There are three looming changes on the horizon that may dramatically transform how the industry conducts business in the future.
These threats include increased regulatory enforcement, plus two major threats that could eliminate or greatly reduce the ability for real estate agents to function as independent contractors.
1. Increased regulation and enforcement
Increased regulation and enforcement are on the rise. Examples include the ongoing dispute between the Department of Justice and the National Association of Realtors (NAR) and the Biden administration’s decision to increase the IRS budget for enforcement by 67 percent.
They also include President Biden’s July 9, 2021, executive order bringing the FTC into the mix to “exercise the FTC’s statutory rulemaking authority, as appropriate and consistent with applicable law, in areas such as” the “unfair occupational licensing restrictions,” “unfair tying practices or exclusionary practices in the brokerage or listing of real estate,” and “any other unfair industry-specific practices that substantially inhibit competition.”
Additional enforcement is also coming in fair housing. At the recent Awesome Females in Real Estate Conference, Laurie Benner, the associate vice president of programs at the National Fair Housing Alliance, explained how the Biden administration stepped up fair housing regulatory enforcement immediately upon taking office.
For the real estate industry, this means increased testers (people who pose as clients to see if Realtors exhibit discriminatory behavior) and increased budget for prosecuting violators. This why having a systematized approach where every client is treated exactly the same with the highest level of professional service is absolutely imperative.
2. The PRO Act
President Biden’s $3.5 trillion spending package now includes the PRO Act, which would end independent contractor (IC) status for most professions as well as right-to-work laws in 27 states. (The original PRO Act bill that passed the House of Representatives is currently stalled in the Senate).
In order for the Biden $3.5 trillion spending bill to become law, all 50 Democratic senators will have to vote for it and the Senate parliamentarian would have to agree that the spending package could be passed using reconciliation (i.e., with a simple majority of 50 votes plus Vice President Harris’s vote to break the tie). If this tactic works, Republicans will be unable to use the filibuster to prevent passage of the bill.
The effects of reclassifying agents as employees rather than independent contractors are profound. One hundred percent commission models, virtual brokerages and firms that support high numbers of agents who close no deals will be hit especially hard, as would membership in most Realtor associations.
Even if this bill doesn’t pass Congress, there’s a much larger looming threat that could force the industry to move to an employee model — increased enforcement by both the State and the National Departments of Labor.
3. The State and National Departments of Labor are poised to use enforcement as an alternative method for ending IC status
In a recent Wall Street Journal opinion piece, WSJ columnist Kimberly Stassel raised significant concerns about the confirmation of David Weil to run the Wage and Hour division of the Labor Department, a position he held from 2014 to 2017 during the Obama Administration.
Even if the PRO Act doesn’t pass, Stassel warned:
“The White House will deputize the Labor Department to implement as much of it as possible through regulatory fiat. Mr. Weil would be a chief enforcer, and history shows he won’t be shy.”
Stassel continued to explain:
“Dr. Weil issued rules stripping most contractors of their independence, forcibly reclassifying them as employees (the better to unionize them). He more recently worked with the Massachusetts attorney general to sue Uber and Lyft, part of that blue state’s effort to kill its own gig economy.”
Two significant cases in California illustrate how costly these actions can be for brokerages dealing with a case under the purview of their state’s Department of Labor.
Bararsani v. Coldwell Banker
This class-action lawsuit alleged that Coldwell Banker had misclassified current and former affiliated sales associates as independent contractors when they should have been classified as employees.
On behalf of the purported class, the plaintiffs sought “the benefit of the California labor laws for expenses, wages and other sums, plus asserted penalties, attorneys’ fees and interest.”
Coldwell Banker settled the lawsuit for $4.5 million. Several experts speculated that if this litigation had been successful, it would have forced the entire industry into an employee model. The fear was that up to 50 percent of the brokerages and an even higher percentage of agents would be put out of business on Day 1 if the Bararsani litigation hadn’t settled.
The Zip Realty litigation and settlement
The California Department of Labor continues to actively pursue companies that violate the existing independent contractor laws. The cost of these violations can be huge.
To illustrate this point, four Zip Realty IC agents filed a lawsuit alleging they were employees rather than independent contractors. Zip Realty settled the suit for $586,000. After the suit settled, the California Labor Commissioner sought an additional $17 million in unpaid wages, damages and penalties for all California Zip Realty agents. The case settled for $5 million.
Unlike the change in the law the PRO Act seeks to make, the massive settlements described above resulted from the California Department of Labor’s enforcement of current employment laws.
Regardless of what happens with the PRO Act, very few companies have the financial capacity to stay in business when facing judgments and fines like those paid by Coldwell Banker and Zip Realty.
Be prepared for what’s coming
Regardless of what happens with the PRO Act and Biden’s $3.5 trillion spending bill, increased regulation and enforcement has arrived.
Real estate professionals must always be hypervigilant about following the fair housing laws as well as avoiding any practices that could result in them being sued for misclassification of employees as independent contractors.
For a more detailed discussion IC status and areas where brokers and agents may be at risk for violating these laws read this Inman article.
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.