Window to the Law: Independent Contractor Best Practices

Window to the Law: Independent Contractor Best Practices

Jan 12, 2024
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Maintaining a broker’s ability to classify salespeople as independent contractors is essential to the real estate industry, and provides benefits to brokerages, real estate professionals and consumers. Follow these best practices to meet challenges that may be posed by legal or legislative challenges.

Window to the Law: Independent Contractor Best Practices — Transcript

The ability of real estate professionals to be classified as independent contractors is essential to the real estate industry. In fact, approximately 89% of NAR Members are independent contractors.

The right of real estate salespeople to work as independent contractors and for brokers to choose to classify salespeople as independent contractors is recognized under state and federal law. Many salespeople prefer to work as independent contractors so they can determine when, how and where to perform their work. A change in the classification of salespeople to employees as a result of legislation, regulation or litigation would increase costs, subject brokerages to fines, tax withholding, payment of a minimum wage, and disappoint the many salespeople who want to have control over their work.

Recent litigation and proposed legislation challenge many real estate professionals’ ability to be classified as independent contractors. While litigation has not yet resulted in a loss of independent contractor classification, challenges remain. Simultaneously, NAR has resisted efforts at the federal level to weaken these rights while supporting actions at the state level to strengthen the rights of brokers to make these determinations. 

The three most common tests to determine whether a worker is an employee or an independent contractor are the ABC Test, the Economic Reality Test and the Common Law Test. These tests focus on the degree of control the business exerts over the worker. The higher degree of control the company exerts, the more likely a worker is considered an employee. Proposed federal legislation and regulations would apply the ABC Test or the Economic Reality Test to worker classification in various fields, including real estate. Even though salespeople are often highly independent, state law typically requires broker supervision of salespeople, creating tension with these worker classification tests.

NAR continues to advocate for laws that preserve the ability of brokerages and salespeople to choose an independent contractor relationship. These efforts include exempting real estate professionals from inappropriate classification tests and classifying real estate professionals as independent contractors, which is how they are currently treated under the Internal Revenue Code. To avoid risk, brokerages should follow these best practices to ensure their classification of salespeople can withstanding scrutiny by regulators and the courts:

  1. Use an independent contractor agreement that clearly defines the salesperson’s status as an independent contractor and specifies the salesperson is an independent contractor for federal tax purposes. 
  2. Pay salespeople on a commission basis.
  3. Require salespeople to provide their own equipment, like cars, phones and computers.
  4. Require salespeople to cover their own business expenses, like insurance, gas, phone bills, and client entertainment.
  5. Avoid mandating dress codes, meeting attendance, desk or phone coverage.
  6. Avoid referring to salespeople as employees.

By observing these best practices, brokerages can preserve the freedom to choose working arrangements which benefit brokerages, salespeople and consumers. 

Thank you for watching this Window to the Law. 

Additional Resources

Window to the Law is a monthly video series that provides valuable risk management tips and information to help real estate professionals navigate legal issues facing the real estate industry.
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