written by attorneys and vetted by attorneys and if you want to sort of cobble something together for your own, I would probably say that is the biggest thing. The horror stories are when people call me and say I paid $10,000, or I paid $5,000, and someone didn’t give me the services that I need, what can I do? Well, do you have a written contract? No. There’s nothing you can do. There’s really nothing, no recourse you have cause that contract substantiates the agreement so that if you have to go to court and enforce the terms, you can. So I would, anything in writing, anything in writing and certainly by an attorney would be ideal.

ASHLEY: Something that my dad taught me is that when you create those documents, you should absolutely list the exit plan, in those documents as well in case of dissolution of a partnership or divorce or something like that. I know that can get a little hairy to think about when you’re forming something, breaking it apart, but is that something that you include in the forms that you offer through Legal In A Box, or something that you have people think about?

AMY: Yeah, absolutely. in order to make your LLC viable, you not only have to file with the secretary of state and come up with a name, and pay your filing fee, but really to make it official, and I’m using LLC as an example, is to draft and sign an operating agreement and an operating agreement is really a roadmap of how things are going to be run in the company. They can include: what each partner is supposed to be doing, how you’re going to split up money that is brought into the business, how much money each person invests into the business. And then succession planning or exit agreement: what happens if a partner doesn’t want to do this anymore? Can they just walk away? Do they have to offer the right of first refusal to the existing partner? So all of these sort of what if, what if is provided for in these operating agreements that then partners can sign and go forward. It’s a little bit easier with single member LLCs, with individuals who are running their business and, and own it entirely outright. But when it comes to partnerships, and I hate to say this because I really, I am an optimistic person. sometimes it’s a matter of not if a partnership goes bad, but when, and that’s just how life is, right? Changing circumstances. But if we can provide at the outset some road, or exit strategy, that people agree on, then it’s not going to be a fight later on.

JAIME: One of the most consequential decisions we make early on in our businesses is where to work. So with that in mind, what terms should we try to negotiate to protect our own interests when we sign a lease knowing that the lease document itself is coming from the landlord? We’re not presenting them with the paperwork.

AMY: Yes. So for a commercial lease, I can not stress enough running this by an attorney. I really can’t because, once you sign that document and you haven’t had it reviewed by an attorney and you all of a sudden find yourself in a 10-year lease, or, you know, not even 10 years, maybe a five year lease, and haven’t really read the fine print, there are, unfortunately, endless pitfalls for tenants who signed these contracts. They’re bound by them. So I would probably say the highlights of the things that I see most with commercial contracts are: something’s broken. Who’s obligated to fix it? If this space needs to be built out, which very often is the case with salons and different spaces in the beauty industry, who pays for it? You know, who’s going to foot the bill for those build-outs? Who’s responsible for the electricity? Is there enough electricity, and if so, do we have to run more electricity into the space? What happens if there’s a flood? What happens if I shut down due to COVID, right? Or some pandemic. So all of these, again, what ifs are so prevalent in commercial leases that I would really, really highly recommend to have an attorney just lay an eye on it to make sure that tenants rights are protected, because most of the time, these commercial leases are certainly written with the tenant in mind.

JAIME: And I imagine we shouldn’t assume if we’re signing a commercial lease that we have the right to sublet that space.

AMY: Yeah, absolutely, and that’s another great point. You want to be able to sublet the space. A lot of times what you’ll see is provisions that call for landlord approval to sublet the space. We just want to make sure there’s language in there that says that it’s not going to be unreasonably withheld and that the landlord is pretty open about that but, I tell you, I have a client that called me last week and she has stuck in an expensive 10 year commercial lease agreement. She’s eight years into it, so there’s only two years left. But, she can’t use the space. She can’t enter the space. She’s waiting for her loan programs to come through with the federal government, but she still owes that rent with no customers. I feel most of the time landlords and tenants are working together pretty well given the circumstances, but that’s not always the case. So I always plan, unfortunately, for the worst case scenario with commercial leases before you sign.

ASHLEY: Well that’s very apropos, because our next question is right in that alley. What would be the optimal way to approach renegotiating a lease, if that’s even possible?

AMY: So hopefully, your landlord has a bit of goodwill and understands the circumstances especially what’s going on now, and that really just an email or a text or a phone call to say, what can you do to help me out? My space relies on people being together, coming on to the establishment. There is no possible way that I can do this working from home. So clearly, I can’t be there and can’t make money. What can you do in the meantime? So some of the examples that I’m seeing is generous landlords waive two months of rent. That’s been best-case scenario. Some landlords are taking those two months of rent and just tacking them on to the end of the contract so that you would owe that money at the end of your lease. Some landlords are saying, well, pay me what you can, and then whatever’s left over when we start business back up again can be paid in a lump sum in the third or fourth month after. There’s a number of different varieties, and landlords have to pay their bills too. They have financial obligations, so we don’t want to always make it about sort of the big bad landlord. It’s two parties that come into the contract. But hopefully a landlord will be reasonable enough to negotiate some kind of change. And then when you negotiate that change, please put it in writing. And this is just called an addendum or an amendment to the lease, and have both parties sign it just to make sure everyone again is on the same page with that agreement.

JAIME: And if you didn’t have an attorney look at the initial lease, you could certainly use their input for an addendum.

AMY: Yeah, absolutely. An addendum or an amendment because really that provides you an opportunity to also amend or change maybe some of the other provisions in the lease agreement that you didn’t the first time around. Now as sort of a tough time given the circumstances so I’m hoping that landlords and tenants are just doing their best to work together with it. But absolutely, an attorney can come in and write an amendment to the lease agreement and maybe cover some things that were problematic that you’d like to address now as well.

JAIME: One of the challenges of contracts and writing that’s meant to be understood by attorneys is that, most lay people don’t feel they’re qualified, even though they’re reading English words and can understand the English language, and yet they’ll sign, as we know. There’s a phrase that we’re hearing more frequently, which isn’t even something we commonly hear, called force majeure, and does that apply? Does that somehow excuse us from our obligations in a contract?

AMY: Yeah. So this is really an interesting area of law. Force majeure, or what they call act of God provisions in contracts, honestly are so very often almost boiler-plate language that is put in every contract that really doesn’t ever get called upon to interpret, unless maybe you, there’s an earthquake or a hurricane or something like that that impacts one particular small community. But now for the first time since I’ve been practicing, attorneys across the world and certainly here in the United States are taking a look at these act of God provisions and saying, well, does this language excuse me? So people are bulking up these force majeure provisions and, just to take a step back, what that means is I’ve got a provision in the contract that says, if something is so unforeseeable that it happens, that it shutters my business, I am not obligated to perform under the contract until the situation is lifted or changed. And a pandemic or epidemic or national quarantine, or worldwide health issue is to me something that’s very unforeseeable. Now, what as attorneys we do is we look at each of those individual provisions to see, well, is this something that was contemplated? And you know, unfortunately, that’s a question for a jury or a judge, and so you don’t really want to get to the litigation stage to try to interpret that and answer that question. But you’re seeing a lot more attention given to force majeure provisions that are better written, more well-written, more detailed, lengthy. So I think if someone has a force majeure provision in their existing contract, it’s a little bit of leverage for them. But I haven’t seen it being an absolute forgiveness but, it’s something to rely upon and certainly to have in.

ASHLEY: Speaking of contracts, would you recommend that salon owners with employees have employment contracts and handbooks?

AMY: Absolutely 100%. I would not call them employee contracts, and again, because most states are at will, which means that employers can fire an employee for any reason at any time, so long as it’s not discriminatory. I’ve tried to kind of steer people away from calling anything an employment contract, suggesting to the employee that they are going to be guaranteed a certain length of employment because now you’ve sort of taken it out of the at-will analysis and brought it into contract analysis and so now we have breach of contract, and so we want to avoid that. So we’ll call it offer letter, conditional letter of employment, and so I think that’s a safer way to do it. But absolutely, handbooks. It’s so important, again, because the handbook, if you get to litigation, or if you’re trying to defend some sort of claim, is really your first line of defense to say, no, she wasn’t terminated, for reasons of age or, no, she wasn’t terminated based on her disability. Here’s our handbook. In that handbook, we have obligations for employees to perform, to show up on time, to not cause disciplinary issues. We have an anti-harassment policy. We accommodate people with disabilities. So here are all of the rules in place, and that really is your shield to say, absolutely not. We terminated her based on performance, not based on some other just discriminatory reason. Again, it’s not something people want to spend a lot of time on, but I can’t stress the importance enough of just putting your employees on notice as to what the rules are.

JAIME: As quickly as the labor law changes, I imagine that an employee handbook, that you had developed or written for you, and approved by an attorney or an HR firm, would be obsolete because we’ve had changes in paid family leave, paid sick leave. These things evolve and you would need, I would think, to have your staff sign something else to acknowledge that they understand that you as the owner are meeting these new obligations as well.

AMY: I really recommend having your employee handbook reviewed once a year, because, you know, even outside of what’s going on right now, there’s going to be changes in your individual state as to employment laws. So I would say at a minimum once a year would be great to make sure you’re up to date with all of those changes, cause especially now because there’s so much happening.

ASHLEY: Looking at the salon owner booth renter relationship, I know we kind of wanted to come back at this a little later but, since we’re talking about contracts, if you could give us a little bit of info about what the ideal booth rental contract would include and, if you would recommend that some of those contracts be either renegotiated, upon reopening or, just revisited.

AMY: To the extent that both parties are open to renegotiate, by all means if there’s more favorable terms that work out for both parties, absolutely. And again, you know, just kind of taking a step back and not looking at it from the circumstances we’re going on now, again, having a document in place that’s an understanding between the renter and the person who’s renting it, you really almost have to approach it as if it’s a mini commercial lease, and make clear what each of the party’s obligations are so that, quite frankly, both sides aren’t getting into any trouble with renting out that booth. So, look at it as if you were renting a mini space of your own and what would you want. What questions would you want answered? How do you access the place? Who’s responsible for what? Is it my responsibility to clean? If I can, if I have to paint something, can I paint it? Do I have to get a landlord’s approval if I want to sublet or share? What’s the provisions, or what’s the process in place, in that agreement? So again, try to get people to take a step back from what’s legal, what’s not legal, and just sort of think about common sense. What are my obligations and what are my landlord’s obligations or my renter’s obligations, so that if an issue comes up, we have something provided for in the contract.

JAIME: Amy, under normal circumstances, that booth, renter salon owner relationship would establish that both are separate businesses. So with that in mind, can a salon owner require booth renters to wear PPE, for example?

AMY: That’s a good question. This is how I’m recommending to people who are reopening. So if you have a salon, for example, and there’s a number of chairs, and let’s say people are employees there, you’re going to want to think in terms of, as a business owner, what is my duty to keep people safe on the premises? And this falls under just general negligence, legal terms. If I’ve got ice on the stairs, I need to make sure the ice is gone. If I spill shampoo on the floor, I need to make sure I put something on the floor so nobody slips on it. Like COVID and health issues now, I try to recommend to people to think in terms of what’s my duty to avoid negligence. So, based on the governor’s provision in your individual state, am I trying to keep people six feet apart? Am I encouraging people to wear masks or PPE? And right now you can absolutely require both the people on your premises, and people coming into your premises as visitors, to wear PPE, and refuse service if you don’t. So that’s entirely legal right now, and I would highly recommend that. If you’re talking about someone who’s renting the space and they’re really two separate entities, I’m going to say from a legal perspective, that person is really almost operating as their own company, and so they would be the person liable and responsible for anything that happens within that space or within their chair. This is, for example, someone who’s got a chair that has maybe a separate entrance, and so they’re, they’re really truly, completely alone. Then that individual carries the responsibility of being the owner and making sure that he or she is not being negligent. So, what does that mean? Wiping down all of the chairs, disinfecting the space, putting 30 minutes in between appointments so that you have the time to disinfect the space and wipe down the chairs and sterilize the instruments and everything like that. So, here I’m, you know, because this is new territory, I’m really encouraging people, what would you do in any other circumstance to keep your customers safe? And let’s, let’s work on doing the same thing here.

ASHLEY: Thinking ahead and trying to be proactive, I know we talked about, and you gave such a great answer about, looking at if it’s needed to renegotiate some of these leases and contracts and agreements. I’m a bit of a pessimist. I’m a staunch realist, let’s put it that way. I fully expect there to be a second wave, and possibly more, of COVID, coming through especially as some states are opening up possibly a little too early, and, would you advise your clients or have you been, looking towards the proactivity of working in some clauses about a second wave and potentially a second shutdown and what that could look like for some of our lease agreements and just our general business agreements within our own entities?

AMY: I’ll say this, you know, to the extent that your landlord is open to that, by all means. That would be great, right? Examples of this would be if we are shut down again or quarantined again, both parties agree that rent will be waived, or both parties agree that rent will be tacked on to the end of my lease, or that the tenant agrees to pay what they can. The tough thing about it is is that it really is based on the leverage of each individual party. And so while the landlords, I’m sure in some cases want to be as benevolent as they possibly can be, they likewise have a mortgage to pay and bills to pay themselves. So by all means try. At the end of the day though, unfortunately, sometimes it’s the tenant holding the bag because they signed the initial contract. They had the opportunity to have that initial contract reviewed. And whatever the terms are exists, those are binding and so, I say this all the time, you know, diplomacy before war.  Hopefully, there are two reasonable people coming into this. Hopefully, your landlord is reasonable and understands the situation because litigation is really no answer for the small business owner. It’s, it’s just extremely cost prohibitive and draining both emotionally and financially. So, to the extent that you can provide some provisions and your landlord is being understanding and flexible, absolutely. Absolutely, and again, get it in writing though. 

ASHLEY: Yeah, definitely. 

JAIME: As we welcome our clients back into our businesses, hopefully sooner rather than later, as long as it’s safe, what’s the role, if any, of consent forms or waivers in our beauty businesses, with regard to our clients?

AMY: This is interesting. Again, this is kind of a whole new area of legal issues that we’re seeing popping up. What’s the exposure? What’s the liability? Can you be sued for someone who comes on to your property and claims that they contracted COVID while there? I think, number one, that’ll be very hard to prove. But, that being said, I don’t think there’s anything wrong with having a written waiver in place, that, just like anyone else coming onto your property, there is going to be an assumption of risk, right? So if I come on your property, and you’ve decided to change your hair coloring products, and for some reason the new product causes a reaction for me, under this legal theory of negligence, as a person coming into a beauty salon, who’s going to have chemicals in their hair of some sort because you’re getting it dyed, you’re assuming the risk that you might have a reaction, and so I can’t, in turn, sue the individual business owner for changing their product just because I had a reaction, unless they were using a product that was just wildly inappropriate or not standard in the industry. So the same thing is really, I think, going to apply to people that come in with the current pandemic situation. There’s going to be an assumption of risk, that there is only so much an individual store or beauty salon can do to protect you. That being said, I think sometimes having it in writing, based on your individual circumstance, if you think it’s appropriate to say, hey, you’re telling me you understand what’s going on here and you waive your right to sue me if you get sick, and we put one of those up in our library. I don’t think it’s a bad idea. Is it going to be your slam dunk insulation? Not necessarily. I mean, if you have a waiver that’s signed by someone coming on to your property, but then you line up your stylists on top of each other, not putting six feet apart and not wearing masks and they’re all coughing and someone says, I’ve got to go home. I have a fever. Well, that waiver is not going to protect these other elements of negligence. It’s just kind of one tool in the toolbox that I think at least puts people on notice that, listen, you can’t sue me. And even if you did, you assume the risk coming on to any property going to a Costco, go into a grocery store, going into any big box store. I mean, you’re assuming a certain level of risk there.

JAIME: And the burden is on us as professionals to use our best judgment, based on our training and our licensure, and to make sure that we’re using products as they’re intended and how manufacturers describe they should be used.

AMY: Exactly. And so under this legal theory of negligence, there is what they call a standard of care, and this applies for, even for medical malpractice. In your geographic community, in the industry that you’re working in, in salons like yours, what are people doing? They’re using these products, as provided for, within the context of what the manufacturers said that they can do. If you’re doing things within a standard of care, and operating in such a way that is safe and reasonable and commercially appropriate and common in your area, then that’s really what insulates you from a negligence claim. Doing things the way you’re supposed to do based on your individual industry.

ASHLEY: Amy, what role would you say non-compete and non-solicitation agreements, how do those function, or what role do they play, in a beauty business sphere?

AMY: Yeah. So this is interesting. I’ve kind of dealt with a case like this not too long ago. Generally speaking, what non-competes provide for is a, it’s a contractual obligation between the employer and the employee, where the employer says, hey, you know what? You’re going to have access to confidential, proprietary personal or other business secrets during your employment here. And if you take those secrets and go across the street and use them, that’s going to be detrimental to my business. That’s going to cause me irreparable harm. And so, what you agree to, employee, is that if you decide to leave my business for any reason, you are not going to work in this industry for X amount of time, and you’re not going to work in this industry, in this geographical region, within two miles, five miles, 10 miles. The problem with these non-competes is that courts do not look at these favorably, because no judge wants to restrict an individual’s right to work. So if you’re going to have a non-compete in an agreement, and you wanted to have to be enforceable, you have to make them extremely narrow and tailored to your individual circumstance and you really have to define, what is it that is so confidential or proprietary that I would really be at risk if somebody told another competing business about it and then went to go work for them. In the beauty industry, I don’t think that there is a lot that we can point to. I mean, if you’re talking about, maybe someone who works in IT, well, I’m not going to go work for a competitor knowing what I created with these coding or algorithm, or the secret sauce to a recipe, or Coke’s formula for making Coke, or a salesman’s, territory and their individual customer list or price contact. Here, I think it’s tougher for a beauty salon to identify something that’s really a protectable interest, given the fact that most people know what products are available and pricing is widely publicly available. You certainly can’t steal someone’s email list and take it as your own. With anyone working in the beauty industry, I would want to take a look at that to make sure that it was really narrowly tailored to try to protect what it is you’re trying to protect, as opposed to just a blanket non-compete, because those are typically not enforceable, or at a minimum, not looked favorably upon.

JAIME: As the owner of an employee-based salon myself, I know the thing that I would most want to protect would be my client list and that information that my clients provided to me as a salon owner, not just so that if someone were to leave, they wouldn’t solicit my clients, but that in terms of privacy, my clients entrusted me as the owner with that information, expecting that it would not be shared.

AMY: Absolutely, and so what I say there is don’t give everyone access to your lists. A surefire way of making sure someone doesn’t steal it is to not have everyone have access to it. And so regardless of what your non-compete says or any other agreement, the more that we can put in place common sense protective provisions to make sure that not everyone can access everything, then you reduce your risk.

ASHLEY: In your opinion, Amy, what aspects of our businesses, as beauty business owners or independent contractors, et cetera, do we generally neglect that could really benefit from some sound legal advice?

AMY: I would say for sure getting your entity set up right, and making sure that you’re complying with that. And so, you know, when I tell people, if you’re going to talk the talk, walk the walk. So if you’re going to say that you are a business, separate and apart from your individual person, then make sure we keep bank accounts separately. Make sure we keep checking accounts separate. Make sure we’re not comingling funds in any way, that you’re not taking your business money and using it for groceries. Because you can have LLC after your name, but unless you’re really acting like an LLC, you’re going to run into problems. So I would probably say, that’s my number one piece of advice, and the number two piece of advice is think about the classification of the people on your property. If you’re telling them to come to work 40 hours a week, and work with your equipment in your space and follow your rules. We’ve got to really, I think, probably do an analysis of who really is an independent contractor and who should be an employee. And that’s a, unfortunately, see that I think crop up quite a bit here.

JAIME: You mentioned the LLC again, and it made me smile because, I happen to be a sole proprietor, but when I advertise the name of my business, I don’t say Precision Nails, sole proprietor. Those businesses that are set up as an LLC, is there any obligation for them to list LLC after their names in their advertising?

AMY: Uh, no, no legal obligation. I think some people like to do it because it sort of suggests a level of sophistication that I’ve taken a step away from being an individual person and have grown this into something larger. But no, there’s no, no legal obligation to put that after your name. What it does is just, it sets you up so that if something does happen, you can demonstrate and show, no, you can’t come after my house because this is my business and it’s separate. And that’ll show with the individual registration in each person’s state.

JAIME: What situation, what legal circumstances does your service have to undo, for the lack of a better term, most often on behalf of your clients?

AMY: I probably would say as far as cleanup goes it would be LLC or corporate cleanup. So I’ve forgotten to file an annual report and now I’m no longer in good standing with my individual state secretary of state. Oh, I didn’t get the notice, and so I didn’t file, and now I have penalties. I never created an operating agreement, or I went into this with a partner, the partners on all of the documents, that partner’s left and I haven’t changed anything. So, you know, we kind of call it corporate cleanup. We want to make sure that all of your documents are really reflective of your business. I would say that’s probably a big one, and then another big one would be flipping independent contractors to employees and making sure that that’s done appropriately.

ASHLEY: Oh, you just hit the button. In that last just like two sentences, I think you just opened up the powder keg because, I fully expect, again, with my realism face on, that so many misclassified employees, and I’m using air quotes around employees, are going to find that they’ve been misclassified by filing for their state’s unemployment insurance or the PUA in their state. And I believe there’s going to be just an absolute deluge of new cases of reporting it to the department of labor and dealing with back employment tax and things like that. How easy is that to kind of backtrack and undo as a business owner who may be got bad advice at the outset and now has to really like extricate themselves from that situation?

AMY: This is so common in this industry and such a big problem and really has really pretty big legal exposure. And for the people that don’t get caught, so to speak, or who kind of go along doing things in a way that’s not right, but nothing ever pops up, that’s all well and good. But just because you call someone an independent contractor does not make them an independent contractor. And I know having employees is more expensive, and I know it’s a pain to set up and do payroll, and I know margins are slim, but I’ll tell you, there is nothing that will sink a business faster then getting an audit from your state or federal department of labor saying you’ve had people misclassified for the past five years or three years, you know. If any of those people have worked overtime, not only do you owe them that over time, going back three years, but there’s penalties involved and attorney’s fees involved. And so I cannot stress this enough, if you want to call them independent contractors, we really have to make them independent contractors, someone that you don’t have control over that you give an assignment to and that person can complete the assignment on their own equipment in their own space without any direction by you. But what I’m finding is is that a lot of employers call people independent contractors when they really should be employees. And I cannot tell you the risk that comes with that. It really is quite, quite a big level of exposure, and you’re absolutely right, we are going to see this now. In other cases, you know, prior to the pandemic, I would probably say it would be like a disgruntled employee then who filed for unemployment and was denied because they were never an employee. And that would sort of be this one-off, oh my goodness, we’ve got to fix this. But now you’re going to see this across the board where people have been maybe misclassified this entire time across the country., and beauty salon owners or anyone working in the beauty industry really has to be crystal clear about who is an independent contractor, within the framework of the law, versus an employee. And we’re certainly happy to walk through that analysis but, I can’t stress that enough.

JAIME: Anyone working in the beauty business who hasn’t been paying attention to what’s happened in California recently, particularly with AB 5, I worry for them because, if they think that that kind of law isn’t coming to their states soon, I think they’re misleading themselves and it’s not that that law changes what should have been happening all along, it’s just more about, in my mind, clarifying exactly what it is that we have to do as salon owners to make sure that those people that we have in our salon, should we have booth renters, are truly independent. And with that in mind, if you are listening now and you’re someone who’s worried that you’re misclassifying workers in your space. Amy, is there some sort of amnesty available if you come forward and change your situation and rectify it before you get caught?

AMY: I think that’s a great idea because what it does is that, at least with the federal law, it lowers your exposure. If you kind of know that these people should be classified differently and you just go along what you’re doing is setting yourself up for sort of willful violation. And that just adds more time to your penalties, so instead of having to go back two years, you have to go back to three years and take a look at all your books. If you move forward to it proactively, and even work with your individual either state or federal, local office of the department of labor to do it the right way, those agencies are going to work with you much easier as opposed to if they find out about you as a result of a complaint. So I think that’s a fantastic idea, and one that I would highly recommend. California is always ahead of the curve with this sort of thing.

JAIME: And just to extend that, violations of labor laws also imply there are going to be violations in tax laws.

AMY: Absolutely. Yeah. I mean, what you’re talking about is that you’re, you are not paying people the way that you’re supposed to paying people. There’s huge issues there. And when I say huge issues, I mean money, penalties.

ASHLEY: Amy, I’d love for you to share some of the benefits of your Legal In A Box service for both salon owners or just individual licensees who are working in our industry, and how they can utilize your services.

AMY: Absolutely. So, I am a practicing attorney, as we said, and when I went out on my own, probably about five years ago, I realized that so many small business owners didn’t have anyone to turn to for legal advice and they were really priced out of the legal market. And so what I was seeing was people weren’t calling and asking the legal questions at the outset. And later trying to dig out when these legal issues became much bigger legal problems, and it was always more expensive. So I thought, every business, regardless of its size, should really be able to say, let me speak to my attorney. And so I tried to do that with Legal In A Box, and that’s where the concept came from. So at legalinabox.com, we have a subscription service for business forms and legal forms. We have flat-fee pricing for LLC setups in all 50 states. And then if somebody is up and running has a bigger business, has a bigger staff or amount of employees, then we also offer reduced rate legal services through my law firm, so that if you want to sign up for $49 a month, you’ll get a reduced hourly rate and the ability to call and ask my attorneys or me questions before their problems There’s no incentive in the current structure that encouraged small businesses to reach out to their attorneys because nobody wanted a $75 bill for a phone call, so some of that is built into these subscription models. So I really try to do it so that it fits a lot of any size business from the startup solo entrepreneur to someone who’s got a team of employees.

JAIME: Well at a minimum, Amy, you can expect to hear from me because one of the first things I’ll want to do is to revise my employee handbook. So that $49 a month that you mentioned, is that something that’s month to month, or am I in a contract if I were to sign up?

AMY: It’s month to month. And so, I tell people, if you just think you need one month of legal services, sign up, you can cancel the next month. No obligations, no contracts, but just so you have some level of legal protection.

ASHLEY: So then how do people sign up for your services?

AMY: Right there on the website at Legal In A Box, you can sign up for the library of documents or LLC formation. And then if you want to sign up for the subscriptions, there’s also a link there as well. 

ASHLEY: Great info. Thank you so much, Amy, for being so generous with your time and for answering all of our millions of questions. To find out more information and to take advantage of the special offer from Legal In A Box, check the link in the show notes. To access the show notes, just swipe up or hit the little info button in the podcast app where you’re listening now

JAIME: We’d love your help reaching more listeners like you. Please subscribe, rate, and review Outgrowth on your favorite podcast platform. Leave us a review and we might read your review on the podcast, like this one: “Thank you. Listening currently to insurance podcast, meaty and so relevant. Thank you both again.” Ashley, I don’t know about you, but being called meaty is a compliment.

ASHLEY: I’m taking it that way, for sure. Love to be meaty. As always, you can follow us and comment on recent episodes on Instagram at @outgrowthpodcast. Until next week.

JAIME: Be smart.

ASHLEY: Stay safe. Bye.