How to avoid legal snafus with an agent-run team
SAN FRANCISCO — If you run a real estate team or are the supervising broker of an office that has agent teams — listen up. There’s a high probability that your teams are violating the independent contractor laws, and it’s time to act now to rectify this situation.
The underlying problem when it comes to both teams and brokerages is that real estate law requires managing brokers to supervise their agents.
Under independent contractor (IC) law, however, the very act of supervising an agent makes that agent an employee. Although there is some degree of protection due to the real estate laws for brokers, there is no provision in the law for an IC agent team leader to supervise another IC agent.
During the Leadership Track at Inman Connect, June Barlow, senior vice president and general counselfor the California Association of Realtors; Linzee Ciprani, founder and CEO of Ciprani Consulting; and Penny Nathan, president/CEO of Ascent Real Estate Inc., identified the legal pitfalls inherent in running agent teams as well as best practices to avoid serious trouble.
Past litigation and damages
With the settlement (pending court approval) of Redfin’s independent contractor (IC) litigation at the onset of its IPO and Coldwell Banker’s reported $4.5 million settlement of the Bararsani litigation, there appears to be no major litigation currently pending that could upend IC status.
The primary risk, however, isn’t litigation, but the state labor boards, especially when it comes to agent teams.
To illustrate this point, four agents filed wage claims alleging that ZipRealty failed to pay its employee/real estate agents minimum wage and overtime premium pay. ZipRealty settled those four claims for close to $600,000.
Even though the litigation had settled, the California Labor Commission sought $7.5 million in minimum wages, $1.25 million in premium overtime pay and over $9 million in additional damages. The case ultimately settled with the Labor Board for $5 million. The company also had to pay the employer’s share of employer taxes on back wages.
If you engage in any of the following behaviors, you and your team are acting in an employee relationship rather than an IC relationship:
- You serve as a boss to the IC agents on your team rather than treating them as an agent receiving an outbound referral.
- The agents on your team are required to attend team meetings, prospect at specific times, hold open houses or show properties at the times that you designate.
- You, rather than your supervising broker, approve the contracts, advertising and other activities that by-law must be supervised by the managing broker.
- You have IC agents doing clerical or transaction management tasks that do not require a license, especially if these individuals work regular hours and are not getting paid minimum wage.
- You have unlicensed individuals conducting activity that requires a license.
Transaction managers running amok
As the ZipRealty settlement illustrates, failure to comply with the IC law can result in fines in the millions of dollars.
Nathan explained how rampant the problem is in her area. For example, Nathan is a supervising broker for her firm. Nevertheless, an unlicensed transaction coordinator from another firm decided to “supervise” how Nathan was handling a transaction. This is a clear violation of real estate and IC laws. The transaction coordinator has no authority whatsoever to step into a supervisory role, especially when she is not even licensed.
An innovative solution
Nathan has come up with an innovative way to address this issue — an “agent leasing” program. Nathan hires licensed agents as W-2 employees of her company and trains them. Once they have completed their training, they can then be “leased” to other agents who need extra help.
Her IC agents use the agent leasing program on a full-time, part-time or even on a temporary basis. When they take a vacation, when they are busier than usual or if they need extra help for any other reason, that extra help is available.
The leasing program is also popular with teams because it lifts the burden of employee management from them. The agents only pay for the hours they use. Because these agents are employees and Nathan supervises them, (not the agent team leaders), there is no conflict with the IC laws.
Agents don’t get it
Any broker who supervises an agent team must be especially wary about allowing agent team leads hire people for their teams.
For example, Ciprani explained how some team leaders have contacted her about having someone work for them from 9 a.m. to 5 p.m. daily and paying them as an independent contractor.
If the person must work specific hours, five days a week, that’s an employee relationship.
Ciprani has also received requests to find a licensee who could work seven days a week for $300-$500 a transaction “because the agent is an independent contractor.” This arrangement could result in the type of fines experienced by ZipRealty because the pay rate is less than the minimum wage.
How to stay out of trouble
Some options for avoiding problems with the IC laws are:
- Require all assistants or team members to be hired by a company such as ADP. The agent then contracts with ADP to lease one of its employees. This way, the team members are employees of the agency, which also takes care of any required tax withholding. Nevertheless, anyone, whether it’s an independent contractor or employee, must be properly supervised the managing broker, a role that managing broker cannot legally abdicate to anyone else.
- Hire the agent as an employee with a salary of $30,000-$35,000 per year with a 10 percent bonus if they close two deals in a month, and a 15 percent bonus for anything over two deals per month.
- Treat your independent contractors like an actual contractor, and stay away from requiring them to do hours of lead generation or having to attend team meetings. Instead, the team leader should “strongly suggest” that agents be present at the office at certain times and that they follow certain team guidelines to avoid having legal or other types of issues.
If you’re running a team and you’re currently engaging in behavior that violates the IC laws, review your situation with a local labor attorney.
To avoid possibly facing hundreds of thousands of dollars in fines and back taxes, make sure that you follow your attorney’s recommendations about what the labor and real estate laws require in your state.
This article was originally posted/written by Inman.