Within the next few weeks, the Massachusetts State Supreme Court will hand down its decision in Monell v. Boston Pads — a case that asserts that agents must be treated as employees rather than independent contractors. Although virtually everyone in the real estate industry agrees that making all agents employees would be a disaster, could there be an upside?
The challenge facing the real estate industry regarding independent contractor status can be summed up in two simple statements. The independent contractor statutes say that independent contractors must be free of supervision from their employers. The real estate statutes say that brokers must supervise their agents.
This conflict has allowed attorneys and their plaintiffs to attack independent contractor status in the courts. In addition to Monell, three additional suits (Bararsani v. Coldwell Banker, Cruz et al. v. Redfin, and Galen v. Redfin) allege that these companies misclassified their agents as independent contractors rather than employees.
Based upon the arguments before the Massachusetts State Supreme Court, it seems likely that the decision in Monell will probably support the status quo — agents might be classified as independent contractors or employees. The Bararsani litigation, however, appears to have the greatest potential for forcing agents into an employee status rather than an independent contractor relationship.
I recently spoke at the Texas Association of Realtors winter meeting on this topic. The last hour of the session was devoted to “What would happen if?” the group had strong, persuasive arguments as to how a shift to employee status would harm not only practitioners, but consumers as well. No one, however, made a strong case for some of the benefits that could ensue from such a shift. Although I personally support maintaining independent contractor status, here are some of the positive benefits that could result.
1. Culling out the “I like looking at houses” crowd
Real estate has always attracted people who thought an agent’s job consisted of looking at houses, having their brokers send them leads, taking an order and collecting a commission check. Although a reduction of 50 to 70 percent of the current agent population would be a disaster for many parts of the industry, those who would remain as employees would be the salespeople who have a stable production history. This would be a boon for virtually everyone involved in the transaction. One of the biggest complaints from top producers is how they end up having to handle issues on both sides of the transaction because the other agent has no idea what he or she is doing. Transaction problems are more likely to be overcome when you have seasoned agents working together to find solutions.
2. Raising the bar on professionalism
For years, the National Association of Realtors’ statistics have shown that approximately 10 percent of the agents are doing about 90 percent of the business. The challenge is the huge number of untrained agents who have little or no experience. According to the Swanepoel Trends Report 2015, in five states you need 40 hours or less of licensing training to become an agent. If brokers had to pay salaries and benefits, they could set higher standards including requiring mandatory training, working with a mentor or even having a college degree.
3. Improved customer experience
If all agents were employees, the brokerage could better control the customer experience. Part of the appeal of brands such as Starbucks is the consistency of the customer experience no matter where the store is located. In an employee model, brokerages could implement standards to improve the customer experience, including a consistent, systematized approach to marketing listings and closing transactions, mandatory response times to incoming customer inquiries, and standards for how agents treat their clients throughout the transaction.
4. New opportunities for brokers
Bryan Robertson, CEO of Los Altos, California-based Catarra Real Estate, believes that a forced employee model would create challenges, but it would also create opportunities.
“I think the shift to an employee model will require brokers to be more proactive and efficient about marketing services, lead generation, and other factors that make business profitable,” he says.
He sees the salary model providing:
- A focus on strong sales professionals.
- Revenue accountability for agents and brokers.
- Introduction of quotas.
- Bonus awards to motivate agents who exceed quotas.
- Reduction of head count in brokerages.
- Reduction in operational expenses due to excessive numbers of agents.
- More broker control over the customer experience.
(Swanepoel Trends Report 2015)
5. A better deal for agents
Although an employee model is not particularly appealing to many entrepreneurial agents, there would be some major benefits, especially for middle-range producers. Examples include:
More stable income
Many agents struggle with the feast-or-famine nature of the real estate business. Having a salary will help agents to weather slumps by providing them with consistent income, less outgo for FICA (agents currently pay all 100 percent), as well as fewer agents being unable to cover their income taxes.
Health, unemployment and worker’s compensation insurance
Hundreds of thousands of Realtors lack adequate health insurance. Brokerages typically can provide better group health insurance at lower rates as compared to what most agents can currently buy now on their own. Workers’ compensation would provide benefits for agents injured on the job. Terminated agents would be able to draw unemployment insurance, as well as having access to COBRA, to cover their transition.
Time off, including paid vacations
By law, employees must be granted a certain amount of time off, including vacation time. If they are hourly rate employees, they must have scheduled hours including regularly scheduled breaks.
Part-timers could get paid
The percentage of part-time agents who close a transaction and receive a commission check is miniscule. An employee model would allow these agents to get paid an hourly rate for the activities they provide. It would also help them to transition more quickly into the business as well.
If the courts put an end to independent contractor status, the effects would be devastating. Nevertheless, as one of my high-tech business friends once said, “America is the great workaround society.” The industry will weather the storm and ultimately find a way to work around whatever happens.
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.
Editor’s note: This story has been updated; an earlier version incorrectly stated that Minnesota requires 13 hours of licensing training to become a real estate agent.