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Employee or Independent Contractor?

Written by on Monday, 13 February 2012 6:00 pm
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Most real estate brokers and sales agents who work for a brokerage firm are classified as independent contractors. And rightly so. They are paid - via commission splits - on the basis of the results of their work, not on the time or manner of their work. They are expected to operate within the bounds of the law and, if they are Realtors®, the Realtor® Code of Ethics. But, for the most part, the manner in which they conduct their business is up to them.

(This is not necessarily so. A brokerage could operate with an employer-employee relationship. Indeed, there are some who do.)

Generally, there is little reason to question the Independent Contractor status of real estate sales agents. Sure, there may be questions now and then about mandatory office meetings, "floor time", or dress codes; but, on the whole, brokerage operations satisfy the various tests that may be imposed by agencies such as the I.R.S., the Department of Labor, and their state counterparts.

It is not so clear, however, that the same thing can be said regarding the people who work for real estate sales people.

Over the years it has become commonplace for real estate agents to take on assistants. Agents may pay assistants to do all manner of things. Some may want assistants to engage in activities that require a real estate license, such as holding an open house and discussing price and terms with prospective buyers who come to it. Others may employ assistants to do more mundane tasks such as bookkeeping, writing and placing ads, or sticking little flags into lawns on the 4th of July. In many cases, assistants may perform both some tasks that require a license and some that don't.

Often, agents who hire assistants will classify them as Independent Contractors. This may be attractive to both parties. It avoids all sorts of paperwork, much of which is payroll related. The assistant doesn't have withholding taken out of his or her check; and the agent avoids paying into such things as workers' compensation, unemployment insurance, or Social Security. A win-win, right? Not in the eyes of the California Legislature.

In October of 2011 the California Governor approved Senate Bill 459 (Corbett), a bill which would "prohibit willful misclassification, as defined, of individuals as independent contractors." The bill became effective January 1, 2012.

Now, everyone already knew that you weren't supposed to willfully misclassify those who you paid as Independent Contractors. But the provisions of SB 459 gave some teeth to that admonition. The bill provides for penalties of $5,000 - $15,000 for each violation, and up to $25,000 for those who have engaged in a pattern or practice of willful misclassification.

Proponents of the bill pointed to two distinct areas of concern: (i) employees who are misclassified lose a variety of benefits and protections such as minimum wage, overtime, workers' compensation, and unemployment insurance; (ii) 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.

The State of California is not the only government entity concerned about this. The U.S. Department of Labor has 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.

To be sure, real estate agents who hire assistants, marketers, coordinators, schedulers, etc. and call them Independent Contractors are not the biggest fish the Department of Labor and state agencies have to fry. But it's a net you wouldn't want to get caught up in. Sales agents and brokers who are hiring staff and assistants would do well to review their employment classifications. One thing to remember for sure: just because your assistant is a licensee doesn't mean that he or she is an Independent Contractor.

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  About the author, Bob Hunt

1 comment

  • Comment Link gwp Tuesday, 13 May 2014 2:31 pm posted by gwp

    Can you tell me what recourse an independent contractor (Realtor) in California has if his/her broker does not pay that Realtor their earned commissions? Is it true that if the Realtor quits as a result of non-payment, the broker has 3 days to pay them or be subject to a lawsuit which would include treble damages?

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