In Los Angeles County Superior Court there is a case pending (Bararsani v. Coldwell Banker Real Estate Brokerage Company) that, depending on its outcome, could have wide-spread consequences for the conduct of real estate brokerage business in California and, possibly, the rest of the country. It has to do with the classification of real estate agents as independent contractors rather than as employees.
In California it is possible for real estate agents to work in employee status, but the overwhelming majority of brokers and agents choose to use the independent contractor model. This is appealing to brokerage firms in a variety of ways. Not only does it save them a great deal of paperwork, but also it relieves them of responsibility for the payment of such things as payroll withholding and unemployment insurance. Moreover, in many cases brokerages that may have hundreds of agents (as independent contractors) might still not have enough employees (secretarial staff, etc.) to meet threshold requirements for such things as mandatory provision of health insurance.
Many agents tend to favor independent contractor status as well. Although most of them might wish that the firm would pay more of their business expenses, they like not having payroll withholding and they enjoy some of the perceived benefits of schedule C deductions. Many just like the idea of being their own boss, not having to be at the office at a certain time, etc.
According to federal law (26 U.S.C. §3508 (b) ), for federal tax purposes, real estate agents will not be treated as employees if a 3-part test is met: (1) The agent must be licensed, (2) Substantially all payment is made on the basis of sales or output, but not on hours worked, and (3) There must be a written contract between agent and company providing that, for federal tax purposes, the agent will not be treated as an employee.
California law contains similar statutes (Business and Professions Code §10032 (b) and Employment Insurance Code §650). However, California does not provide that agents can be treated as independent contractors for all purposes, even if the 3-part test is met. Thus, California firms must carry workers' compensation insurance for their agents, even if they have an independent contractor agreement. Also, California brokers cannot limit their liability to third parties for the agent's actions by attempting to claim that the agents are independent contractors.
According to an SEC filing by Realogy (corporate parent of Coldwell Banker), the Bararsani suit alleges that Coldwell Banker Real Estate Brokerage Company (CBRBC) "…had misclassified current and former affiliated sales associates as independent contractors when they were actually employees," and, because of that, "....CBRBC has violated several sections of the California Labor Code including section 2802 for failing to reimburse plaintiff and the purported class for business related expenses…" [my emphasis] Among other things, it appears that the suit will ask that the class be reimbursed for dues paid to multiple listing systems and to associations of Realtors®. This is not small potatoes.
The Bararsani suit was filed November 15, 2012. In July of 2013, CBRBC filed a Demurrer (essentially, a motion to dismiss) asserting that, under California law, the claims were without basis, because all elements of California's 3-part test had been satisfied by the company and its agents. The court denied the Demurrer, thus allowing the trial court to look at a more complex multi-factor common law test to determine whether there had been a misclassification.
There is a 20-factor test that is used in cases where an employee/independent contractor classification is challenged. It is used by the IRS, among others. It includes questions such as, "May the person receive training from or at the direction of the employer?"; "May the person quit work at any time without incurring liability?" Yes answers to these questions indicate an employee relationship.
CBRBC appealed, but the appellate court has sent the matter back to the trial court.
The suit has been filed as a class-action, which makes it even more complex than it might have been. Currently, the plaintiff's side is seeking to have a class certified. This means finding a sufficient number of people who fit the plaintiff's situation. Many Coldwell Banker agents who had been affiliated at the relevant times have been contacted with respect to joining the class.
It's not going to be over soon. No matter what happens at the trial level, you can count on appeals. The ultimate result could have a significant effect on the real estate industry.