Window to the Law: Worker Classification Update

Worker classification is a critical issue for the real estate industry. Many brokers classify their salespeople as independent contractors since salespeople typically operate independently and are paid on a commission basis. Brokers also enjoy a lower exposure to liability for independent contractors. Whether that classification is proper, however, will depend on the actual relationship between the broker and salesperson. Unfortunately, a number of court cases have been filed recently challenging the classification of salespeople as independent contractors, which is why it’s crucial for brokers to ensure that as independent contractors are properly treated as such.

Worker classification is governed by state law, and the tests vary from state to state. Three common tests are the ABC Test, the Economic Reality Test, and the Common Law Test, all of which 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 under the tests.

The real estate industry is unique, however, in that while salespeople are often highly independent, state law typically requires brokers to maintain control and oversight over salespeople. This responsibility to control directly conflicts with the worker classification tests. Also, a broker’s relationship with its salespeople varies from brokerage to brokerage, resulting in different applications of the worker classification tests.

This inherent tension between a broker’s statutory obligation to maintain control and the standard practice of treating salespeople as independent contractors has resulted in a number of lawsuits. Most recently, real estate licensee plaintiffs in California have filed suit against their brokerages under the California Private Attorneys General Act, or PAGA, alleging that salespeople were misclassified as independent contractors. PAGA allows aggrieved employees to file lawsuits against their employers for Labor Code and OSHA violations and recover penalties on behalf of themselves, other employees, and the State of California. For any PAGA penalties assessed against an employer, the aggrieved employees receive 25% of such penalties, and the remaining 75% is allocated to California’s Labor and Workforce Development Agency. Real estate licensee plaintiffs are also filing traditional class action lawsuits in other states, which similarly allege that salespeople should be classified as employees.

Ultimately, it’s a broker’s right to classify their salespeople as either employees or independent contractors. Whatever that choice, it’s crucial to treat salespeople consistently with the desired classification. The more control a brokerage has over a salesperson, the more likely that salesperson will be deemed an employee. The following best practices will help any brokerage that wants to ensure its salespeople are properly considered independent contractors.

First, and most importantly, always use an independent contractor agreement that clearly defines the salesperson’s status as an independent contractor. Include other provisions supporting that relationship, such as specifying that the salesperson will be treated as an independent contractor for federal tax purposes, that the salesperson will be paid on a commission basis, and that the salesperson is responsible for supplying his or her own tools and materials.

Keep in mind that an independent contractor agreement alone could be insufficient to establish that salespeople are in fact independent contractors. Courts and government agencies will look at the realities of the parties’ relationship and how much control the broker actually exerts over his or her salespeople. So, be sure to:

1. Have salespeople provide their own tools and materials, such as a car, computer, and phone.
2. Use a commission-based compensation structure.
3. Require salespeople to cover their own business expenses, such as insurance, gas, phone bills, and client meals.
4. Consider avoiding dress codes, mandatory desk or phone time, or mandatory meeting attendance.
5. Do not refer to salespeople as employees or staff, including within contracts or other formal documents.
6. And finally, ensure your business practices are consistent with your state’s laws.

Be sure to check out NAR’s other resources on worker classification.

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