As a real estate broker, knowing the difference between an employee and an independent contractor (and more importantly, communicating this to others) is crucial. Real estate agents are generally accepted as independent contractors in the United States. But a rise in litigation is challenging that status, and the need to define your relationships with your agents has never been as important as it is today.
The fact that real estate agents are accountable to brokers can muddy the waters in comparison to other industries, where the independent contractor relationship is more clear-cut. Real estate agents have more autonomy than an employee, but the necessary supervision of a broker is a unique factor.
Failure to define clear independent contractor relationships can result in you facing a lawsuit from an agent who misunderstands their role within your company. This kind of confusion can be detrimental to your real estate business, so let’s look at what constitutes an employee vs an independent contractor relationship.
Legally, the main distinction between employees and independent contractors is the level of control the business has over the individual worker. If the business has significant control, that person is likely to be deemed an employee. But, if the business has very little control, and individuals have the freedom within their role to do their work as they please, they are more likely to be classified as independent contractors.
Employers have certain obligations to their employees under United States Labor Laws. Employers must comply with minimum wage, overtime, working hours and recordkeeping standards. In many states, workers’ compensation insurance may also be required — depending on the nature of the occupation and the health condition being claimed (as there are many exclusions).
- Both the states of Oklahoma and Texas, for example, allow any employer to opt out of having workers’ compensation altogether.
- In California, a real estate brokerage must provide workers’ compensation insurance for all real estate agents (whether employees, independent contractors, or 1099 employees).
In the real estate industry in the United States, real estate agents, while under the supervision of real estate brokers, are not generally considered employees unless this employer/employee has been expressly stated. Instead, in most cases, real estate agents are considered independent contractors.
Independent Contractor Relationship
Being in charge of one’s own work schedules, business functions, accounting systems and other activities in the course of business are all hallmarks of an independent contractor. In this case, there should be a contract or written agreement between the contractor and the business.
In your real estate business, your obligations to independent contractors are far less than to your employees. Even though your real estate agents will work under your supervision, they maintain some independence and control over their work and you are not required to comply with U.S. Labor Laws in regards to the independent contractor relationship.
However, in many cases, a real estate broker can be held liable for the actions of their real estate agents, even though they are classified as independent contractors. In contrast, this is not generally the case in other independent contractor relationships existing in other industries. It is for this reason the IRS treats real estate agents as “statutory non-employees” for tax purposes.
A NAR White Paper covers the topic of Independent Contractors. According to the paper, there are approximately 22 state real estate statutes that include language “expressly permitting” real estate brokers to treat their real estate agents as independent contractors, while also undertaking their mandated responsibilities to supervise them.
In California, the situation is complex, due to the Dynamex case. In this case, the Supreme Court adopted a new three-factor “ABC Test”, to decide whether a person is an independent contractor. The test puts the responsibility on the employer to prove all of the following:
- The worker is free from the control and direction of the hirer/business “in connection with the performance of the work”
- The worker performs work that is outside of the usual course of the hiring company’s business
- The worker is “customarily engaged in an independently established trade, occupation, or business of the same nature” as the work performed by the “hirer”
This landmark case could have significant impacts on the real estate industry in California due to the unique nature of real estate agents and brokers. However, the California Business and Professions Code does state that the relationship between a real estate broker and agent can be either an employee/employer or independent contractor relationship.
Common Pitfalls When The Relationship is Not Clear
Ultimately, it is your choice as a real estate broker, to either employ real estate agents or engage them as independent contractors. It is imperative that this relationship is clear between both parties to avoid litigation in the future.
When the relationship is not clear, brokers open themselves up to risk and potential lawsuits about:
- Unpaid wages or overtime
- Non-compliance in relation to US labor laws
- Taxes not being withheld
- Claims for “work-related” injuries
In the Bararsani v. Coldwell Banker case, there was a class action lawsuit accusing Coldwell Banker of classifying their real estate agents as independent contractors, while treating them as employees. The company was proven to have significant control over the work of their real estate agents, including designating where and when agents would work. The settlement for the case was some $4.5 million, though much of the settlement funds went towards legal costs. The amount received by each real estate agent party to the class action was minimal.
Protecting Your Real Estate Business
To protect yourself and your business against unnecessary risks relating to your real estate agents, ensure you have adequate insurance coverage, both for yourself and your team. CRES Real Estate E&O + ClaimPrevent®, is fully customizable, so we can tailor a solution specifically to suit your business needs. A free Legal Services Hotline is also available 7 days a week with your E&O + ClaimPrevent® policy, so you can obtain assistance before you find yourself facing a lawsuit.
We can also provide a quote for a Business Owner’s policy to include liability and property coverage, as well as cyber liability and workers’ compensation insurance. To find out more about CRES Real Estate Insurance options for your real estate office, contact us at 800.880.2747.
This is a general overview of employer-employee law and is not intended as legal advice for any particular situation. Consult an attorney to discuss any specific questions you have.