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The U.S. Department of Labor’s recent release of its final rule regarding how workers should be classified under the Fair Labor Standards Act (FLSA) could pose a risk to real estate professionals’ classification as independent contractors. The DOL rule as written may be misinterpreted and lead to greater litigation and confusion regarding how certain workers should be classified. The rule also could threaten workers’ ability to be classified as independent contractors, including most real estate professionals.
The National Association of REALTORS® has long advocated for laws to protect practitioners’ independent contractor status and will continue to vigorously work to protect this status for real estate professionals, including working to advance H.R. 5419, the Direct Seller and Real Estate Agent Harmonization Act, to get a carve-out for real estate agents under the FLSA.
If federal or state laws reclassify real estate pros, the result could burden agents and brokerages with “increased costs, fines, tax withholding, payment of a minimum wage and disappoint the many salespeople who want to have control over their work,” says Matt Troiani, NAR’s senior counsel and director of legal affairs, in the latest “Window to the Law” video.
Under the current Internal Revenue Code, real estate professionals can be classified as independent contractors by their brokerage, however the new DOL rule impacts worker classification under the FLSA, which is a labor law. But the real estate industry has grown increasingly concerned about regulations, legislation, and proposed tests for determining employee status that could jeopardize certain classifications, whether at the federal or state levels.
Currently, about 89% of NAR members are classified as independent contractors, with a majority affiliated with an independent real estate company, according to NAR data. “Many salespeople prefer to work as independent contractors so they can determine when, how and where to perform their work,” Troiani says.
“Being classified as an independent contractor is why many individuals are attracted to the real estate industry—it empowers entrepreneurship, maximizes flexibility and promotes autonomy,” NAR and the Direct Selling Association wrote in a letter to lawmakers this past fall.
Preventing Misclassifications
The most common tests to determine whether a worker should be classified as an “employee” versus “independent contractor” are known as the ABC Test, Economic Reality Test or Common Law Test. (Learn about all three at nar.realtor.) But “even though salespeople are often highly independent, state law typically requires broker supervision of salespeople, creating tension with these worker classification tests,” Troiani says. The new DOL rule adopts the Economic Reality
Test, which includes several factors that must be considered in assessing whether a worker is an employee or independent contractor under the FLSA.
Troiani shares in the “Window to Law” video how brokerages can help lessen the scrutiny from regulators and courts by ensuring their classification of salespeople takes into account the following:
- Use an independent contractor agreement. The agreement should clearly define the salesperson’s worker status and specify for federal tax purposes whether they are an independent contractor, Troiani says.
- Pay salespeople on a commission basis.
- Require salespeople to cover their own business expenses, such as insurance, phone bills and gas. Also, require them to provide their own business equipment, such as cars, phones and computers, Troiani says.
- Do not refer to salespeople as “employees” if they are designated as an independent contractor.
