Frequently Asked Questions About the Department of Labor’s Independent Contractor Rule

Workers are classified as either employees or independent contractors. There are important legal and practical differences between the two. Indeed, how workers are classified impacts how they are paid and taxed, their eligibility for benefits, and whether they are covered by many labor and employment laws. 

As a general matter, independent contractors have more flexibility and autonomy over their work. They typically are engaged to perform distinct services, are paid by the project instead of earning an annual salary or hourly wage, and retain control over the manner and method of their work. This offers an independent contractor more freedom and more opportunity for profit than an employee from project to project. Independent contractors are not subject to employment taxes, but are usually not eligible for workers’ compensation benefits or many other employer-provided benefits (e.g., health insurance, retirement, etc.). Independent contractors are usually not covered by federal, state, or local labor and employment laws.

Employees, on the other hand, are subject to a significant degree of control from their employers, which direct when, how, and where employees accomplish their job responsibilities. Employees are paid set wages at fixed intervals and are typically eligible for workers’ compensation and employer-provided benefits. Employers must pay employment taxes, make appropriate withholdings, obtain certain insurance coverage, and they are bound by the requirements of various labor and employment laws with respect to their employees.

No. Whether a worker is classified as an employee or independent contractor is determined by the nature of the relationship between the worker and the business or individual that engages the worker. The decision whether to classify a real estate salesperson as an independent contractor or an employee is one that each broker and real estate salesperson must make on their own after evaluating the benefits and drawbacks of each type of relationship.

To a protect the independent contractor status of real estate salespersons, brokerages should limit the control they exercise over salespersons as much as possible and limit the support they provide. Other practical steps that can help mitigate the risk of misclassification include:

• Real estate salespersons, not their brokerages, should have responsibility for advertising and marketing their services, staging, and photographing homes.
• A majority of a real estate salesperson’s compensation should come from commissions, not salary.
• Brokerages should exercise as little control as possible over which homes an individual real estate salesperson is allowed to sell, and not place significant limits on where and how a salesperson sells.
• Real estate salespersons should be responsible for their own business expenses, such as those associated with vehicles, computers, cell phones, and real estate licenses, as well as their legal and professional expenses, office expenses, and travel expenses.  The more financial support brokerages provide to salespersons, the more it undermines independent contractor status.
• Brokerages should enter into written independent contractor agreements with real estate salespersons, which should be for limited duration (even if later extended) and not have automatic-renewal clauses.
• To the extent permissible, brokerages should reduce or limit non-competition and exclusivity agreements that real estate salespersons must sign.
• Brokerages should exercise minimal control over the schedules of real estate salespersons.

Brokerages concerned about potential misclassification claims should consult with their legal counsel to assess whether their real estate salespersons are properly classified as independent contractors.

Independent contractor status provides several benefits to real estate salespersons. First and foremost is flexibility. Independent contractors have more control over their schedules and work methods. More freedom to choose when and how much they work allows for a better work-life balance and the ability to pursue other interests or responsibilities. Additionally, there may be tax advantages to independent contractor status, including the ability to take advantage of tax deductions for business expenses. Real estate salespersons who are classified as independent contractors also may have a higher earning potential than employees (though they may also have less guaranteed earnings than employees). Beyond these benefits, independent contractors essentially run their own businesses within the framework of the brokerage, which can lead to a greater sense of pride and motivation to succeed. Independent contractor status also may make it easier for real estate salespersons to work with multiple brokerages simultaneously or move freely between brokerages, letting them explore different business models, cultures, and support structures to find the best fit for their needs and goals. Finally, many independent contractor real estate salespersons prefer the opportunity to purchase and manage their own benefits rather than select from a pre-determined set of employment benefits selected by the brokerage.

Ultimately, there are both benefits and drawbacks to a real estate salespersons being classified as an independent contractor, just as there are being classified as an employee, so real estate salespersons must decide which classification best meets their needs.

There is no one law that determines whether a worker is an employee or an independent contractor. Instead, the relationship between brokerages and real estate salespersons is subject to many different laws – at the federal, state, and local level – and each may have its own test for determining whether the real estate salesperson is an employee or an independent contractor.

For example, different states have different laws and regulations regarding worker classification. Some states explicitly recognize that certain real estate professionals are independent contractors, while other states do not.

At the federal level, the IRS ordinarily uses a 20-factor test to evaluate whether a worker is an employee or an independent contractor. However, a specific carve-out under the Internal Revenue Code applies to real estate salespersons such that they are considered independent contractors if they are licensed real estate professionals, substantially all of their payments are directed to sales or other output (rather than hours worked), and their services are provided pursuant to a written contract providing that they will not be treated as employees for Federal tax purposes.

Although the Internal Revenue Code contains a carve-out specific to real estate professionals, many other federal laws do not. For example, the Fair Labor Standards Act – a federal law that requires employees to be paid a minimum wage and receive an overtime premium for working more than 40 hours per workweek – does not contain such a carve-out. Recently, the U.S. Department of Labor announced a new rule regarding independent contractor classification that will apply when determining if workers are employees or independent contractors under the Fair Labor Standards Act. The new rule took effect on March 11, 2024.

The FLSA is a Federal law establishing wage and hour standards for most public and private employers. The FLSA’s basic requirements include minimum wage for nonexempt employees, overtime pay for nonexempt employees, equal pay, child labor provisions, and certain recordkeeping responsibilities.

Until recently, the DOL classified workers as employees or independent contractors using a multi-factor test that gave greater weight to two core factors:

1. The nature and degree of the worker’s control over the work, and
2. The worker’s opportunity for profit or loss based on personal initiative or investment.

The new rule shifts the analysis of whether a worker is an employee or an independent contractor to a more complex “totality-of-the circumstances” standard. The DOL promulgated the rule to protect workers, including the most vulnerable workers, from being improperly classified as independent contractors and thus deprived of rights and protections under employment laws. The rule is expected to make it harder for workers to be classified as independent contractors, despite the DOL stating that the new rule will not result in widespread changes to worker classification.

Under the new rule, the factors to be considered when determining worker classification are:

1. The worker’s opportunity for profit or loss depending on managerial skill;
2. The investments by the worker and the employer;
3. The degree of permanence of the work relationship;
4. The nature and degree of control;
5. The extent to which the work performed is an integral part of the employer’s business;
6. The skill and initiative of the worker; and
7. Any additional factors as may be relevant.

The rule states that the weight given to each factor will depend upon the facts and circumstances of the particular relationship. The new rule also allows consideration of additional factors that may show a worker is economically dependent on an employer.

a. How can a brokerage demonstrate a real estate salesperson’s “opportunity for profit or loss depending on managerial skill?

This factor focuses on the worker’s ability to earn profits or suffer losses through their own independent effort and decision-making. Helpful evidence to establish this factor might include that the worker negotiates his/her earnings rate (e.g., per project recovery or commissions percentage), has the ability to accept and reject assignments, can work as many or as few hours as the worker wants, can hire and fire its own workers, and has made independent investments (e.g., marketing) in its business without first seeking approval. A worker who has a fixed project or hourly rate, and who decides only whether to work more or fewer hours, likely cannot demonstrate sufficient independent effort and decision-making to establish an independent contractor relationship.

While brokers must exercise some supervisory responsibility over real estate salespersons in most states, independent contractor status may still be established by showing that the salesperson’s own initiative and decision-making play a significantly greater role in determining the salesperson’s earnings than do the broker’s supervision and efforts.

b. How can a brokerage demonstrate “investments by the worker”?

This factor requires that the worker make investments that generally support an independent business and serve a business-like function, such as increasing the worker’s ability to do different types of or more work, reducing costs, or extending the business’s market reach. While investments by real estate salespersons do not have to be equal to the brokerage’s investments, they should be able to demonstrate meaningful investment in areas that advance the real estate salesperson’s opportunities.

For example, if brokerages require real estate salespersons to be responsible for their own expenses (e.g., vehicles, computers, cell phones, real estate licenses, advertising, legal and professional assistance, office space, office supplies, travel, etc.), this indicates the real estate salespersons are making investments that are entrepreneurial in nature. Brokerages should be mindful when covering costs of its real estate salesperson’s business, as these types of investments by the brokerage are indicative of an employee/employer relationship.

c. How can a brokerage demonstrate a low “degree of permanence of the work relationship”?

A brokerage will be more likely to demonstrate a low “degree of permanence” of their work relationship with a real estate salesperson if their contracts are definite in duration, project-based, or sporadic based on the salesperson being in business for themselves. Additionally, contracts that do not include noncompetition, exclusivity provisions, or automatic renewal clauses can also indicate a low “degree of permanence” in the work relationship.

d. How can a brokerage demonstrate that the “nature and degree of control” indicate an independent contractor relationship with a real estate salesperson?

Facts relevant to a brokerage’s “nature and degree of control” over a real estate salesperson include whether the brokerage sets the salesperson’s schedule, determines which houses the salesperson can sell, or which customers the salesperson can work with, and whether the brokerage uses technological means to supervise the performance of the salesperson’s work, reserves the right to discipline salespersons, or places demands or restrictions on salespersons that do not allow them to work elsewhere.

Actions taken by a brokerage for the sole purpose of complying with a specific law or regulation should not be indicative of control under this factor. Real estate licensing laws may require a brokerage to supervise real estate salespersons to a certain degree, and brokerages should continue to provide this level of supervision and enforce legally required policies such as those related to legal compliance, audits, and ethics. However, actions taken to control the real estate salesperson that are not necessary for legal compliance, including in areas such as safety, quality control, branding, contractual, or customer service standards, are indicative of an employee/employer relationship.

e. How can a brokerage demonstrate “the skill and initiative of the worker”?

This factor considers whether the worker has specialized skills and whether those skills contribute to business-like initiative. Real estate salespersons possess specialized skills, which require training, licensing, expertise, and continuing education. Thus, in most cases alleging misclassification, this factor will turn on the extent to which the real estate salesperson uses those skills to advance his own business objectives. The salesperson’s efforts at promoting and marketing his or her skills, rather than relying on the brokerage to develop business, will be meaningful in this analysis. While brokerages have an essential supervisory role and provide access to various tools and resources, a salesperson may still be classified as an independent contractor if it demonstrate business-like initiative independent of the brokerage.

The new rule took effect on March 11, 2024. There have already been four separate lawsuits filed by both freelancers and businesses arguing that the new standard violates the law, but to date no court has held that the new rule is improper.

No, there are no exemptions for real estate professionals under the FLSA. However, there is currently bipartisan legislation – the Direct Seller and Real Estate Agent Harmonization Act – that would provide an exemption for real estate agents under the FLSA.

No. Whether a real estate salesperson is legally classified as an employee or independent contractor is determined by the facts of the relationship between the salesperson and the brokerage, not by the label given to the salesperson in a written agreement. However, the use of written independent contractor agreements is highly recommended. Such agreements demonstrate the parties’ intent to be in an independent contractor relationship and can establish terms of the relationship that make it more likely that a court or the Department of Labor will the salesperson to be properly classified as an independent contractor.

No. The rule only reflects the DOL’s approach to classifying workers under the FLSA. It has no effect on other laws—federal, state, or local. The rule does not preempt any other state, local or federal laws, so businesses must continue to comply with all federal, state, and local laws. Moreover, within any particular state, real estate salespersons may be classified as independent contractors for some purposes, but employees for other purposes.

Brokerages who misclassify real estate salespersons as independent contractors may face civil and criminal liability under the FLSA. Civil liability may result from an investigation and/or litigation by the Department of Labor, or litigation filed by a real estate salesperson who believes he or she has been misclassified. Financial liability under the FLSA may include civil monetary penalties, reimbursement of unpaid overtime and/or minimum wages, liquidated damages equal to the amount of unpaid wages owed, and payment of the opposing party’s attorneys’ fees and costs. Further, assuming the brokerage treats all of its real estate salespersons similarly, a finding that one salesperson is an independent contractor likely would lead a court to conclude the others are as well, thereby increasing the brokerage’s financial exposure under the FLSA.

Brokerages who misclassify a salesperson could face consequences under other laws as well. For example, they may be penalized for failing to withhold federal and state employment taxes, or they may be required to pay into government benefit programs for the salesperson. Moreover, a finding that a real estate salesperson is an employee of a brokerage under the FLSA will serve as persuasive precedent that the worker should be classified as an employee under other federal, state, and local laws as well.

Brokerages and real estate salespersons should be intentional in classifying salespersons as employees or independent contractors going forward. For some brokerages and salespersons, this may require no changes in their relationship. Others may need to adjust their business practices to mitigate the increased risk of independent contractor misclassification.

For brokerages that wish to classify real estate salespersons as independent contractors, changes to their business practices might include entering into independent contractor agreements with real estate salespersons, ensuring those salespersons are paid by commissions rather than by salary, not reimbursing salespersons for business expenses, revoking any non-compete or exclusivity agreements with salespersons, giving salespersons’ more control over their schedules, and relaxing limitations on which homes salesperson’s can sell or when and how they do their work.

a. Is misclassification a risk for salespersons who are part of a franchise?

Yes. Franchisors often provide training, guidance, and other forms of support, and require the franchisee and its employees to operate in a specified manner to maintain the uniform public image of the brand. These requirements may obligate the franchisee to exercise a degree of control over its employees that makes it more difficult for the franchisee to classify its salespersons as independent contractors. For example, where real estate franchisors require franchisee salespersons to attend specific training, engage in specific behaviors, utilize specific workplace platforms and technology, work exclusively for their franchisee, or otherwise reduce the ability of franchisee salespersons to operate independently from the franchisee, these are types of evidence indicating the salesperson is an employee of the franchisee.

b. Is misclassification a risk for salespersons who are part of a real estate agent team?

Real estate teams take a variety of forms, so determining whether the salespersons on these terms are employees or independent contractors requires a highly fact-specific analysis.

Some real estate teams consist of salespersons who work under a brokerage, but do not interact with the brokerage’s direct employees. Some of these salespersons may even have their own employees. This level of independence and entrepreneurial investment is indicative of an independent contractor relationship between the members of the team and the brokerage.

On other real estate teams, the salespersons are very dependent on the brokerage and may use brokerage employees to assist with administrative tasks, marketing, transaction support, or other business functions. If the brokerage is providing this level of support to the salespersons on these teams, it could indicate the salespersons are not making the required investments that an independent contractor, operating its own business, would typically make, and they are employees of the brokerage.

Additionally, regardless of whether the members of the real estate teams are deemed independent contractor or employees of the brokerage, the real estate professionals who lead these teams face a separate risk of misclassification with respect to the salespersons who work on their teams. A “team lead” who exercises significant control over the salespersons who report to them – controlling their opportunities for profit and loss, setting their rate structure, establishing their work schedule – may be found to be in an employment relationship with the salespersons on their team.

c. How will training, mentorship, supervision, and the level of support provided to salespersons change in response to the increased risk of misclassification?

While brokerages may continue to provide optional training and mentorship to real estate salespersons without undermining their independent contractor status, brokerages should seek to minimize the level of control they exercise over salespersons to mitigate the risk of misclassification. To maintain their independent contractor status, salespersons should be able to operate their business without extensive support from their brokerages and largely free from their brokerage’s control. Indeed, to prove independent contractor status if a salesperson’s classification is challenged, the brokerages will need to establish the salesperson has made meaningful investments, his earnings can increase or decrease based on the extent of his initiative, effort, and skill, and he is not subject to meaningful control by the brokerage.