Independent contractor or employee? Agent status called into question via lawsuits

woman thinking about real estate

The age-old debate as to whether a real estate agent is an employee or not has been reignited with a new round of lawsuits. What does the future hold?

Independent Contractor? Employee? It’s a slippery slope for brokers across the United States as more and more questions arise about the appropriate status for real estate salespersons.

It’s a real pickle. Brokers are required to supervise their associates. Adequate supervision can only happen if agents attend trainings, learn policies and procedures associated with risk management, contracts, and closings. If agents are to be successful, earn for themselves and for the brokerage, and not act as a liability, then it would seem to reason that there must be certain requirements that brokerages can place on their agents.

Current Cases Question Agent Status

Yet, the independent contractor status of real estate agents has been “caught in the crosshairs”, according to the National Association of Realtors®.

Recently, several lawsuits have arisen surrounding this very issue. Cruz v. Redfin Corp. in Alameda County Superior Court and Bararsani v. Coldwell Banker Residential Brokerage in Los Angeles Superior Court are two California cases that have not yet gone to trial. In both of these cases, accusations have been made that certain independent contractors were, in fact, employees and should have been compensated as such.

Realty Times reports that “according to federal law (26 U.S.C. §3508 (b)), for federal tax purposes, real estate agents will not be treated as employees if a 3-part test is met: (1) The agent must be licensed, (2) Substantially all payment is made on the basis of sales or output, but not on hours worked, and (3) There must be a written contract between agent and company providing that, for federal tax purposes, the agent will not be treated as an employee.”

Yet, the Internal Revenue Service has a different evaluation system; it’s a 20-factor test (not a 3-part test) that determines whether the status of an individual worker is that of employee or independent contractor.

The Future for Real Estate Agents

The ramifications of altering the status of real estate agents on a national level could be vast. According to Lesley Walker, associate counsel at the National Association of Realtors®, “Having an employer-employee relationship for a broker could be more expensive, more burdensome, and more time-consuming.”

If these lawsuits determine that real estate salespersons are to be employees and not independent contractors, this could have devastating consequences on the real estate industry. Brokers could owe hundreds of thousands of dollars in back pay, income, and payroll taxes, which would bankrupt even the most successful of brokerages.

On a personal level, our brokerage offers all sorts of ongoing trainings. Many are recorded and can be watched on the agent’s own time. Others are live. While the agent is not required to attend the live trainings, there is a direct correlation between an agent’s income and his or her participation in professional development activities.

If you cannot require that agents attend training, how can you protect your license from loose cannons or rogue agents? Believe it or not, you may not even be able to terminate your independent contractors, as the 20-factor IRS test states that “the right to discharge a worker is a factor indicating that the worker is an employee.”

Real estate brokers are in quite a bind. You’re damned if you do, and you’re damned if you don’t. It will be interesting to see how this will play out in the industry.

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