Real Estate

The Crux Of The Independent Contractor Status Issue In Real Estate

The PRO Act, which would make the ABC Test the national standard for determining Independent Contractor (IC) status, has already passed the House and has advanced to the Senate. Given 33 states already use a version of the ABC Test to determine IC status for employment purposes, the Senate may be more open to passing the PRO Act than anyone anticipates.

When it comes to IC status for the real estate industry, the crux of the issue is the real estate statutes in every state require agents to be under the supervision of their broker, while the U.S. Department of Labor (DOL) regulations require ICs to be “free of control.” 

Robert Cosgrove, the trial court judge in the Massachusetts Monell v. Boston Pads case, pointed to the legal issues this conflict creates: 

“It is difficult to read the independent contractor and real estate statutes harmoniously. How can a real estate salesperson be ‘free from control’ of the broker under the independent contractor statute, where the real estate statute requires that the salesperson ‘be under (the) supervision of (the) broker?’”

How the two primary tests for classifying ICs work

The two tests for determining IC status are the Common Law Test and the ABC Test. The IRS uses the Common Law Test, as do 17 states. The U.S. DOL and 33 states use some version of the ABC Test to classify employees as ICs.  

Here are the primary differences in the Common Law Test and the ABC Test.

The Common Law Test

The Common Law Test for determining IC status considers three key factors in determining whether an individual is an IC. 

  • “Behavioral control” exists when an employer directs and/or controls how his or her workers perform the tasks they’ve been hired to do. 
  • “Financial control” exists if employers can control their workers’ finances. This includes expense reimbursement, providing facilities and equipment, and whether the agent/employee can experience both profit and loss. 
  • “Relationship of the parties” can include whether an individual receives benefits and has contracts or statements describing their work relationship. The crucial issue is whether or not the worker’s business is out of the usual course of the employee’s business. (This provision mirrors “B” of the “ABC” test.)

The ABC Test

This test states that 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. 

8 states do not use ‘B’ of the ABC Test

What’s fascinating is that Colorado, Idaho, Montana, Pennsylvania, Wisconsin and Wyoming have dropped “B” (“the service is performed outside the usual course of the business of the employer”) from their statutes for classifying ICs.

Provision “B” and the supervision requirements are the two main issues with using the ABC test for determining IC status for employment purposes. To see which standard your state uses, click here

The California Department of Real Estate (CA DRE) reaffirms the duty to supervise agents

In a November 2020, a ruling from the CA DRE resulted in a broker having to surrender their license for failing to supervise an agent who engaged in activities for which the agent was not licensed. Here’s what the CA DRE concluded in its ruling: 

Ultimately, brokers are responsible for all activities of their agents performed within the course and scope of their employment with the broker. [Gipson v. Davis Realty Company (1963) 215 CA2d 190]

Because of this, brokers are required to continuously exercise reasonable supervision over their agent’s activities. The sales agent’s duties owed to the broker’s clients and others in a transaction are equivalent to the duties owed to clients by the employing broker. [CC §2079.13(b)]

Even when an agent is technically classified as an independent contractor, they are always an employee of the broker under California’s labor laws. Thus, the broker is liable as an employer for their agent’s wrongful conduct and owes a duty of supervision to the DRE. Violations could lead to loss of license, heavy fines, or both.

NAR is actively engaged in blocking the passage of the PRO Act

NAR issued the following statement in response to press coverage about the PRO Act:

Despite the recent news coverage, the PRO Act should continue to face an uphill battle in the Senate under the current political structure. Republicans are united in opposition, and even some Democrats are opposed. As of the latest count, there are fewer than 50 members in support. Should that change, there is bipartisan interest in pushing real estate specific exemptions in any ABC test legislation.

Additionally, California’s AB-5 included a real estate industry exemption from the very beginning, initially spearheaded by a strong pro-labor member of the CA assembly. 

Further, in the House passed version of the PRO Act, an amendment was included that protected state definitions of “employer” and “employee” under existing state wage, hour, workers’ comp, and unemployment laws, where real estate professionals are typically classified as independent contractors.

Lastly, the modification under the bill to the National Labor Relations Act (NLRA) does not impact the Internal Revenue Code protection (26 U.S.C. §3508) for real estate professionals, and therefore there is no direct effect on the ability of real estate agents to be classified as statutory non-employees for federal tax purposes. 

Here’s what’s notable in the NAR response:

  • The amendment NAR cites to the PRO Act that the House passed “protected state definitions of ‘employer’ and ‘employee.’” The challenge is 33 states already use The ABC test to define IC status, so that amendment has no bearing on those states already using this test.
  • The IRS classifies ICs based on the Common Law Act. Consequently, as NAR notes, these changes will have no effect on the ability of real estate agents to be classified as “statutory non-employees” for federal tax purposes — not for how the Labor Department classifies employees.

As this article by the Wrapbook explained

“The way regulations are worded, it’s possible for a worker to be an independent contractor under Common Law and an employee under the ABC Test.

For example, an employee can be classified as an independent contractor by the IRS. However, when trying to get covered for unemployment, that same worker could be classified as an employee, because the state (who handles unemployment) uses the ABC Test.”  

Which senators are willing to make a deal? 

Although NAR, with its 1,448,090 members, has considerable legislative clout, the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), with its 12.5 million members, has made passing the PRO Act a top priority. Furthermore, President Biden has expressed his support of the PRO Act legislation as well. 

In addition, Congress recently brought back “earmarks.” An “earmark” is a congressional directive that allows funds to be spent on specific projects.

Since 66 senators are from states that already use the ABC Test to determine IC status for employees, it’s easy to envision how several “bi-partisan” senators might be “motivated” to support the PRO Act if they were to receive a major earmark for their state or some other political tradeoff.    

Steps to take ‘just in case’ 

Regardless of what happens with the PRO Act, if you’re an agent and are capable of doing so, obtain your broker’s license. That way, if the PRO Act does pass, you can continue operating your business using your own license.

Second, take as much training as possible to make sure your income qualifies you to become an employee should the PRO Act pass. 

Third, consult your CPA to determine if it makes sense for you to incorporate using an LLC or S corporation. Being incorporated allows you to operate on a business-to-business footing as opposed to those who are not incorporated and would have to be hired as an employee if the PRO Act does pass. 

For brokers, create your Plan B. This begins with talking with a labor attorney about what would be required if the PRO Act were to pass. Also, inquire how you could set up your brokerage with full-time and part-time employees, as well as how you could legally work with agents on a B2B basis who have incorporated.  

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.

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