Real estate teams are increasingly becoming a popular way for top producers to service many clients at once. A team usually is centered around a highly successful salesperson and the team operates within a brokerage. The team is comprised of two or more real estate salespeople who pool resources on marketing, administrative staff, and may offer specialists for various aspects of the real estate business. In some cases, a team can appear to operate as a separate brokerage firm to consumers. While teams may be profitable for the real estate brokerage, teams raise a number of legal issues for managing brokers, ranging from license law issues to employment law. In this article, we will review the legal issues raised by teams and offer tools/ideas for brokers to manage the risk. A checklist is also available to brokers highlighting the legal issues raised by teams.
State License Law Issues
The most obvious area where teams need supervision and guidance from the managing broker is the state license law. The main regulatory focus on teams is their advertising, with states regulating team advertising either through the creation of team specific rules or by using existing advertising rules. Other license law issues for teams include unlicensed assistants who may perform licensed duties and compliance with agency disclosure. The payment of commissions is another area where brokers need to monitor teams.
To read a survey of the various team statutes and regulations:
The State Issues Tracker contains information about Agency:
A chart setting forth how states regulate unlicensed assistants:
A. Advertising Requirements
Team advertising is a focus for regulators because regulators believe that teams do not always identify the brokerage that they are associated with and give consumers the impression that the team is a brokerage firm. To address the issue, some states have used existing license laws to regulate teams, but many states are now enhancing these laws to assure the broker’s name is prominently displayed in all advertisements. For example, four states – Michigan, Nebraska, Tennessee, and Texas – all recently issued rules that require licensee advertising to include the broker name. Likewise, the Rhode Island Department of Business Regulation issued a notice reminding licensees that advertising must include the broker name. Other rules will specify where and how the brokerage’s information must be displayed in the ad, with some even specifying font sizes. Some states have also created rules for advertisements placed on social media how the ad needs to link the brokerage’s information. Since not following the advertising rules will be the easiest violation for regulators to discover, making sure teams within your brokerage comply with state advertising regulations is an important contribution the broker can make to the team.
B. Team-Specific Regulations
Rather than simply adapt or modify existing laws to regulate teams, twelve states have created specific requirements for teams. The laws vary- some simply regulate the team name, but others regulate many aspects of the team and address supervision of the teams.
Maryland was one of the first states to regulate teams, and it remains one of the more comprehensive regulations. The Maryland statute requires the brokerage to designate a team leader, and the team leader must have certain qualifications. The leader then becomes responsible for supervising the team, in addition to the supervision required by the managing broker, and the team leader must also maintain a list of the team members. The statute requires that the name of the brokerage must be displayed in a meaningful way in all advertisements and requires that the team name cannot be made to sound like it is the brokerage by including terms like “real estate” or “real estate brokerage” in its name.
Other states have different requirements. Oklahoma requires teams to register with the Oklahoma Real Estate Commission. Ohio requires identification of all unlicensed persons whose names are included in the advertisement. New York has promulgated a regulation that a team name must include the full licensed name of the brokers, associate brokers, or real-estate salespersons who are on the team, or, if the names are not included, the team name must be followed immediately by the phrase “at/of [full name of broker/brokerage].”
C. Unlicensed & Licensed Assistants
Another license law issue for teams is unlicensed assistants. While this issue is not unique to teams, concerns have been raised about teams using unlicensed assistants. Brokers should make sure that unlicensed assistants working with teams are not performing licensed services. Many states have defined what functions an unlicensed assistant can perform either through the license law or through real estate commission guidance. A table covering the rules and guidance is linked to above.
D. Agency Disclosure/Dual Agency
Agency is also an area of concern for teams. Teams are designed to share information and clients, but brokers need to make sure that teams understand when to keep client information confidential. For example, teams often share clients and so multiple team members may have confidential information about a client. This can pose a problem when clients of the team interact with each other, such as one client becoming interested in another client’s property. This could be true even in a state that has nonagency relationships, as disclosures may still be required when the firm is representing multiple parties in the transaction.
Brokers will need to make sure the teams know when dual agency disclosures need to be made and also that the salespeople understand the confidential information that can’t be shared with the other clients. Brokers could also consider restricting clients to a particular member of the team, in order to avoid undisclosed dual agency allegations.
E. Commission Issues
Another issue that can arise between teams and the broker is commission splits. The license law requires that all payments must be paid to the managing broker but due to the confusion that teams can cause over who is the broker, there have been commission disputes between teams and the managing broker. As with all other licensees, the commission splits between the broker and team members should be memorialized in writing and the broker should collect all commissions paid to the team in order to assure compliance with state licensing laws.
Real estate teams can also raise employment law issues, primarily in the area of worker classification. Real estate brokers need to assure that their salespeople who work in a team are treated like independent contractors and not employees. Another issue for teams is the payment of commissions to licensed individuals who are not providing licensed services, such as an administrative assistant or transaction manager.
NAR Independent Contractor Status whitepaper:
Independent Contractor FAQ:
Other Independent Contractor Resources:
“Ten Ways to Successfully Manage Your Independent Contractor Relationships”:
Chart detailing various state labor laws approach to classifying real estate professionals:
Key Provisions for Independent Contractor Agreements:
A. Management of Team Members
A renewed focus on the independent contractor status of salespeople has emerged in recent years due to litigation. While there has yet to be any unfavorable judicial precedents, some brokerages have entered into substantial settlements with salespeople who claimed they were improperly classified as independent contractors instead of employees. The same issues that brokers face with their regular salespeople can be exacerbated when the salespeople are working on a team.
While a broker has a duty to supervise the licensees in the brokerage for certain tasks, a team leader usually has no such responsibility. Since many teams usually focus on a top producer and most of the clients for the team will be clients of the top producer, the top producer may want to control or dictate how the salespeople interact with the clients. Unlike a managing broker, team leaders do not have any statutory duty to supervise the salespeople except in a few states like Maryland. The excessive control of the salespeople by the team leader as well as the lack of statutory duty to supervise poses the risk of a misclassification challenge from salespeople working in a team.
Brokers will need to educate team leaders about worker classification issues and the need to treat team members as independent contractors. If that is not how the team functions, the broker will need to consider making the licensees serving on the team into employees to avoid potential liability.
B. Classification of Team Members Who Aren’t Performing Licensed Services
Another worker classification issue occurs when members of the team are paid by commission but are not providing licensed services. For example, a team may have a licensee who is managing the team and not interacting with clients. Or, the team may have a licensed assistant who is performing administrative functions and not acting as a licensee.
Because these individuals are not providing licensed services, they should not be paid by collecting a portion of the team’s real estate commission payments. Additionally, these individuals would not qualify for the IRS exemption for real estate licensees because the individuals are not providing licensed services, posing employment tax issues for the brokerage. Instead, these individuals need to be classified as employees by the broker. Louisiana has addressed this issue by prohibiting licensees who are part of a team from receiving compensation from other team members.
Teams are an increasingly popular vehicle for top producers to share their clients and listings with other salespeople. However, brokers need to be aware that teams pose both license law issues and employment law issues. Brokers need to make sure the team leaders are aware of these issues and do not run afoul the legal requirements. For more information, contact Finley Maxson, NAR Senior Counsel, at email@example.com.