Congratulations—you're ready to hire your first employee! Whether you're bringing on a receptionist to handle bookings or another stylist to keep up with demand, this is a huge milestone for your salon or spa. But here's what catches most new employers off guard: the moment you hire that first person, your insurance needs change completely. Suddenly you're not just protecting your business from property damage or liability claims—you're also responsible for protecting your employees.
The good news? The insurance you need isn't as complicated or expensive as you might think. The key is understanding exactly what's required in your state, how to classify your employees correctly, and which additional coverages make sense for your specific situation. Let's break down everything you need to know about salon and spa insurance when you hire your first employee.
Workers' Compensation: The Non-Negotiable Requirement
Here's the thing most salon owners don't realize: in 48 out of 50 states, workers' compensation insurance becomes mandatory the second you hire your first employee. Only Texas and South Dakota give beauty businesses a pass on this requirement. Everywhere else—California, New York, Florida, Georgia—you need coverage immediately.
Workers' comp exists to cover medical expenses and lost wages if an employee gets hurt on the job. In a salon or spa, that might mean a stylist burning their hand with a flat iron, a nail technician developing carpal tunnel syndrome, or a massage therapist straining their back. Even though these aren't construction-level risks, the law treats employee injuries seriously regardless of industry.
The cost is surprisingly reasonable. For salon businesses in 2025, workers' compensation averages about $0.52 per $100 of payroll. That translates to roughly $19 per employee per month, plus taxes and fees. If you're paying a stylist $3,000 monthly, you're looking at about $15.60 in workers' comp premiums for that employee. It's not a budget-breaker, but skipping it can be catastrophic—states impose steep fines for operating without required coverage, and you could be personally liable for any workplace injuries.
Important distinction: if you're a solo owner with no employees, you don't need workers' comp. The requirement only kicks in when you bring someone else onto the payroll. And if you rent booth space to independent contractors? Those contractors aren't covered under your policy—they need their own coverage because they're running their own businesses within your location.
Getting Employee Classification Right
This is where things get a bit technical, but it's absolutely critical to understand. Workers' compensation insurance uses classification codes to determine your premium rates. Different types of work carry different risk levels, so they're rated differently.
For salons and spas, the primary classification code is 9586. This covers stylists, colorists, nail technicians, estheticians—anyone performing hands-on beauty services. The rate of $0.49 to $0.52 per $100 of payroll reflects the relatively moderate injury risk in these roles. You're working with scissors, chemicals, and heat tools, but you're not operating heavy machinery or working at dangerous heights.
Your receptionist or bookkeeper falls under a completely different code: 8810 for office and clerical work. This carries a much lower rate because office work is lower risk. If you offer medical-grade treatments like Botox or cosmetic injectables, those employees might fall under Class Code 8832, which has higher premiums due to the elevated risk. And if you operate a full spa with massage, hydrotherapy, or sauna facilities, you might need Code 9054 for spa and personal appearance services.
Why does this matter? Because if you misclassify employees, you could underpay your premiums and get hit with a massive bill during your annual audit. Or you might overpay by incorrectly classifying your receptionist under the stylist code. When you set up your policy, be specific about what each employee actually does. Your insurance agent needs accurate information to classify everyone correctly.
Employment Practices Liability Insurance: Your Safety Net for Employee Disputes
Workers' comp covers physical injuries, but what about everything else that can go wrong when you become an employer? That's where Employment Practices Liability Insurance—EPLI for short—comes in. This coverage protects you against claims of wrongful termination, discrimination, harassment, and retaliation.
Think it won't happen to you? Here's a reality check: the average cost to defend an employment claim—even if you win—runs between $75,000 and $125,000. For a small salon operating on tight margins, that kind of legal expense could be financially devastating. And employment lawsuits are more common than you'd think. An esthetician feels she was passed over for a promotion due to her age. A stylist alleges a supervisor made inappropriate comments. An employee claims you fired them for requesting medical leave.
The good news is EPLI is surprisingly affordable. Small businesses typically pay around $222 per month, or about $2,665 annually. Some insurers offer add-on EPLI coverage for as little as $18 per employee per year. Many policies designed for salons with under 10 employees offer flat-rate premiums with scaled coverage limits that match your revenue and risk level.
While EPLI isn't legally required like workers' comp, it's becoming essential for any business with employees. California, in particular, has strict employment regulations, making EPLI especially important for salons in that state. Even if you have excellent relationships with your staff and clear policies in place, EPLI provides critical protection against claims that can arise from misunderstandings, personality conflicts, or simply the realities of running a business.
Payroll Reporting and the Annual Audit
Here's something that surprises new employers: your workers' comp premium isn't a fixed annual cost. It's based on your actual payroll, and at the end of each policy year, you'll go through an audit to reconcile what you paid versus what you should have paid based on actual wages.
When you first get your policy, the insurer estimates your annual payroll. You pay premiums based on that estimate. But if you hire more people than expected, give raises, or your business grows faster than anticipated, your actual payroll will be higher than the estimate. The audit catches that difference, and you'll owe additional premium. On the flip side, if your payroll comes in lower than estimated, you'll get money back.
The key is keeping accurate payroll records. Your auditor will want to see W-2s, payroll registers, and documentation of employee classifications. If you've been sloppy about separating employee types—mixing stylist wages with receptionist wages, for example—you'll have trouble proving correct classification during the audit. And remember: independent contractors don't count toward your payroll for workers' comp purposes, but you'll need to prove they're truly independent and not misclassified employees.
The Independent Contractor Question
Many salon owners try to avoid the complexity and cost of having employees by classifying everyone as independent contractors or booth renters. This can work, but only if the arrangement genuinely meets the legal definition of independent contractor status. The consequences of misclassification are severe: back taxes, penalties, fines, and potential lawsuits.
True independent contractors set their own schedules, provide their own supplies, determine their own prices, and operate as separate businesses. If you're dictating when someone works, what products they use, and how much they charge clients, that person is legally an employee—regardless of what your agreement says. States are cracking down hard on misclassification, especially in the beauty industry where it's common.
For insurance purposes, independent contractors maintain their own coverage. They're not covered under your workers' comp policy, and they need their own liability insurance. Make sure any contractors working in your space carry certificates of insurance—if they get hurt and aren't properly insured, you could end up facing liability despite the independent contractor agreement.
Getting Started: Your Action Plan
Before you officially hire your first employee, take these steps to ensure you're properly covered. First, verify your state's specific workers' compensation requirements. While most states require it immediately with your first hire, some have different thresholds. Contact your state's labor department or talk to a local insurance agent who specializes in business coverage.
Next, gather accurate information about your expected payroll and employee roles. Your insurance agent will need to know how many employees you're hiring, what they'll be doing, and approximately how much you'll pay them. Be prepared to provide details about whether you're hiring stylists, technicians, receptionists, or a mix of roles.
Shop around for insurance quotes. Workers' comp rates are regulated by state, but insurers can still vary in their offerings, service quality, and additional coverage options. Ask about bundling EPLI with your workers' comp policy—you'll often get a better rate buying them together. Many insurers offer business owner's policies (BOPs) that bundle property, liability, and other coverages into one package designed for small businesses like salons.
Finally, set up proper payroll systems from day one. Whether you use a payroll service or handle it yourself, keep meticulous records that clearly separate employee types and track all wages accurately. This will make your annual workers' comp audit painless and ensure you're paying the right premiums throughout the year.
Hiring your first employee is an exciting step that signals real growth for your salon or spa. By understanding your insurance obligations and setting up the right coverage from the start, you're protecting not just your business, but also the people who help you build it. The investment in proper insurance is minimal compared to the risks of operating without it—and it's simply part of being a responsible employer. Get your coverage in place before your new hire's first day, and you can focus on what you do best: creating an amazing experience for your clients.
