Brokers and agents, beware! Misclassifying employees as independent contractors has potential to bankrupt your business

If courts reclassify agents as employees, what will this mean for virtual brokerages, underperforming agents?

Do you run a brokerage or a team? Do you have someone who does part-time work for your business on the side that you pay as an independent contractor? If so, you may be playing with a loaded gun that can literally bankrupt your business.

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You may already know about the lawsuits filed against Coldwell Banker and Redfin alleging that their agents were acting as employees rather than independent contractors.

Given how slowly the courts move and that any verdict will probably be appealed, this story fell off my radar. At our recent Awesome Females in Real Estate (AFIRE) conference, however, Leslie Appleton-Young, the chief economist and vice president of the California Association of Realtors, indicated how such lawsuits could fundamentally change how the real estate industry is conducted.

Appleton-Young voiced concerns about “the impact on their (CAR) membership, as well as the real possibility that a number of firms would go bankrupt if the court reclassifies agents from independent contractors to employees.”

The risk for brokerages and agent teams who currently have independent contractors could include payment of back wages, benefits, fines, IRS penalties, as well as potential agent reimbursement for agent-paid MLS and board membership fees.

In my opinion, the most profound change would be the elimination of hundreds of thousands of agents who fail to produce enough income to merit being hired as an employee with benefits.

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Part of the confusion around this issue is that there are two different standards for determining whether someone is an independent contractor. The first is the three-factor IRS Code of what constitutes a “qualified real estate agent.”

The risk for brokerages and agent teams who currently have independent contractors could include payment of back wages, benefits, fines, IRS penalties, as well as potential agent reimbursement for agent-paid MLS and board membership fees.”

The second is a more comprehensive 20-point checklist.

Karel Murray, past president of the Real Estate Educators Association who also holds a bachelor’s degree in human resources, recommends that companies use the more comprehensive 20-point checklist. The 20 factors are summarized here.

Far-reaching effects

The effects of reclassifying agents as employees rather than independent contractors are profound. One hundred percent commission models, virtual brokerages and firms that support high numbers of agents who close no deals could be hit especially hard.

Agent teams, especially inside of larger brokerages, may create additional liability for these firms. Specifically, agents often assume that their team members are independent contractors when their team members are actually functioning as employees.

Protect yourself and your business

Here is a partial list of areas where you may be vulnerable as an agent or a broker. Since employment and tax laws vary from state to state, check with your CPA/tax attorney — as well as with an employment attorney — to determine whether any of the items below are an issue for you or your business.

1. Combination reimbursement models are a red flag

If you have someone that you pay both on a commission and an employee basis, this is a red flag for the IRS. For example, if you are a broker and you pay an agent to cover the reception desk on weekends, or if you run a team and you compensate a team member with a combination of hourly earnings plus commissions, you probably have an issue.

Many agents and brokerages have chosen to avoid this issue by compensating staff as either an employee or as an independent contractor, but not both. A particularly sticky part of this issue occurs when you are compensating the agent on commissions and they then compensate a team member as an employee. Is this a combination reimbursement schedule?

2. Do you supply tools and equipment to your agents or staff?

An independent contractor normally pays for his or her own supplies, materials and technology. For those who run a team or have teams in their offices, if the agent provides a team member with a computer, materials or other supplies, that person is probably an employee and will need to be compensated as such.

3. Required hours or office meetings?

Do you require your agents to attend your office meetings or to be available for floor duty? If so, you may be creating an employee situation. If you are running a team and require your team members to be present at times you set for them to prospect, hold open house, or to take incoming sign calls, especially if they have to be in your office, chances are that team member should be compensated as an employee.

4. A major issue for those using virtual assistance

I currently use a virtual assistant who manages my company. She has other clients. If she loses those clients and works only for our company, she would be considered an employee, even though she works out of state, works on her own schedule, has her own equipment and has met the classification of independent contractor for the last 16 years.

The issue this raises from both the brokerage and the agent side is whether the person you pay $10 per hour to put out your signs or brochures, pick up your cleaning or do other tasks is an employee.

One way to circumvent this issue is to hire people through a service such as Elance.com or Odesk.com where you pay the service and they reimburse the contractor.

It will probably be a number of years before the lawsuits around this issue are tried and appealed in the courts. Nevertheless, if you suspect any of your independent contractors may be acting as employees, take immediate steps to have your situation reviewed by the appropriate legal and tax experts to identify any steps you need to take to be in compliance with the law.

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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