On March 9, 2021, the House of Representatives passed H.R. 842 (the PRO Act) amending the 1935 National Labor Relations Act (NLRA), and President Joe Biden strongly urged the Senate to also pass the measure.
If passed, the PRO Act would make the “ABC” test for independent contractor (IC) status the law of the land and would classify real estate professionals and almost all other gig workers as employees. The new law would go into effect on Jan. 1, 2023.
IC status in real estate has been under attack in the courts for years. The primary reason is due to the numerous conflicting laws as to what constitutes IC status. For example, at the federal level, the definition of IC status for tax purposes is different from the definition in the National Labor Relations Act (NLRA).
Complicating matters even further, states have conflicting laws as well. In California, this led to the California Supreme Court Dynamex Decision that upheld Assembly Bill replacing the Borello test that most California companies used to classify ICs with the so-called “ABC” test. (California is currently operating under Borello.)
Lobbying by the California Association of Realtors led to a carve out from the legislature for Realtors. In November 2020, California voters passed Proposition 22 that allowed Lyft and Uber drivers to remain as ICs as well.
Provisions of the PRO Act that eliminate IC status for Realtors and gig workers
The PRO Act seeks to expand “various labor protections related to employees’ rights to organize and collectively bargain in the workplace” and weaken “right to work” laws which exist in 27 states.
The language (i.e. the “ABC” test) specifically impacting IC status for real estate professionals and other gig workers states:
An individual performing any service shall be considered an employee (except as provided in the previous sentence) and not an independent contractor, unless—
“(A) the individual is free from control and direction in connection with the performance of the service, both under the contract for the performance of service and in fact;
(B) the service is performed outside the usual course of the business of the employer; and
(C) the individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.”
According to an analysis by Littler, a law firm specializing in labor and employment law:
Through the PRO Act, Congress seeks to decide “once and for all” at the federal level the independent contractor versus employee classification issue. Implementing the ABC test through the PRO Act would compel employers to terminate independent contractor relationships or submit to the added burdens of converting independent contractors to regular employees despite the preference of many contractors to remain independent.
The biggest issue for real estate is “B.” According to the National Law Review in its analysis of California’s Dynamex Decision and the implementation of the “ABC” test in California:
Note that each of these requirements need to be met in order for the presumption that a worker is an employee can be rebutted, and for a court to recognize that a worker has been properly classified as an independent contractor. Prong B of the ABC test is particularly notable because it seemingly precludes businesses from using independent contractors to deliver or provide their core product or service.
In other words, “B” says that if you’re a real estate agent who works for a broker whose primary business is selling real estate, you must be an employee. (For a more in-depth analysis of the other provisions in the PRO Act, visit JD Supra.)
Where the real fight will be
Michael Lissack, the managing broker for The Virtual Realty Group in Oregon and Washington and has been involved in a number of labor claims and litigation regarding violations of the existing IC laws in multiple states. Lissack believes the odds the bill will pass the Senate are about 60-40:
“The PRO Act will pass if the Democrats can persuade 10 Republican Senators to override any filibuster of the bill. The ABC Test does not even register on the Senate’s priority list. Instead, the Republicans will probably pursue making changes in the right-to-work provisions that would be eliminated in 27 states.
“The PRO Act would be highly likely to pass if it was tied to revising the Section 230 provisions that limit the civil liability of big tech companies resulting from external content published on their servers. The most notable examples are Facebook and Twitter.”
While the Republicans are eager to make changes in Section 230, even that pales in comparison with the upcoming fights over immigration and tax increases. Lissack is right: The ABC test is not even on the radar of what matters most.
In contrast to Lissack’s opinion, an analysis by JD Supra, a law firm that provides information to the legal community, legal consumers, media and general public, stated: “As proposed, the PRO Act remains unlikely to win Senate approval this year.”
The operative words are “as proposed,” hence Lissack’s comments about the potential for the Democrats and Republicans negotiating some sort of compromise.
What’s ahead if the PRO Act becomes law
According to NAR, 87 percent of all Realtors are independent contractors, and only 5 percent are employees. If real estate agents must shift to becoming employees, they will be entitled to a minimum wage, expense reimbursements, employee benefits, rest breaks, vacations and other benefits afforded to employees under federal/state law.
It also means they will be subject a new set of standards regarding how, when and where they perform their work.
10 changes to expect if the PRO Act becomes law
1. The industry will have a consistent federal standard with respect to how the labor laws apply to brokers and agents. State lawmakers will no longer be able to carve out exceptions to the IC laws as they have done in the past.
2. The PRO Act only applies to agents who are not brokers and/or who are not incorporated (i.e., are operating as an LLC or S corporation). Agents who are incorporated are functioning in a business-to-business (B2B) relationship. If they have a broker’s license and their license is hanging at a brokerage that goes out of business, they always have the option of continuing their business as an independent broker.
3. To become a full-time employee, agents who are not brokers or who are not incorporated will have to produce enough income to pay them the minimum wage in their state plus benefits and a profit for their broker.
For example, at $15 per hour for minimum wage, that would be $30,000 per year plus vacation time, sick leave and the 6.2 percent employers must pay in social security benefits. Covering all those costs could easily be in the $45,000 to $50,000 range, and that’s with zero profit for the broker.
According to NAR, in 2019 the median income for Realtors was $49,700. Consequently, at least half the current Realtor population wouldn’t make the cut for full-time employment.
4. Agents who do become employees can expect major changes in what’s required of them. These may include:
- Required training, mandatory meetings and increased supervision.
- More rigorous control over the customer experience with incentives tied to customer ratings.
- Quotas and bonuses based on production and reviews.
- More part-time employees compensated on an hourly basis who will handle specific tasks such as open houses, conducting buyer showings, prospecting, etc.
5. The PRO Act will disrupt brokerage revenue models, especially those who rely primarily on desk fees or high agent count. These companies will have to make major changes in their current revenue models if they hope to survive.
6. Solo practitioner brokerages and team models will explode as agents seek to retain their independence and control their own businesses.
7. The trend towards outsourcing work to virtual assistants will also explode, especially for companies already providing these services to the real estate industry and for freelancing companies like Odesk that brokers can hire on a B2B basis.
8. Due to decreased membership, NAR, state and local associations will have less political clout. The decline in revenue may also result in a dues increase coupled with fewer resources for consumers and Realtor members.
9. Due to the decline in the number of agents, many Multiple Listing Services will be forced out of business or forced to merge. This will hasten the move to larger regional MLSs in order for them to survive.
10. The portals and vendors that have contracted with large companies or Realtor associations will experience a drop in their income commensurate with the decline in agent count. This will result in additional disruption as systems and products agents and brokers relied upon may no longer be available.
Will real estate dodge the loss of IC status once again?
So far the industry has dodged losing IC status. If the PRO Act does pass, the months leading up to Jan. 1, 2023 will be highly disruptive. Nevertheless, as one of my friends who is in high tech once observed, “America is the great workaround society.”
We figured out how to work around COVID-19. The industry’s entrepreneurial spirit and determination will figure out how to make things work no matter what the politicians ultimately decide to do.
Bernice Ross, President and CEO of BrokerageUP and RealEstateCoach.com, is a national speaker, author and trainer with over 1,000 published articles. Learn about her broker/manager training programs designed for women, by women, at BrokerageUp.com and her new agent sales training at RealEstateCoach.com/newagent.