Case Study

EMPLOYEE OR INDEPENDENT CONTRACTOR

John Amos is licensed by the state as a hair stylist and has done a market survey which concluded that there is a tremendous need for a barber and beauty shop in an area adjacent to the local university. John is a retired hair stylist and would like to act on the results of the market survey by opening a barber and beauty shop, The House of Beauty, which will be located close to City University. Although John will not personally provide services in the new shop, he would like to proceed with the following plan.

John will purchase a building that has sufficient space for eight hair stylists. He will hire and charge these individuals $225 per week for their workstation. This fee is payable each week without regard to the number of days worked or the amount of services performed during the week. Hair stylists may determine what days and hours they will work. However, they may not lease or let someone else use their assigned workstation. John will also hire a receptionist whose primary responsibilities will be to answer the phone, maintain an appointment book for the shop, and assign customers who have no hair stylist preference.

Although hair stylists must provide their own equipment, John will provide towels and smocks for all workstations and will maintain an adequate supply of specified hair products at each workstation. John will be reimbursed for these products as they are used by the hair stylist. A selection of hair products will also be on hand for sale to customers. Customers will pay the receptionist for the services provided, and all checks will be made payable to The House of Beauty. At the end of each week, John will write out a check to each hair stylist for services performed during the week as indicated by the master appointment book and the daily cash reconciliations. (The $225 workstation fee will be deducted.) John will not withhold federal and/or provincial income taxes, canada pension or employment insurance from the payments to the hair stylists. However, each hair stylist will be provided with information on estimated tax payments and will be required to furnish John with a copy of their estimated tax payments to Revenue Canada.

Each hair stylist will be required to sign a contract agreeing to the $225 per week workstation charge and agreeing to abide by the provincial professional code of conduct for hair stylists. John has the authority to void any contract for individuals who are late with their workstation fee or who violate the professional code of conduct. Hair stylists may also terminate the contract as long as they provide John with one month's notice. If they do not provide this notice, they will be required to pay one month's workstation charge.

Instructions:

1. What factors do you think John Amos should consider in deciding whether the hair stylists are employees or independent contractors of The House of Beauty? Evaluate the presence or absence of these factors in this case.
2. What cost savings will John realize by treating these individuals as independent contractors instead of as employees?
3. Do you think the hair stylists are employees or independent contractors? Why?