Teams are an increasingly common way to operate a real estate practice. According to NAR’s 2021 Profile of Real Estate Firms, 13% of all real estate firms had teams, with a median of three people per team. Since brokers remain liable for supervision of teams, it is not surprising that supervising real estate teams is among a broker’s biggest challenges.
Teams take many forms but generally involve one or more highly successful salespersons or “team lead”, working with less experienced sales persons and unlicensed support such as marketers and transaction coordinators. There are three main legal issues teams should consider: state licensing law, employment law and business entity operations.
At least 24 states have specific requirements for teams. Some states require teams to register if they are advertising or doing business under any name different from their license or brokerage. Keep in mind, the NAR Code of Ethics and most state laws require teams to conspicuously display the real estate brokerage’s name in any team advertisement. Several states require specific agency disclosures when two team members represent different parties in the same transaction. Many states also require specific client disclosures when services are provided by an unlicensed team member.
Employment law and worker classification are other major issues for brokers and team leads to consider. Salespersons working on a team should generally be treated as independent contractors or employees consistent with brokerage policy for all salespersons. The difference between an employee and an independent contractor is the amount of control the business exerts over the salesperson. While team leads may want to dictate how team members interact with clients and manage their time, doing so poses a risk of misclassification of salespeople as employees, as opposed to independent contractors. Misclassification could subject the brokerage and the team to statutory fines, tax penalties and withholding, and payment of a minimum wage. However, unlicensed team members may be classified differently, consistent with brokerage policy. Unlicensed team members should be paid on an hourly or salary basis since most states prohibit the sharing of commissions with non-licensees.
Team leads are understandably excited about the new business venture, but shouldn’t overlook the importance of setting up the team properly. While some state laws require the registration of a team business entity, it may be a good idea even when not required to minimize the risk of costly litigation and regulatory complaints. There should be a team agreement in place addressing issues like compensation, who owns the team name and client lists, what happens when a team member leaves the team or the team dissolves, and how revenue and expenses will be divided among team members. Brokers should have a copy of the team agreement and require that all team members adhere to brokerage policies.
A well-drafted team agreement can ensure compliance with state law, avoid worker misclassification and minimize disputes. Brokers play an important role in supervising teams to mitigate risk to the brokerage while supporting an environment in which teams can thrive.