The majority of agents are ICs. Understanding what this classification means — and having a solid independent contractor agreement — is crucial for any brokerage or team.

Jay Thompson is a former brokerage owner who spent six years working for Zillow Group. He retired in August 2018 but can’t seem to leave the real estate industry behind. His weekly Inman column publishes every Wednesday.

Let’s get this out of the way right upfront: I’m not an attorney. This, or anything else I write, isn’t legal advice by any stretch of the imagination.

If you’re a broker or a team leader and making decisions about hiring and firing employees or bringing in and releasing independent contractors, then you have a lawyer, and you should be talking to them. If you’re a broker without an attorney on retainer, get off the internet, and go hire one.  

All that being said, let’s go back a couple of decades to when 38-year-old me was sitting in one of my last undergraduate classes (yes, I was on the “extended plan” for college graduation).

The professor, holder of one of the sharpest minds I’ve ever known, was waxing quite eloquently about the differences between independent contractors and employees. After sitting through several years of similar courses in the pursuit of my human resources degree, I’d long ago arrived at the conclusion that I knew enough on the subject matter — so I could safely detune.

Then Dr. Sutherland proclaimed, in her loud and, to be honest, distractingly raspy voice, “Mark my words, there is going to be all sorts of complications in the next 10 to 20 years from the IC (independent contractors) and employee line blurring.”

This caught my attention for a couple of reasons:

  1. The prof was an anthropologist, and when she started weaving stories of human culture into future predictions, it was always a fascinating discussion.
  2. She was really getting animated, and when Kay Sutherland (rest her soul) got wound up, look out. There was sure to be fireworks, impassioned debate and wonderful learning opportunities. So rather than detune, I leaned in.

To be honest, I don’t recall the specifics. Seems the discussion continued for a couple more classes. I distinctly recall gaining a good understanding of what separates employees and ICs, how their classifications matter and are interconnected with several other human relations types of operation — benefits, compensation, legal, contracts, etc. 

I know, weird to even care about things like employment classification types. But I was a younger person, wanting a new career path and HR fascinated me, boring as it probably sounds to many. 

Anyway, from those classes 20-some years ago to today, ICs are still the subject of discussion and debate. Remember the DANGER report? It put the IRS reclassification of ICs to employees as its fourth-ranked threat to agents.  

That the vast majority of real estate agents are ICs is a big deal. Change that, and you’re fundamentally changing many things. Yet despite its importance, there isn’t a lot of practical discussion about how to interact with ICs, and brokers receive very little training in what they can and can’t do with ICs under their supervision. There are a lot of misconceptions out there about what can and can’t be done with respect to independent contractors.

Employee vs. independent contractor

If you’re a broker or a team leader, you have to understand the differences between employees and independent contractors. Treating ICs like employees is problematic and potentially very expensive.

Something you rarely see mentioned in any discussion of ICs or employees is the fact that the IRS has a special designation for licensed real estate agents: “Statutory Nonemployees.”

That is pretty much exactly what it sounds like. Real estate agents have a legally designated status of a nonemployee, if two conditions are met:

  • Substantially all payments for their services as direct sellers or real estate agents are directly related to sales or other output, rather than to the number of hours worked
  • Their services are performed under a written contract providing that they will not be treated as employees for Federal tax purposes

This statutory nonemployee status doesn’t mean that agents and brokers can disregard everything else and still enjoy independent contractor status. There have been, and will continue to be, lawsuits claiming employee status. The lines will get fuzzier, the consequences more expensive. Just because tax laws provide a classification doesn’t mean it can’t change. What the IRS giveth, it can take away.

The IRS classification, confusion, blurred lines, fear of losing IC status — this all leads to an all-too-common response from real estate leaders and brokers any time the subject of agent hiring, discipline or questionable behavior comes up. You hear it frequently; if it’s an in-person conversation, it comes with a shrug and a shake of the head. The free pass for bad behavior is delivered once again:

“They’re an independent contractor, what can you do?”

Actually, you can do quite a bit, assuming you’ve done your due diligence on that second bullet point above from the IRS: “Their services are performed under a written contract … “

The all-important IC Agreement

If you are a broker, a good independent contractor agreement is crucial to your business. This is not the place where you want to post on Facebook, “Hey people, can someone shoot me over their IC agreement? Need to get one ASAP. Thanks, bye!” This is not the place where you want to go online, pay $29.95, and get a “TOP FORM LEGAL IN YOUR STATE!” PDF file in your inbox.

Don’t FSBO important legal work. Find an attorney. Find one well-versed in employment and contract law. There is way too much potential liability in something as foundational to your business as your IC agreement. This isn’t the place to scrimp.

If you are an agent, read your IC agreement. I bet half of you can’t even find it. You need to understand what is in it. You need to understand the benefits and disadvantages of being an IC versus an employee. Understand that IC agreements can vary between brokerages. You need, and deserve, to be treated properly based on whichever employment status you have. (Yes, there are some brokerages where the agents are employees, not ICs.)

The IC agreement is important, for everyone in this business. Read it. Understand it. Revisit yours, and see if it needs updating.

Myth: You can’t tell an IC what to do

Having been quite vocal in the past couple of weeks about the Newsday fair housing investigation, I’ve received more feedback than usual. Some of that feedback sounds like this:

“Yes, discrimination is bad. But I can’t make agents go to fair housing class. I can’t tell them they can’t discriminate. They’re independent contractors you know.”

Although you can’t direct and micro-manage the day-to-day activities of an independent contractor, you most certainly can — and should — have minimum education requirements and fundamental ethical behavior clauses in your policy and procedures manual, which is of course referenced in that all-important IC agreement.

Some states require a policy and procedures manual, some do not. If you’re in a state that does not, that probably doesn’t preclude you from having one. And you should. It’s good for you, and your agents.   

Myth: You can’t fire an IC

“Any agent that discriminates should be fired!” many proclaimed in the wake of the Newsday results.

“Can’t fire an independent contractor,” some responded.

Technically, that’s true. Only employees can be “fired,” and frankly “firing” ICs outside their contract can lead to all sorts of problems. Expensive problems. Legal problems. Problems no one wants.

But no one wants the problems caused by someone associated with their business going off the rails. No agent needs their business and reputation tarnished because some moron in their office thinks violating the norms of decency and respect is just a cost of doing business.

Is this some unsolvable conundrum? Can ICs just flit about, doing business in any way they see fit, regardless of their affect and impact on your business and that of the other ICs in your office?

Not if you spell it out in your IC agreements and policy manuals. The IC agreement should state that either party can terminate the agreement for cause upon breach of the contract. This is why you have a contract and why it’s important.

You can end the agreement with an IC, if the provisions for termination are spelled out in the contract. Again, this is why the IC agreement is so important to running your business.

IC status is not a crutch

We all need to stop tossing the “IC thing” out there as an excuse or pass for not taking action. A properly structured IC agreement helps protect both the brokerage and the agent. I think this is often a woefully misunderstood document, and the ramifications if there are changes in how agents are classified is immense.

With a lot to learn around this issue, starting with a review of your existing IC agreement seems prudent. Brokers need to have the ability to separate an underperforming or misbehaving agent, and agents deserve to know what is expected of them and to be able to work in an inviting and ethical work environment.

Jay Thompson is a real estate veteran and retiree in Seattle, as well as the one spinning the wheels at Now Pondering. Follow him on Facebook, Instagram and Twitter. He holds an active Arizona broker’s license with eXp Realty. “Retired but not dead,” Jay speaks around the world on many things real estate.

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