Do you run an agent team or manage an office with agent teams? Do you or do any of your independent contractors manage other independent contractors? If so, now is the time to seriously consider moving to an employee model. Failure to do so could have dire consequences for your business.
Should real estate agents be required to be employees rather than having the option to be independent contractors? When Inman asked readers this question, the results were overwhelming: 79 percent said “no,” 17 percent said “yes,” and 4 percent were unsure.
The attack on independent contractor status
If you’re unfamiliar with the battle being waged over independent contractor vs. employee status in the real estate industry, most experts agree this may be the greatest threat ever to the real estate business as we know it.
The challenges in the four cases currently pending over this issue (Bararsani v. Coldwell Banker; Cruz v. Redfin; Galen v. Redfin; and Monell v. Boston Pads) result from one central conflict: Real estate law requires brokers to supervise their agents, while labor law normally does not allow independent contractors to be supervised. Attorneys have used this discrepancy to allege that current brokerage practices violate the labor laws and that their plaintiffs should have been compensated as employees rather than independent contractors.
Making the issue even more complex, the definition of the term “independent contractor” varies depending upon which law is being considered. Different statutes (for tax, unemployment taxes and workers’ compensation) define “independent contractor” differently.
Monell v. Boston Pads: a glimpse of what’s to come?
Monell v. Boston Pads (Massachusetts) is the first state Supreme Court case to address whether real estate agents should be reclassified as employees rather than independent contractors. The court’s ruling will be released this spring. (To listen to the full hearing, visit this link.)
Massachusetts law uses a “three-factor test” to determine independent contractor status as opposed to the more complex “multifactor” test. Defense counsel Steve Perry summarized the three-factor test as it applies in Massachusetts:
1. Supervision: The individual must be free from “control and direction” in connection with respect to his or her performance.
2. The agent must act outside the course of the broker’s business, which is “literally impossible.”
3. The agent “must wear his or her own hat” in terms of being engaged in a profession different from the employing broker (which is also impossible).
Judge Robert Cosgrove summed up the Monell conflict:
“It is difficult to read the independent contractor and real estate statutes harmoniously … This begs the question, how can a real estate salesperson be ‘free from control’ of the broker under the independent contractor statute, where the real estate statute requires that the salesperson ‘be under (the) supervision of (the) broker’?”
Cosgrove decided that one of the two statutes would have to prevail. He found in favor of the brokers, rejecting the agents’ claims that they should have been compensated as employees.
What’s unusual about Monell is that the Supreme Court took this case directly from the trial court rather than waiting for it to be heard at the appellate level.
While the Supreme Court justices challenged both sides, the most notable debate came over plaintiff attorney Hillary Schwab’s contention that “the commission-only provisions of the minimum wage law only provide an exemption for overtime, but not for minimum wage.”
Justice Robert J. Cordy retorted: “So commission-only doesn’t mean commission-only?”
Schwab replied: “The minimum wage law contains no exemptions for commission employees.”
Justice Barbara Lenk inquired, “Is there any time that agents can be independent contractors?”
Before Schwab could respond completely, Lenk interrupted her by asking: “But who draws the line? Why doesn’t the broker get to decide the degree of supervision?”
While the ruling in Monell will apply only in Massachusetts, the losing side could appeal the ruling to the United States Supreme Court.
What makes teams vulnerable
Even if all four decisions ultimately side with the defendants and support continuation of the independent contractor model, agent teams are particularly vulnerable to violating the labor laws.
Specifically, the real estate statutes give supervisory duties to the managing/supervising broker. Nowhere in the statutes does the law extend this duty to an independent contractor agent who “manages” other independent contractor team members. In other words, agent team members who are required to attend regular meetings, hold open houses at specific times, or to use the same tools and systems that their team leader uses should be classified as employees.
What steps can brokers and agent team leaders take to comply with the law, as well as to minimize their risk of litigation? See Part 2 to learn more.
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, author and trainer with over 1,000 published articles and two best-selling real estate books. Discover why leading Realtor associations and companies have chosen Bernice’s new and experienced real estate sales training for their agents at www.RealEstateCoach.com/AgentTraining and www.RealEstateCoach.com/newagent.
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