Why Some Real Estate Agents Are Employees Not Independent Contractors?
|Prepared By: Melissa C. Marsh, Los Angeles Employment Attorney
Written: March 2016
An important issue in the real estate industry is the extent to which real estate agents can properly be classified as independent contractors. Because the typically test used by the IRS and California were difficult to apply to California real estate agents and salespersons, California adopted specific legislation to address the independent contractor versus employee issue for real estate salespersons. That test is set forth in California Business & Professions Code Section 10032 ("B&P Code 10032").
Pursuant to California B&P Code 10032, a real estate agent or salesperson may be classified as an independent contractor ONLY IF ALL three of the following conditions are met:
- They possess a real estate license (most, if not all, do); AND
- They perform their services pursuant to a written contract that identifies that they will not be treated as an employee for tax purposes; AND
- They derive substantially all of their compensation for services performed as a real estate agent rather than the number of hours worked.
The federal statute setting forth the requirements for real estate agents to be classified as independent contractors is set forth in 26 U.S.C.A. 3508(b) and is substantially similar.
Recently in 2012, Coldwell Banker Real Estate Brokerage Company faced a class action lawsuit in Los Angeles County Superior Court over its classification of real estate agents as independent contractors as opposed to employees. In January of 2016, the case was settled with Coldwell Banker paying out $4.5 million to its California real estate agents and associates who worked under its brokers.
California Real Estate Agents and Salespersons Working as Personal Assistants are Employees.
The situation, however, has become more complicated as many California real estate agents and salespersons opt to work as personal assistants to other more profitable real estate brokers and salespersons. First, if the person hired is not yet licensed, that person must be paid as an employee. But what about a licensed California real estate agent or salesperson? If a California licensed real estate agent works for another real estate broker or salesperson are they independent contractors or employees? The Answer is not so much unclear, but dependent on what the job functions are and how they are paid.
For a licensed California real estate agent to be considered an independent contractor when working for another real estate salesperson two conditions must be met:
- There MUST be a WRITTEN CONTRACT that identifies specifically states that the real estate agent will not be treated as an employee for tax purposes; and
- The licensed California real estate agent must derive substantially all of their compensation for services performed as a real estate agent rather than the number of hours worked.
Consequently, if a California real estate agent is paid by the hour or even a salary, the real estate agent should be classified as an employee. However if a licensed real estate agent has a written contract stating that s/he is an independent contractor and will be paid on commission, then the real estate agent may be paid as an independent contractor.
It should be noted, however, that the real estate agent should primarily (more than 50% of the time) be engaged in activities that require a real estate license like hosting open houses, showing properties, and soliciting business. If the California real estate agent is engaged in duties that do not require a California real estate license, such as answering the phone, taking messages, assembling documents, writing or placing ads, preparing flyers and other generic clerical work then s/he may argue that she was hired as a personal assistant and therefore should be classified as an employee.
© 2016 Melissa C. Marsh. All Rights Reserved.