Could the National Association of Realtors lose more than half a million members in one simple stroke of President Obama’s pen?

Several months ago Fafie Moore of Realty Executives Nevada alerted me to a crackdown on independent contractors’ employment classification.

According to Moore, a legislative provision dealing with independent contractor status could occur as an add-on to another bill.

If the independent contractor status of real estate agents were eliminated, the results would be devastating to current business models.

Editor’s note: See related article: "8 reasons we need independent contractors."

Could the National Association of Realtors lose more than half a million members in one simple stroke of President Obama’s pen?

Several months ago Fafie Moore of Realty Executives Nevada alerted me to a crackdown on independent contractors’ employment classification.

According to Moore, a legislative provision dealing with independent contractor status could occur as an add-on to another bill.

If the independent contractor status of real estate agents were eliminated, the results would be devastating to current business models. Many brokers would be forced to move to an employee model. Would individual agents set up separate companies to contract to do work with the broker’s company? The havoc this would wreak within the industry would be beyond almost anything we can imagine.

It likely won’t come to that. In an article in this month’s edition of Realtor Magazine, an official publication of the National Association of Realtors trade group, J.D. Rinehart, NAR’s vice chairman of NAR’s Federal Taxation Committee, said, "For real estate, sales associates’ status as independent contractors is very well defined in law and laid out very simply."

He added, "We’re in good shape … as long as we continue to adhere to these very well-established criteria."

The article’s author, Robert Freedman, also notes, "Much, if not all, of any stepped-up enforcement would likely bypass real estate, NAR analysts say," as a special provision in the Internal Revenue Code (Section 3508) provides specific criteria that real estate brokers use to classify sales associates as independent contractors.

Freedman does note that there has been an "intensified" focus on the issue of independent-contractor status, and the Obama administration has supported a "ramp up" in "investigations of employee misclassification."

And members of Congress have introducted legislation (see: Taxpayer Responsibility, Accountability, and Consistency Act) to clarify the definition of independent contractor, among other aims, Freedman reports.

Because of its reliance on the independent contractor employment model, a total cessation of that classification would be disastrous to the industry.

Here are just a few examples of the potential fallout such a hypothetical change could produce:

1. The brokerage-agent cost relationship shifts dramatically
Broker profit margins are already thin. Many of the largest firms are running at a loss. Thousands of companies are tied to long-term leases for large office space. A forced switch from independent contractor agents to employee agents means that brokerages will now have to pay normal employee expenses, including unemployment insurance, workers’ compensation, as well as the employer share of Social Security withholding (FICA).

As an employer, the brokerage may also have to be responsible for handling errors and omissions insurance, auto expenses, computers, phones and all the other normal expenses linked to having employees. It’s also unclear whether the brokerage would also be responsible for MLS fees, any costs related to marketing the firm’s listings, and possibly auto expenses as well. These additional expenses would put many brokerages already on the edge out of business.

2. Surviving brokerages will have to reinvent their business and compensation models
An immediate outcome of this shift would be that most brokerages would fire all nonproductive agents. This would eliminate virtually all part-timers plus a large percentage of full-timers who do a few deals per year. Of those who remain, high commission splits would become a distant memory.

Because the brokerage would be incurring so many costs, brokers will have to reduce agent splits. "Draw against commissions" and "production quotas" would become part of the standard lexicon of residential brokerage. …CONTINUED

3. Health care issues compound the difficulties
The newly passed health care legislation seems to require part-time employers to pay a pro-rata share of their part-time employees’ expenses or pay a fine. For example, if an "employee agent" works only 40 hours per month (out of a 160-hour work month), the employer would be responsible for paying 25 percent of the employee’s health care expenses unless that individual had coverage elsewhere.

4. Will eliminating independent contractors kill the "rent-a-desk" model?
Many agents lack broker’s licenses. This means they must be under the wing of a "supervising broker" in order to do business. If the agent must be "supervised," then that could trigger an employee relationship in this hypothetical scenario.

For those agents who hold brokerage licenses, they could elect to "rent a desk," but this would be the equivalent of renting office space. If the agent requires any services from the brokerage, the employee provision would probably apply. The result could be that the industry will shatter into thousands of mini-brokerages much like it was back in the mid-20th century.

5. Agent teams operating inside of umbrella brands create multiple employee issues
The team model has become quite popular inside a number of major brands. The challenge is that if agents can no longer be independent contractors, what happens to teams that work within an existing brokerage? Will the brokerage have to make all members of the agent’s team employees of the brokerage?

Could a team leader hire employees under an umbrella brand and take on the responsibility of the costs and liability? In that case, would there be secondary liability for the team leader’s supervising broker?

6. The industry shrinks by 50 percent or even more
One of the most stunning results of this change would be that brokerages would immediately get rid of any agents who are not meeting minimum production standards. Since many of these agents will not have broker licenses, they will have no choice but to leave the business.

The loss of hundreds of thousands of agents would also create huge issues for Realtor associations in terms of their business models. Companies that serve the industry would also see their user base decline dramatically, which would put a number of them out of business.

The changes above look at the effects the elimination of the independent contractor status could have at the macro-level. Don’t miss Part 2 of this series that examines how this change may impact individual agents who manage to stay in the business.

Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, trainer and author of "Real Estate Dough: Your Recipe for Real Estate Success" and other books. You can reach her at Bernice@RealEstateCoach.com and find her on Twitter: @bross.

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