Independent Contractor Status in Real Estate - 2015 White Paper

Updated July 14, 2016

Issue

While the issue of worker classification has been challenged in a variety of industries, the real estate industry’s regulatory structure presents a unique framework within which to operate when it comes to worker classification.  The hallmark characteristic of an independent contractor relationship is one where the worker is generally free of control.  However, state real estate statutes specifically require brokers to exercise supervision over their agents.  Since the requirement of a broker to exercise supervision over agents is in direct conflict with one of the basic tenants of an independent contractor relationship, it is difficult for a broker to both comply with labor laws in order to establish an independent contractor relationship, while also fulfilling their supervisory duties under state real estate laws.

Fortunately, both federal and state legislatures have recognized the unique aspects presented by the real estate industry by addressing the independent contractor issue directly through statutory carve outs.  Many state workers’ compensation acts specifically exempt real estate agents from the definition of “employee” under the statute.  For example, the Alabama Worker’s Compensation Statute states “a licensed real estate agent operating under a licensed broker shall not be considered an employee for the purposes of this chapter.”  In Pennsylvania, the workers’ compensation statute does not apply to “any person who is a licensed real estate salesperson or associate real estate broker affiliated with a licensed real estate broker”, and Louisiana’s workers’ compensation statute exempts any real estate broker or salesperson licensed to do business in the state of Louisiana and operating under the auspices of a licensed broker in the state of Louisiana from application of the act.  Alabama, Pennsylvania and Louisiana are not alone.  There are approximately twenty-nine states that exempt real estate agents from the application of the workers’ compensation statute.  See attached state law chart.

The issue of independent contractor status of real estate salespeople is also addressed in several state real estate statutes.  There are roughly twenty-two state real estate statutes that contain language expressly permitting a real estate broker to treat their real estate salespeople as independent contractors while simultaneously exercising their mandatory supervisory duties under the statute.  Utah’s real estate statute creates a presumption that an independent contractor relationship exists unless there is “clear and convincing evidence that the relationship was intended by the parties to be an employer employee relationship”.  Louisiana’s real estate statute outlines a three-prong test for establishing a real estate salesperson or associate as an independent contractor of their affiliated broker.  Under the statute, an independent contractor relationship has been successfully established if: 1) the real estate salesperson or associate broker is a licensee, 2) substantially all remuneration for services performed is directly related to sales output rather than number of hours worked, and 3) there is a written agreement specifying that the real estate salesperson or associate broker will not be treated as an employee.

There are several other states, including Indiana, Michigan, and South Dakota, that have also addressed this issue head on and legislatively helped eliminate a conflict between the labor laws and the real estate statute.  Indiana’s workers’ compensation statute provides a similar test to that outlined in Louisiana’s real estate statute to determine the independent contractor status of a real estate professional, and Indiana’s real estate statute presumes an independent contractor relationship, unless otherwise specified in a written contract between the principal broker and the associated salesperson or broker.  Michigan’s labor laws exclude from the definition of “employment” the services performed by real estate salespeople if the real estate salesperson is compensated principally or wholly by way of commission.  Further, Michigan’s real estate statute defines an “independent contractor relationship” as a relationship between a real estate broker and an associate broker or real estate salesperson where there is both a written agreement between the parties stating that the associate broker or real estate salesperson is not considered an employee for federal and state income tax purposes and not less than 75% of the annual compensation paid by the broker to the associate broker or real estate salesperson is from commissions from the sale of real estate. 

Effective July 1, 2016, the Wisconsin worker’s compensation statute will be amended to include a safe harbor similar to the IRS safe harbor for the treatment of real estate licensees as independent contractors. The amended statute also includes the ability for brokers to exclude real estate agents from workers’ compensation coverage. And, in order to remove any suggestion of a default employer/employee relationship between a real estate company or sole proprietor broker and a licensee, the Wisconsin real estate license law was also amended to remove all employer and employee references, and instead make reference to firm and agent.

State legislatures are not alone in recognizing the unique nature of the real estate industry and the corresponding need to carve out real estate professionals from general application of particular statutes.  The United States Internal Revenue Service (“IRS”) considers real estate agents to be “statutory nonemployees” if three factors are met.  First, the real estate agent must be licensed.  Second, substantially all payments for the licensed real estate agent’s services must be directly related to their sales or other output rather than based on number of hours worked, and lastly, the real estate agent’s services must be performed pursuant to an agreement that states the real estate agent will not be treated as an employee for federal tax purposes.  While satisfaction of the aforementioned IRS test relates only to the federal tax treatment of real estate agents, it demonstrates the federal government’s recognition of the unique nature of the real estate industry and, as such, the need to treat it differently than other industries. 

Even more recently, the passage of the final regulations under the Affordable Care Act (“ACA”) demonstrated recognition on behalf of the federal government that different treatment of the real estate industry is needed.  The ACA requires large employers (defined under the ACA as those with fifty or more employees) to offer their full-time employees health care coverage that is affordable and has a minimum standard of value.  This requirement is known as the “Shared Responsibility for Employers”.  However, the ACA recognizes that those real estate agents that are recognized as “qualified real estate agents” and thus statutory non-employees under the IRS code, will similarly be non-employees for purposes of the “Shared Responsibility for Employers”.  Here again, the federal government acknowledged the unique independent contractor relationship between real estate salespeople and brokers.  

Litigation Matters

Despite recognition on both the federal and state levels as an acceptable practice by real estate brokers, plaintiffs have challenged whether real estate agents can properly be classified as independent contractors under various state laws.  The recent uptick in litigation has generated concern among brokers across the country.  Brokers are worried about what this litigation means to their businesses and whether they are exposing themselves to legal liability by classifying their real estate salespeople as independent contractors.

In a California lawsuit, Bararsani v. Coldwell Banker, the plaintiff filed a class action lawsuit against Coldwell Banker Residential Brokerage (“Coldwell Banker”) alleging that Coldwell Banker improperly classified affiliated sales associates as independent contractors when they were actually employees of the broker.  In addition, the plaintiff alleged that Coldwell Banker violated the California Labor Code by failing to reimburse certain business expenses and maintain proper records. 

In July 2013, the defendants filed a Demurrer seeking to dismiss the plaintiffs’ amended complaint, asserting that the amended complaint was without basis because the California Business & Professions Code Section 10032 (“Code”) sets out the relevant three-part test for classification of real estate professionals as independent contractors, which defendants alleged were satisfied.  Plaintiffs filed an opposition to the defendants’ Demurrer.  While the language in the Code cited by defendants expressly permits real estate professionals to be treated as independent contractors or as employees, the Code does not require that real estate professionals be treated as independent contractors.  The court denied defendants’ Demurrer, asserting that California law permits a worker to be classified as an independent contractor for some purposes, but not all, and stating that the court would apply a multi-factor common law test to determine whether plaintiffs were properly classified as independent contractors for purposes of this case. 

In addition, the court also denied plaintiffs’ motion to invalidate mandatory arbitration and class action waiver clauses contained in independent contractor agreements executed by class members.  Therefore, individuals who executed such agreements would be bound by such clauses, and therefore, ineligible as class members. 

The parties later entered into settlement discussions, and on January 13, 2016, the court granted final approval of a class action settlement and entry of order and judgement in the case.  The settlement order contained no finding or admission of wrongdoing by Coldwell Banker, however, likely due to the considerable expense and time it takes to defend a class action lawsuit, Coldwell Banker agreed to pay the sum of $4,500,000 which was distributed among the certified class members.  The settlement order certified the class for settlement purposes, which Coldwell Banker was able to successfully limit to only those agents who had not signed an agreement to arbitrate.    

In a Massachusetts case, Monell et al. v. Boston Pads, the plaintiffs alleged that their former broker misclassified them as independent contractors rather than employees, thereby violating the Massachusetts independent contractor statute.  Plaintiffs alleged that, among other things, the defendants required plaintiffs to own day planners, pay desk fees each month, have cell phones with a “617” area code, complete office hours duty in some cases, and were subject to disciplinary action if productivity goals were not met.  The court denied the plaintiffs’ motion for summary judgment, which argued that the defendants could not establish the plaintiffs as independent contractors under Massachusetts’s independent contractor statute.  Instead, the court ordered summary judgment in favor of the defendants, finding that the Massachusetts real estate statute required the broker to exercise some degree of supervision over the plaintiffs in order to comply with real estate license laws and acknowledging that it was impossible to read the real estate statute and the independent contractor statute in harmony.  The Massachusetts independent contractor statute contains a presumption that an individual is an employee unless three specific factors are met, which is commonly referred to as the “ABC test”.  However, given the real estate statute’s supervision requirement, it would be difficult, if not impossible, for brokers to meet the independent contractor statute’s three-factor test. Recognizing the inherent conflict, the court turned to the rules of statutory construction, under which the court determined the real estate statute, as the more specific statute, must control.  The plaintiffs’ appealed the trial court’s decision and the Massachusetts Supreme Court granted direct review of the case. 

In a positive win for the real estate industry, the Massachusetts Supreme Court affirmed the lower court’s ruling, holding that the Massachusetts independent contractor statute does not apply to real estate salespersons.  Instead, the Massachusetts Supreme Court held that, as the more specific statute, the real estate license law controls. 

In reaching its decision, the court noted that despite the level of supervision and control brokers are required to exercise over their salespeople under the real estate license laws, the real estate statute expressly permits a broker to classify their salespeople as employees or independent contractors.  The court observed that compliance with the various controls set forth in the real estate licensing statute makes it difficult for a real estate salesperson to meet the “ABC Test” in the independent contractor statute, but that it could not have been the legislature’s intent to exclude real estate salespersons from independent contractor status.  In construing both the independent contractor statute and the real estate licensing laws together, and taking into consideration the legislative purpose behind these laws, the court determined that the real state licensing laws control.  This decision preserves Massachusetts brokers’ longstanding practice and ability to continue to choose to classify their salespeople as independent contractors.

In another California case, Cruz et. al. v. Redfin, the plaintiffs alleged that Redfin’s field agents were misclassified as independent contractors when in reality the field agents were employees.  Plaintiffs alleged this misclassification denied them various wages and benefits they were otherwise entitled to as employees.  The plaintiffs also alleged that in addition to requiring them to obtain a smartphone, laptop and GPS, Redfin maintained complete control over the plaintiffs and provided the plaintiffs with training and supervision as to how they were to perform their duties.  Similar facts are alleged in another case filed against Redfin Corporation, Galen v. Redfin Corporation.  In this case, the plaintiff alleged that he was also improperly classified as an independent contractor, rather than as an employee.  While Galen attempted to pursue this action in state court, Galen had signed an independent contractor agreement with Redfin, which contained a mandatory arbitration clause.  While the trial court denied the defendant’s motion to compel arbitration, the Court of Appeals reversed the ruling, holding that the parties had entered into an independent contractor agreement containing a mandatory arbitration clause,  whereby the parties agreed that any claims not settled by mediation would be resolved by binding arbitration.  The plaintiff appealed, and the Supreme Court of California granted review of the Court of Appeals decision in order to determine, in part, whether the plaintiff’s statutory misclassification claims are covered by the mandatory arbitration clause in the independent contractor agreement.

An unfavorable outcome in these cases could lead to a drastic shift in the way the real estate industry has historically done business in those states.  For decades, the industry has primarily relied on the independent contractor model for conducting its business.  If a broker’s ability to treat real estate salespeople as independent contractors is limited, then brokers will be forced to take on more costs and responsibilities, such as the provision of employee benefits and payment of various employment taxes, than previously accounted for within a broker’s business model.  A resulting shift away from the independent contractor model may result in a significant reduction in the number of real estate agents, as brokers struggle with the increased costs of employing agents.  In addition, brokers would have to assume heightened control over real estate salespeople, resulting in significant decrease in the freedom and flexibility that real estate agents currently enjoy in an independent contractor relationship.

Conclusion

The independent contractor relationship between brokers and their salespeople is a longstanding tradition in the real estate industry.  NAR supports the protection of, and efforts to further secure, the right of brokers to choose whether to classify their real estate salespeople as employees or as independent contractors.  As a means of achieving protection of this practice, NAR encourages states to review their existing labor and employment statutes, along with their real estate statute, and determine if those laws sufficiently secure brokers’ ability to classify real estate agents as independent contractors.  In some states, it may be appropriate to urge legislatures to make a direct and unequivocal carve out for the treatment of real estate salespeople as independent contractors.  This will help solidify the status of real estate salespeople as independent contractors and avoid future litigation challenging this practice.  As discussed, many states, along with the federal government, already recognize real estate salespeople as nonemployees, but in light of the recent litigation regarding this matter, NAR and its membership are taking proactive measures to gain increased clarity of a real estate broker’s ability to classify real estate salespeople as independent contractors. 

For additional information, questions or assistance with respect to this issue, you may contact Lesley Muchow, NAR Deputy General Counsel (lmuchow@nar.realtor).

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