The 2013 California class action lawsuit, Bararsani v. Coldwell Banker, caused waves in the community when Coldwell Banker Residential Brokerage (”Coldwell”) was sued for falsely classifying connected sales representatives as independent contractors, even though they were in fact employees of the broker. The plaintiffs alleged violations of the California Labor Code for failing to reimburse the company`s expenses and keeping proper records. Coldwell`s defense attorney argued that the claims were unfounded under the California Business & Professions Code 10032 discussed above, and asserted that he presented the relevant three-part test to classify real estate professionals as independent contractors, which the defendants said was satisfied. Procedurally, the court refused to grant early release, stating that 10032 does not require a specific classification, but gives real estate professionals the respect of being treated as independent contractors. In the end, the matter was settled with Coldwell, who reportedly agreed to pay a large sum distributed among the certified members of the group. Real estate agents and brokers are specially classified by the IRS as legally independent contractors. In the changing world of real estate services, it is important to stay informed about the rules governing this status, as new business models and new methods of compensation can lead to classification as employees. There`s nothing wrong with suspending your license with a broker, and in many cases, it`s mandatory. But when using the broker`s services and offices, always remember that you are your business. If they offer you space on the website, take it, but set up your own online presence with a website and/or social media as soon as possible.
You never know when you`ll want to go out on your own or switch to another broker. Federal and state employee classification laws, as well as state real estate licensing laws, apply to a broker`s classification of its sellers. At the federal level, the Internal Revenue Service has created a special non-employee legal status for real estate professionals and has qualified them as independent contractors if all of the following requirements are met: The fact that real estate agents are accountable to brokers can muddy the waters compared to other industries where the independent contractor relationship is clearer. Real estate agents have more autonomy than an employee, but the necessary supervision of a broker is a unique factor. Lawsuits against companies accused of falsely classifying workers as independent contractors are taking place following last year`s landmark California Supreme Court decision, Dynamex v. Supreme Court, which announced a new standard for determining whether an employee is an employee or an independent contractor. In fact, since that decision, companies have paid millions of dollars in judgments and settlements after being the recipients of class action lawsuits filed by labor groups claiming they were not properly classified and, as a result, deprived of the benefits and protection afforded to employees under California labor laws. Real estate agents have traditionally been treated as independent contractors, but in the wake of Dynamex, this has been questioned.
Should real estate agents be classified as employees and are real estate brokerage firms vulnerable to class actions? The new standard under Dynamex makes it very difficult for real estate brokerage firms to determine that their real estate agents are independent contractors. However, in many cases, a real estate agent can be held liable for the actions of their real estate agents, even if they are classified as independent contractors. In contrast, this is generally not the case with other independent contractor relationships that exist in other industries. For this reason, the IRS treats real estate agents as ”statutory non-employees” for tax reasons. The hiring company has the burden of establishing the existence of these three conditions. If the company is unable to set any of the conditions, the employee is classified as an employee. In the case of a real estate agent, the second element is worrisome, because the usual course of business of a real estate brokerage company is in the marketing and sale of real estate, and real estate agents do the same job. The first element of control can also be problematic and is certainly a highly contentious element in class actions alleging misclassification. If a broker has a licensed assistant, but that person pays by the hour or bases the remuneration on the hours worked in any way, that person cannot be an independent contractor. If you are a part-time agent and you perform other brokerage work on an hourly or salary basis, it is likely that independent contractor status does not apply because the majority of your compensation does not come from sales-related activities. A real estate agent who is an independent contractor provides services to a real estate agency.
In this role, you have more leeway than an employee. You determine where, how and when you do your job. In addition, you are responsible for having the necessary equipment or tools to perform your tasks. In your real estate business, your obligations to independent contractors are much less than to your employees. Although your real estate agents work under your supervision, they retain some independence and control over their work and you are not required to comply with U.S. labor laws regarding the independent contractor relationship. Although the Internal Revenue Service (the ”IRS”) once used the ”Twenty Factor” test to determine whether an employee should be classified as an employee or an independent contractor, the IRS is now using the ”Eleven Factor” test to try to streamline the test. These factors are also known as ”common law” rules (i.e., rules that have emerged from case law over the years and are not actual legal rules passed by Congress or a state legislature). The ”eleven factors” test is divided into three categories: ”Behavior Control, Financial Control, and Party Relationship.” (See www.irs.gov/pub/irs-pdf/p15a.pdf).
Below are relevant excerpts from IRS Publication 15-A, titled ”Employer`s Supplementary Tax Guide,” which details and explains the 11 factors. As more and more agents are recruited into discount brokers with business models that pay salaries for basic income, there could be problems meeting the criteria for independent contractor status. The broker and agent need to know exactly what their relationship is and that some kind of document or contract indicates that relationship. .