BrokerageRegulations

Worries for real estate mount as Uber independent contractor suit moves forward

NAR warns of potential 'drastic shift' in how real estate brokers do business

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Takeaways:

  • Class-action suit against Uber could spell big trouble for real estate agents and brokers.
  • Increased employment costs could lead to a “significant reduction” in agents, according to the National Association of Realtors.
  • Some state legislatures have specifically carved out real estate salespeople as independent contractors, but others have not.

A federal judge has granted class-action status to a controversial lawsuit questioning whether drivers for ride-hailing app company Uber are independent contractors or statutory employees, allowing the case to move forward.

The eventual outcome of the case and a slew of others could spell big trouble for other businesses, including real estate brokers, that have for many years chosen to classify real estate agents as independent contractors.

Some of the cases directly involve real estate agents and brokers, and some don’t. At the same time, many state legislatures are taking a closer look at employment relationships in the real estate industry and are carving out exemptions to protect the business model, and some protections exist at the federal level as well.

But recent battles in the court arena “could lead to a drastic shift in the way the real estate industry has historically done business in those states,” warns the National Association of Realtors (NAR), which recently published a white paper on the use of independent contractors in real estate and how the practice may be impacted by cases like Uber’s.

“For decades, the industry has primarily relied on the independent contractor model for conducting its business,” the association stated.

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“If a broker’s ability to treat real estate salespeople as independent contractors is limited, then brokers will be forced to take on more costs and responsibilities, such as the provision of employee benefits and payment of various employment taxes, than previously accounted for within a broker’s business model.

“A resulting shift away from the independent contractor model may result in a significant reduction in the number of real estate agents, as brokers struggle with the increased costs of employing agents.

“In addition, brokers would have to assume heightened control over real estate salespeople, resulting in a significant decrease in the freedom and flexibility that real estate agents currently enjoy in an independent contractor relationship.”

Gratuity not included

The trouble for Uber began in August 2013, when four drivers — Douglas O’Connor, Thomas Colopy, Matthew Manahan and Elie Gurfinkel — took issue with Uber’s gratuity policy.

They filed suit in San Francisco’s U.S. District Court for the Northern District of California against Uber, as well as Travis Kalanick, the company’s co-founder and CEO, and Ryan Graves, head of global operations, who are responsible for Uber’s pay and employment policies across the country.

In their complaint, the four San Francisco Bay Area drivers said Uber advertises to riders that gratuity is included in the cost of the service, but many drivers receive only a portion of that gratuity — if they receive anything at all.

According to the drivers, because Uber communicates to customers that gratuity is included in the price of its service, few customers leave tips.

But the plaintiffs further alleged that they and other Uber drivers across the country have been misclassified as independent contractors, but are, in fact, employees under most state labor laws in that they are required to pay business expenses, such as vehicle gas and maintenance.

“They are required to follow a litany of detailed requirements imposed on them by Uber, and they are graded, and are subject to termination, based on their failure to adhere to these requirements (such as rules regarding their conduct with customers, the cleanliness of their vehicles, their timeliness in picking up customers and taking them to their destination, what they are allowed to say to customers, etc.),” the plaintiffs alleged in their complaint.

The lawsuit was filed on their own behalf and that of about 160,000 other Uber drivers in the country (except Massachusetts, where lawmakers are working to implement safety and other restrictions on the service) for unjust enrichment, tortious interference with contractual and/or advantageous relations, and violation of the California Gratuities Law, California Labor Code Section 351 and the California Unfair Competition Law.

In its defense, Uber has countered in court documents that not only have the plaintiffs failed to state “enough facts to state a claim to relief that is plausible on its face,” but also noted that the Software License and Online Services Agreement and Driver Addendum Related to Uber Services that it enters into with its drivers specifically provides that the company is not the drivers’ employer and denies Uber the requisite control needed to establish an employment relationship under employment laws.

Judge defines the class

After a flurry of filings during the last two years, U.S. District Judge Edward M. Chen ruled on the plaintiffs’ motion for class-action certification. The Sept. 1 ruling does not discuss the merits of the case. It answers only two questions: whether the case can properly proceed as a class action, and if so, how.

Giving partial approval to the class certification, Chen ruled that the class will be defined as: “All UberBlack, UberX and UberSUV drivers who have driven for Uber in the state of California at any time since Aug. 16, 2009, and who (1) signed up to drive directly with Uber or an Uber subsidiary under their individual name; and (2) are/were paid by Uber or an Uber subsidiary directly and in their individual name; and (3) did not electronically accept any contract with Uber or one of Uber’s subsidiaries … unless the driver timely opted-out of that contract’s arbitration agreement.”

This motion was granted only for the plaintiffs’ claim that drivers were owed tips, and not necessarily that they are unfairly denied compensation for items like mileage and taxes.

Chen effectively shut down Uber’s arguments against class-certification, calling them “problematic.”

The company had argued that the drivers’ employment classification cannot be adjudicated on a classwide basis because both its right of control over its drivers, as well as the day-to-day reality of its relationship with them, are not sufficiently uniform across the proposed class to satisfy legal requirements.

“There is inherent tension between this argument and Uber’s position on the merits,” Chen stated in his ruling.

“On one hand, Uber argues that it has properly classified every single driver as an independent contractor; on the other, Uber argues that individual issues with respect to each driver’s ‘unique’ relationship with Uber so predominate that this court (unlike, apparently, Uber itself) cannot make a classwide determination of its drivers’ proper job classification. It appears that at least one of these arguments cannot be entirely accurate.”

A case management conference has been scheduled for Oct. 22.

In a blog post discussing Chen’s decision, Abby Horrigan, managing counsel for employment at Uber, hinted at how the company may respond to this development.

Noting that the ruling excludes drivers who opted out of the arbitration option in their agreements since June 2014 — which occurred around the time that Uber experienced most of its growth in driver numbers — Horrigan said, “only a few hundred drivers who are actively driving with Uber today can now be part of this case.”

In addition, Horrigan contended that before June 2014, most of Uber’s business in California was comprised of drivers for UberBlack who work primarily for limo companies and can’t be included in the case because they never had a contract directly with Uber.

“In fact, one of the three plaintiffs — Thomas Colopy — has only worked for limo companies and so can no longer be included in the case,” she said. Other people who registered with Uber as a corporation also cannot participate in the class, she added.

“Despite these facts, we will likely still appeal because partners use Uber on their own terms, and there really is no typical driver — the key question at issue here,” Horrigan wrote.

“When asked in a survey earlier this year, most drivers said they love being their own boss. And it’s no wonder: Uber fits around their lives, not the other way around.

“Most drivers who use the Uber app already have full-time careers or part-time jobs. Many are students or retirees. About half of drivers in the U.S. work less than 10 hours per week.

“And, most drivers vary the number of hours they drive each week significantly. You’re more likely to find someone who drives five hours one week, 15 hours the next and eight hours the week after, than one who drives 10 hours week after week.”

Real estate’s unique framework

If that scenario sounds familiar, it’s probably because independent contractor relationships between real estate brokers and their salespeople are a long-standing tradition in the real estate industry.

In its June 15 white paper, NAR warned its members that the outcome of cases like Uber’s — which is only one of several cases in a recent wave of similar litigation — could potentially have a wide-reaching impact on the manner in which brokers have traditional done business.

“The real estate industry is not alone, as the issue of worker classification has been raised in several industries in various jurisdictions throughout the country, and the Department of Labor has made it clear that it will aggressively pursue worker misclassification as a top priority,” wrote Joe Molinaro, NAR’s managing director of smart growth and housing, and Lesley Walker, the association’s associate counsel, in the white paper.

“While the issue of worker classification has been challenged in a variety of industries, the real estate industry’s regulatory structure presents a unique framework within which to operate when it comes to worker classification.

“The hallmark characteristic of an independent contractor relationship is one where the worker is generally free of control. However, state real estate statutes specifically require brokers to exercise supervision over their agents.

“Since the requirement of a broker to exercise supervision over agents is in direct conflict with one of the basic tenets of an independent contractor relationship, it is difficult for a broker to both comply with labor laws in order to establish an independent contractor relationship while also fulfilling their supervisory duties under state real estate laws.”

According to NAR’s analysis, about 22 state real estate statutes contain language expressly permitting a real estate broker to treat their real estate salespeople as independent contractors while simultaneously exercising their mandatory supervisory duties under the statute.

Several other states, including Indiana, Michigan and South Dakota, have also addressed this issue head on and enacted legislation to eliminate a conflict between the labor laws and the real estate statute.

But state legislatures are not alone in recognizing the unique nature of the real estate industry and the corresponding need to carve out real estate professionals from general application of particular statutes, NAR noted.

The Internal Revenue Service considers real estate agents to be “statutory nonemployees” if three factors are met: the agent must be licensed; all payments for the agent’s services must be directly related to their sales or other output, rather than based on number of hours worked; and lastly, the agent’s services must be performed pursuant to an agreement that states the real estate agent will not be treated as an employee for federal tax purposes.

This three-pronged test is intended only to determine the federal tax treatment of agents, but it also “demonstrates the federal government’s recognition of the unique nature of the real estate industry and, as such, the need to treat it differently than other industries,” NAR said.

Yet another important consideration is the Affordable Care Act (ACA), which requires large employers (those with 50 or more employees) to offer health care coverage to their full-time employees. But as NAR pointed out in its white paper, the ACA also recognizes that agents who are recognized as “qualified real estate agents” and statutory non-employees under the IRS code will similarly be viewed as “non-employees” under the act.

“Here again, the federal government acknowledged the unique independent contractor relationship between real estate salespeople and brokers,” NAR said.

But the trade group added that “a recent uptick in litigation has generated concern among brokers across the country. 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.”

For those reasons, NAR recommends that states review their existing labor and employment statutes, along with their real estate statute, and determine if those laws sufficiently secure brokers’ ability to classify real estate agents as independent contractors.

In some states, it may be appropriate to urge legislatures to make a direct and unequivocal carve-out for the treatment of real estate salespeople as independent contractors.

“This will help solidify the status of real estate salespeople as independent contractors and avoid future litigation,” NAR advised.

Email Amy Swinderman.