As a wave of recent litigation challenging the real estate industry’s long-standing practice of classifying real estate professionals as independent contractors is making its way through the legal system, the age-old question of worker classification is garnering the real estate industry’s attention. Not only are these potential class action lawsuits raising the issue of worker classification, the attention of federal and state agencies to this issue, including a recent U.S. Department of Labor Administrator’s Interpretation, has also caused brokers to pause in order to ensure that proper attention is paid to the classification of their real estate salespeople.
The fact is, when it comes to worker classification, the real estate industry is unique. Unlike a typical employer/employee relationship, an independent contractor largely maintains the control in the relationship. However, state real estate license laws run contrary to this principle. Pursuant to real estate license laws, brokers are legally obligated to supervise their agents, thereby requiring a broker to exercise control over his or her real estate salespeople. The regulatory structure of the real estate industry often makes it difficult for brokers to fulfill their obligations under the real estate license laws and adhere to employment and labor laws pertaining to independent contractors. But, there is good news.
Many state and federal laws recognize the unique nature of the real estate industry and have created specific carve-outs for real estate salespeople. For example, the IRS has a safe harbor that allows real estate salespeople to be treated as independent contractors for federal tax purposes, provided the following three conditions are met:
1. The salesperson is a licensed real estate professional.
2. A written contract exists between the parties that clearly states that the salesperson will not be treated as an employee for federal tax purposes.
3. Substantially all of the salesperson’s compensation is directly related to their sales or other output, rather than the number of hours worked.
So how can you, as a broker, properly manage your independent contractor relationships? First, know your state laws. Also, become familiar with any carve-outs available for real estate professionals in your state so that you can tailor your relationships to take advantage of them. Next, be sure to have a written agreement with your independent-contractor salespeople. Not only is this important in setting the tone for the relationship and addressing issues related to creating a successful independent contractor relationship, it is also a required element of the IRS safe harbor and a number of state law carve-outs for real estate salespeople.
In addition to having a written agreement, be sure to avoid certain actions, such as referring to your independent contractors as employees in any oral or written communications, making monthly meetings mandatory or requiring your independent contractors to report to the office on certain days or during certain hours.
The National Association of REALTORS® authored a 2015 White Paper Report titled, “Independent Contractor Status in Real Estate,” which outlines this issue and the recent litigation matters challenging the real estate industry’s practice of classifying salespeople as independent contractors. This 2015 White Paper Report, among other valuable worker classification resources from the National Association of REALTORS®, is a good place to start becoming familiar with how you can protect your brokerage from being the subject of a future worker misclassification lawsuit.
To learn more, visit www.realtor.org/topics/independent-contractor.
This column is brought to you by the NAR Real Estate Services group.
Lesley Walker is associate counsel for the National Association of REALTORS®.
