It has become commonplace for high-producing real estate agents or teams to have one or more assistants. Sometimes these assistants are licensed real estate agents themselves, sometimes not. In either case, what has unfortunately also become commonplace is for these persons to be misclassified as independent contractors.
The motivations for such misclassification are fairly obvious. No withholding is paid on behalf of independent contractors. Nor, generally, is worker's compensation. There are also other payments an employer is required to make for employees but not for independent contractors. Perhaps even more important to many is that there is simply a whole lot less paperwork involved if a provider of service is treated as an independent contractor rather than as an employee.
There are a number of both state and federal tests to determine whether or not a relationship is one of principal/independent contractor rather than employer/employee. Most of these have to do with control. In general, if the individual is subject to the principal's instructions about when, where, and how to work, the person is probably an employee. Are the worker's expenses reimbursed? If so, he or she is probably an employee. Can the worker make a profit or sustain a loss? If so, he or she is probably an independent contractor. The lists of questions go on and on.
In California, real estate agents often seek to hire real-estate licensed assistants, thinking that this will bring them under the general rule that makes real estate agents independent contractors for I.R.S. purposes. But this rule requires a three-element test:
- The individual must be licensed.
- There must be a contract between broker and agent.
- Payment to the agent must be based on the results they produce (i.e. commissions), not on a fixed wage or time-based scale.
Usually, the relation between the assistant and the associate licensee who hires the assistant will lack this third element. Assistants are generally paid on an hourly basis or at a fixed wage.
The California Association of REALTORS® (CAR) provides a contract that can be used between an assistant and an associate licensee. It also produces a three-party agreement that can be used between a broker, an associate licensee, and an assistant to the associate licensee. In both it is clear that the assistant is, with respect to the associate licensee, an employee. For example, the agreement provides for the associate licensee to identify his worker's compensation carrier.
Some think that they can legitimize the independent contractor status of an assistant by creating a contract wherein the parties can agree that the assistant will be an independent contractor. This is simply not the case.
It is not a good idea to attempt to dodge around this issue, as many agents may be inclined to do. A few years ago, The U.S. Department of Labor signed agreements with Colorado, Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah, and Washington to work together to target employers who are guilty of misclassification. Why? The U.S. Government Accountability Office conducted a study that found "employee misclassification cost the United States Government $2.72 billion in revenue from Social Security, unemployment and income taxes in 2006 alone."
The State of California is estimated to have lost in the neighborhood of $7 billion in tax revenues over the years as a result of misclassifications. They want their money.
A California employer who is found to have willfully misclassified employees as independent contractors is not only subject to the back payments (with penalties) but also can be charged up to $25,000 per violation.
Agents who have assistants, and brokers who have agents with assistants, would all do well to review their employment agreements and practices.