Are real estate agents independent contractors or employees? This seemingly simple question has sparked some debate — and some lawsuits.

The controversy seems to have reached new levels since the arrival of new “sharing economy” business models like Uber, which also bring lawsuits in their wake. Uber’s lawsuit is still pending, but a lawsuit settled in 2015 and one settled in 2016 have direct applications to real estate.

So here are your questions about real estate independent contractor lawsuits, explained.

What’s the issue?

According to a National Association of Realtors white paper about the topic, real estate agents occupy a unique legal status. Real estate agents must be supervised by a broker, so they don’t meet the “hallmark characteristic” of an independent contractor: freedom to operate their business how they want and when they want, without oversight.

However, in many other ways, real estate agents are treated as independent contractors. For example, the Internal Revenue Service (IRS) asks agents to follow self-employment tax laws, with a few exceptions.

This means that real estate agents are caught in a kind of legal middle ground. They have some control over their business practices — quite a bit more than a typical employee. But every agent is still accountable to a broker as well as clients.

Bararsani v. Coldwell Banker

What is it?

A class action lawsuit filed in 2012 and accusing Coldwell Banker Residential Brokerage Co. of misclassifying some of its real estate agents as independent contractors while allegedly treating them as statutory employees. It was settled out of court in January 2016 for $4.5 million, $1.5 of which will go to lawyers and the rest of which will be distributed to plaintiffs.

Why was the lawsuit filed?

Ali Bararsani, a real estate agent in Southern California, alleged that Coldwell Banker “willfully misclassified” current and former affiliated sales associates as independent contractors while exerting significant control over their work, including requiring them to work at a designated physical location, requiring them to attend training meetings and precluding them from working for any other company or brokerage.

Arguing that they were being treated as employees as defined by the California Labor Code, the plaintiffs contended that they were deprived of employee benefits such as regular and overtime wages, payroll taxes and reimbursement of business-related expenses.

Who was included in the lawsuit?

Bararsani was filed on behalf of all individuals who worked for Coldwell Banker in California from November 2008 to May 2014 and were classified as independent contractors.

The defense

In July 2013, Coldwell Banker filed a demurrer, asserting that it believed it had properly classified the sales associates by following “widespread industry practice for many decades” as well as satisfying California’s three-part test for classification of real estate professionals as independent contractors.

That test, laid out in California Business & Professions Code Section 10032, provides an exemption for real estate agents to be classified as independent contractors if three conditions exist:

  1. They possess a real estate license;
  2. They derive substantially all of their compensation for services performed as a real estate agent rather than the number of hours worked; and
  3. They perform their services pursuant to a written contract that identifies that they will not be treated as an employee for tax purposes.

Did it work?

It did not. The court shot down the demurrer, stating that it would use the IRS’ more complex, 11-factor test to determine whether the plaintiffs were misclassified. Coldwell Banker sought a discretionary review of that decision in September 2013, but the Court of Appeal denied that petition in November 2013.

Next step: Class size reduction

Coldwell Banker employed another strategy in seeking to get the complaint dismissed, by using the arbitration provisions in its Independent Contractor Agreement (ICA) to reduce the size of the class. The company asked each putative class member whether he or she would prefer to be part of the class-action lawsuit or arbitrate one-on-one with Coldwell Banker.

Ultimately, this strategy worked, as a majority of agents opted for individual arbitration, shrinking the size of the class — and, absent the catastrophic damages the plaintiffs sought, paving the way for a settlement to be put on the table.

The steps toward settlement

An exchange of information and discovery followed. According to Los Angeles Superior Court Judge William F. Highberger’s settlement approval order, the plaintiffs considered the expense and length of continuing the proceedings, the uncertainty and risk of the outcome of further litigation and the burden of proof necessary for establishing liability, while Coldwell Banker continued to deny any fault, wrongdoing or liability, including any concession that class certification would be appropriate.

Both sides entered into a private mediation and reached a tentative settlement agreement in May 2015. The proposed settlement was filed with the court in July, and a hearing was held in August where the court certified a class of 5,631 members, granted preliminary approval to the settlement and set the final approval hearing for Jan. 13 of 2016.

Who was included in the settlement?

For settlement purposes only, the court defined the class members as “all sales associates and/or real estate agents who were classified by Coldwell Banker as independent contractors in the state of California from Nov. 15, 2008, through May 4, 2015, and who have not signed an agreement to arbitrate the claims in this matter on an individual basis.”

Under the terms of the settlement, the plaintiffs may not seek any further legal action against Coldwell Banker and its employees, directors, officers, attorneys, representatives, insurers, parent company, subsidiaries, affiliates, related companies, predecessors, successors, lessees and assigns.

Where will the money go?

Of the $4.5-million settlement, $1.5 million will go to the plaintiffs’ attorneys, who will also get another $25,629 for reimbursement of court costs.

Bararsani himself will receive $5,000 for serving as the class leader. Doing the math on the remaining funds, each known class member will receive about $535.

Who were the attorneys?

Bararsani was represented by Majed Dakak and Maxwell M. Blecher of Blecher & Collins PC, Larry W. Lee of Diversity Law Group and Dennis S. Hyun of Hyun Legal APC. Coldwell Banker was represented by O’Melveny & Myers LLP and Calvin E. Davis of Gordon Rees Scully Mansukhani LLP.

Did either side say anything else about it?

Coldwell Banker Residential Brokerage in Southern California released a statement saying that it “remains firm in its belief that it has properly classified its affiliated agents as independent contractors and that preserving the freedom for agents and brokers to engage one another as independent contractors is important to the independence, flexibility and ingenuity that energizes our industry.”

“While we have agreed to settle a class action involving mostly former and some current real estate agents affiliated with our company, Coldwell Banker Residential Brokerage makes no admission of wrongdoing or liability, and is not obligated to change its business structures. The company continues to deny that it did anything wrong, and believes it would have significant defenses to the claims asserted in the action. This settlement will end two and a half years of litigation, and we are pleased that this dispute will soon be behind us,” the company stated.

So who ‘won’?

The settlement is considered by many to be a huge win for Coldwell Banker, as a finding in favor of the more than 5,000 class members could have had big financial repercussions for the brokerage as well as its parent company, Realogy.

What’s more, many legal eagles and real estate industry leaders who nicknamed the case “The Big One” said the settlement averted the threat of half of California’s brokers and 75 percent of its agents being forced out of business.

Does this case only affect Coldwell Banker?

Some question whether a case targeting the largest Coldwell Banker-owned shop in California may have been an attack on the other brands under Realogy’s umbrella, including Better Homes and Gardens Real Estate, Century 21, ERA, Sotheby’s International Realty and ZipRealty.

In hushed tones, others have whispered their suspicions that the case may also have been an attempt to establish court precedent that could be used against some of the nation’s largest franchisors like Re/Max and Keller Williams.

But while the settlement has soothed those concerns — for now — the ability of real estate brokers to classify real estate salespeople as independent contractors remains an issue on which the industry is working to gain clarity.

Monell v. Boston Pads LLC

What is it?

A lawsuit filed by plaintiffs Nesto Monell, Jonathan Gibson, Rachael Butcher, Lindsey Burnes, Ann McGovern and Benjamin Smith. They were real estate agents working for defendants Jacob Realty, NextGen Realty and RentMyUnit.Com/Boardwalk Properties. A partial summary judgment was granted to the defendants in June 2015.

Why was the lawsuit filed?

Monell and the other plaintiffs had a few complaints about their relationship with their brokerages.

During training, the agents were required to work 60 “front desk” hours. After training was over, monthly “office hours” were required. During these hours, agents had to answer phone calls from and greet prospective clients.

Agents could choose their own office hours. However, they were allowed “only one shift change every two months,” according to the decision written by Justice Geraldine Hines for the Massachusetts Supreme Judicial Court.

The agents in the lawsuit also objected to the brokerages’ training programs, nondisclosure/nonsolicitation/noncompete agreements and the dress codes, cell phone requirements, suggestions that they purchase a day planner and threats of disciplinary action if they did not meet productivity goals.

Wait — but what’s Boston Pads?

It’s a website.

According a footnote in the decision written by Justice Hines: “The defendants deny that defendant Boston Pads, LLC, operates a real estate office and that it had any real estate agents associated with it. The defendants contend that Boston Pads, LLC, is a professional consulting services firm that does not trade, lease, buy, or sell real estate for commissions. For the purpose of this opinion, when we refer to the defendants or to the business entities, such references shall not include Boston Pads, Inc.”

What did the court decide?

A summary judgment for the defendants means that the court ruled in favor of the brokerages (defendants) and against the agents (plaintiffs). However, Justice Hines’ ruling makes it clear that this is not a runaway win that upholds the real estate industry’s current independent contractor status.

Monell and the co-plaintiffs filed the lawsuit under an independent contractor statute. Hines’ decision upholds a lower decision by a Superior Court judge that this statute does not apply to real estate agents.

“In reaching that conclusion, however, we take no position on whether the plaintiffs in fact are employees or independent contractors, or on how, in the absence of the framework established by the independent contractor statute, it may be determined whether a real estate salesperson is properly classified as an independent contractor or employee,” wrote Hines.

“In light of the potential impact of that issue on the real estate industry as a whole and its significant ramifications for real estate salespersons’ access to the rights and benefits of employment, we think it prudent to leave that issue’s resolution to another day, when it has been fully briefed and argued.”

This clearly leaves open the question whether real estate agents are considered employees.

CAR and NAR protect the homeland

CAR sponsored AB 2169 — what was that?

Recognizing the potentially devastating impact that Bararsani imposed on brokers, and spurred into action by a recent uptick in similar litigation, the California Association of Realtors (CAR) attempted to attack the issue legislatively.

In 2014, the association sponsored AB 2169, which sought to clarify existing state law allowing brokers and real estate agents to decide for themselves whether an agent is an independent contractor or an employee. But the measure failed to pass out of the Assembly Insurance Committee.

“We favor the right of the employing broker and their agents to choose whether they will be employees or independent contractors,” said June Barlow, CAR’s vice president and general counsel, in the 2015 Swanepoel Trends Report. “Of course, that means the applicable rules including the three-factor test would have to be followed.”

CAR’s revised independent contractor agreement

In February 2015, CAR revised its own ICA to insert an optional, binding arbitration clause which states:

  • “Broker and associate licensee must first attempt to resolve disputes by mediation before resorting to litigation or arbitration. The parties may mutually agree to have commission disputes heard by an arbitration panel at an Association of Realtors.
  • All unresolved claims must be arbitrated except claims between the brokerage or associate licensee and a client or customer (including cross-claims between the licensees).
  • Arbitration shall be conducted at nearest JAMS office in accordance with JAMS arbitration rules, which can be accessed on JAMS or CAR websites. Broker shall pay those costs that are greater than those that an associate-licensee would have to pay if bringing a case in court.
  • The arbitrator shall apply substantive law. All claims must be brought within the applicable statute of limitations.
  • Only individual claims may be brought. Neither the broker nor associate-licensee will bring or participate in a class action.
  • The arbitration proceedings shall be confidential.
  • Associate-licensee must separately initial the clause for it to be binding on both parties. Associate-licensee advised to seek legal advice before deciding whether or not to initial.”

NAR’s stance

In light of litigation like the Bararsani case, the National Association of Realtors (NAR) said in a September 2015 white paper that it will continue to take “proactive measures to gain increased clarity of a real estate broker’s ability to classify real estate salespeople as independent contractors.”

“Brokers are worried about what this litigation means to their businesses and whether they are exposing themselves to legal liability by classifying their real estate salespeople as independent contractors,” NAR stated.

Will there be more cases like this?

The answer: almost certainly.

Why?

Although brokers have emerged relatively unscathed from Bararsani and Monell, NAR noted an uptick in litigation across the country, and warned that “An unfavorable outcome in these cases could lead to a drastic shift in the way the real estate industry has historically done business in those states.”

Threats still on the horizon

In the 2015 Swanepoel Trends Report, Bernice Ross, CEO of RealEstateCoach.com and a consultant and columnist opinion on real estate industry issues, noted that despite the resolution reached in some of these cases, “as a defense against independent contractor misclassification and vicarious liability claims, a number of franchisors and broker owners are rewriting their franchise agreements/policies and procedures manuals to only include what is required to meet regulatory standards. Mandatory training, systems, tools and procedures must now become ‘optional,’ ‘highly recommended,’ or ‘best practices,’” Ross said.

Attorney and entrepreneur Rob Hahn presented a more pessimistic view on his blog, The Notorious R.O.B. In a post titled, “Forecast Calls for Vultures,” Hahn predicted that “we will see a flurry of litigation around the country against large real estate companies by a swarm of lawyers seeking a pay day.”

Amy Swinderman and Amber Taufen contributed reporting to this piece.