Understand Your Salespeople's Worker Classification

It’s important to properly classify your agents—not only in a written independent contractor agreement but also in the relationships you build with them every day.

October 17, 2014

Three recent potential class action lawsuits, in which sales associates claim they were improperly classified as independent contractors rather than employees, highlight the importance of ensuring the proper worker classification of your salespeople.

Two of the cases are currently pending in California. In the third case, a Massachusetts trial court ruled in favor of the brokerage in 2013, holding that the state’s real estate statute allows real estate salespeople to be classified as independent contractors or as employees controlled. The court also denied the plaintiff’s class action certification, finding that the class could not allege violations of the state’s independent contractor statute. The case is currently on appeal before the Massachusetts Supreme Court. Read more about all three cases here.

Given the current waive of litigation, it’s a good time to review the structure of your relationships with your real estate salespeople and to confirm that in both practice and in theory they are properly classified. Here are some tips from NAR’s Associate Counsel Lesley Walker on ways to be successfully manage your independent contractor relationships.

  • Have an independent contractor agreement with sales associates. It must include language establishing that theirs is an independent contractor relationship rather than an employer-employee relationship. Even with the agreement, however, remember that the type of business relationship you have isn’t determined by your intent but by the reality of how it’s playing out.
  • Make sure you meet federal requirements. You must comply with three requirements of the Internal Revenue Service’s safe harbor that allows real estate brokers to classify their salespeople as independent contractors for federal income tax purposes:
  1. Salespeople must be licensed real estate professionals.
  2. You must have a written contract spelling out that they’re not employees for federal tax purposes (also mentioned above).
  3. You must ensure that substantially all the compensation you provide is directly related to associates’ sales or other output, rather than the number of hours worked.
  • Evaluate how much control you have over your sales associates’ behavior and operations. The more control you exercise, the more you risk having the work arrangement pegged as an employment situation. Think about the answers to the following questions: Are you insisting that sales associates work in or check into the office daily? Are you setting the hours they must work? Are you dictating the ways they have to work? Do you require them to attend regular meetings? Another factor that fits into the analysis is whose equipment salespeople are using. Are they choosing and paying for their own equipment—smartphones, laptops, and tablets—or are you insisting they use certain devices and covering the expense?

Real estate statutes mandate that brokers supervise their salespeople’s activities—but it’s a delicate balance. If these relationships are not managed properly, you could find yourself on the hook for providing the types of benefits normally afforded in an employer-employee relationship, along with fines and penalties. Better to get your documentation, and policies and practices in order now—before you’re challenged in a court of law.

For more information, visit the Independent Contractor Status FAQs from NAR’s Legal Affairs.



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freelance writer

G.M. Filisko is a Chicago area freelance and former editor for REALTOR® Magazine. 

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