Courts and federal agencies take a new look at whether real estate sales people and other freelance workers are actually employees.

The independent contractor status of real estate salespeople recently has been challenged in three new court cases. This has caused a great deal of concern among brokerages across the country, and the National Association of REALTORS® is watching the cases closely to see what effect they may have on the industry.

To help explain to your broker members how to avoid these types of legal claims, NAR has put together a variety of resource materials, including handouts and videos, that you can reproduce in your member communications, present at a broker meeting, or link to in your social media channels (see sidebar).

These resources are also relevant if your association uses independent contractors or if you, as an AE, are an independent contractor.

Challenges to independent contractor status of salespeople

Of the three court challenges—one in Massachusetts and two in California—the Massachusetts case was decided, in a trial court, for the broker, who successfully argued that his brokerage’s real estate salespeople are properly classified as statutory independent contractors.

Independent contractors are free to determine where, when, and how they perform their job. By contrast, employees are directed by the employer as to where, when, and how to fulfill their tasks and responsibilities. A number of tests have evolved to determine whether the individual is an independent contractor or an employee, but the primary focus is the amount of control being exerted by the business over the individual. The salespeople in the Massachusetts case had argued that certain elements of control imposed by the broker, such as mandatory office time and a dress code, mandated their classification as employees.

The lawsuit brought to light two areas of Massachusetts law that are in conflict. The state’s real estate law says sales associates can be either employees or independent contractors and requires brokers to exercise supervisory authority over them, regardless of their status. That conflicts with the state’s employment law, which defines independent contractors in a way that such supervision can appear to undermine a contractor’s independence.

The trial court found that the amount of control being exercised over the individual salespeople was in line with what the state’s real estate license law required. The case is now before the state’s highest court. The challenges in California are still in the early stages.

Despite the broker prevailing in Massachusetts, the challenges have raised concern among brokerages across the country, which are re-evaluating their processes and procedures.

These are the questions brokerages should ask when evaluating their relationship with their salespeople.

  1. Are you complying with state employment and labor law?
    • Every state has different statutes pertaining to independent contractors and worker’s compensation, labor laws, and unemployment compensation.
  2. Is there a written independent contractor agreement?
    • Although an independent contractor agreement between the parties alone is not determinative, it should create the framework of the relationship between the parties.
  3. In practice, is the brokerage exerting appropriate control over the salesperson?
    • How a salesperson is classified is determined by the actual relationship and practices of the parties. Brokers should avoid making certain acts mandatory, such as requirements to work certain hours, dress in a certain way, or undertake specific ­training—although these acts do not necessarily undermine independent contractor status. Providing benefits such as health insurance to an independent contractor could also be seen as a factor in classifying the individual as an employee.

Point Broker Members to These Independent Contractor Resources here at nar.realtor

Independent Contractor Issues in the News:

  • Groundbreaking federal appeals court decision overturns a lower court decision applicable to 42 court cases where FedEx Ground delivery drivers were misclassified as independent contractors and not employees. Aug. 27.
  • Virginia Governor Terry McAuliffe issued an executive order establishing an interagency independent contractor misclassification task force. Aug. 15.
  • Independent contractor cab drivers in San Francisco vote to form the first independent contractor affiliate of the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO). Aug. 13.

According to federal law, for federal tax purposes, real estate agents will not be treated as employees if these three requirements are met: (1) The agent must be licensed; (2) Substantially all income must be made on the basis of sales or output, not on hours worked; and (3) There must be a written contract between the salesperson and company stipulating independent contractor status. Additional state requirements may apply.

F.P. Maxson is senior counsel at the National Association of REALTORS®. Contact him at 312-329-8373 or fmaxson@realtors.org.

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