Independent contractor status in real estate has been under attack for over two decades. What steps would you have to take if minimum wage requirements came to your state or if your state no longer allowed real estate agents to act as independent contractors (ICs)?
There are two primary threats to IC status—the supervision laws prohibiting independent contractors from being supervised and the minimum wage laws. Until this underlying conflict is resolved, Independent Contractor (IC) status in real estate will continue to be at risk due to the steady flow of litigation both inside and outside the industry.
If Minimum Wage Becomes a Reality for Real Estate
While some people feel that the implementation of a minimum wage in real estate would be disastrous, there are numerous models in place today that provide potential paths for both brokers and agents to cope with such a disruptive change.
If real estate becomes subject to a minimum wage requirement, agents will have the following choices:
1. Agents who meet the minimum wage threshold for their state
- These agents would have no problem being hired at a basic salary (minimum wage) with some sort of bonuses or draw against commission. They could become employees or continue to work as ICs, depending upon whether the ruling comes from the minimum wage provisions or from the supervision issues prohibiting ICs from being supervised.
2. Agents who do not meet the income threshold
Agents who fail to meet the income needed to cover an employer paying them minimum wage plus the employee contributions for taxes, benefits, and some amount of employer profit, will have the following options.
- They can work as part-time employees who are paid either on a per-task or hourly rate basis for such activities as holding open house, attending inspections, or showing property. Another term for this approach is a “fee for service.”
- Licensees who work part-time or who would like to retire, could join a referral agent program. These agents would receive training on how make referrals to the company’s active agents and would receive a flat fee per referral or a percentage of the commission.
- If you do not currently make the required minimum, it’s time to take more training and to increase your prospecting in order to make the cutoff mark. (In California, that would probably range between $42,000-$50,000 Gross Commission Income (GCI) to you.)
3. Best Advice to Agents: Obtain Your Broker’s License Now!
- If you are a licensed broker, you will have the option of going out on your own or joining a “broker association.”
CAVEAT: While the business models below are in use today, any changes to your business model should be reviewed and approved by a labor attorney familiar with your state’s employment and real estate law.
Broker Models: Who Would Feel the Least Pain in a Minimum Wage Environment?
- Solo practitioners or partnerships where there are no other ICs.
- Brokers with existing employee models such as Redfin.
- Small Indie brokers who rely on their own production supported by full or part-time employees or virtual assistants.
Innovative Models in Use Today
1. The Agent Leasing Model
One of the quandaries in a shift to a minimum wage or an employee model is what to do with all those agents who fail to make the income cutoff and/or lack broker’s licenses where they can go out on their own. Two options are doing hourly work or joining a referral program.
Penny Nathan, President and CEO of Ascent Real Estate, has created a third option that could serve as a blueprint for how part-timers and full-time employee/IC agents might work together inside a brokerage.
Nathan’s “agent leasing” program 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 on a full-time, part-time, or temporary basis within her brokerage. Not surprisingly, Nathan’s agents have embraced this model because they can take time off, cover more than one open house on the same day, or pay for assistance on as pay-as-you-go basis. Furthermore, because Nathan supervises these employee agents, there is no conflict with IC or minimum wage laws.
2. Brokerage Shifts to an Outsourcing Model
Melissa Zavala, Broker-Owner of Broadpoint Properties in San Diego, has already launched an outsourcing model in her brokerage that could serve as a model for other brokerages in this new paradigm. These services could be available on a subscription, retainer, or per transaction basis. This approach could work particularly well for current brokerages that charge an affiliation fee coupled with a fee per transaction.
During the recession, Zavala set up a division in her company that handled REO transactions for agents from other firms. The agents using her service referred the transactions to Zavala’s brokerage and received a referral fee when the transaction closed.
Today, her company also helps agents from other companies with transaction coordination and compliance as well. Her company handles the details and provides the agent with a file that meets California’s compliance standards at closing.
3. The Brokerage Association Model
The model I was in was an all broker association. Each of us was an independent broker who worked under an Umbrella DBA. We all had our own membership at the board as separate brokers. If one broker didn’t pay their MLS dues, it didn’t hurt anyone else. We had no salespeople in the office. During the 25 years I worked there, there was never a lead broker. The system worked for us. There was a camaraderie and we helped each other. The office made no demands on us other than to pay our portion of the office costs.
Nancy Troxell also works within a broker association called BrokerInTrust Real Estate (https://www.brokerintrust.com/). Membership is by invitation only, is limited to the top 15 percent of producers in their area, and requires a valid broker’s license. There are no agents.
Although all broker members have the same DBA format and share the same brand, they operate independently.
The company also has an extensive library of resources, an active social network where the brokers can share new listings and obtain updates on current events, plus a la carte services including transaction management and listing processing.
Will It Come to Pass?
Going forward, many remain optimistic that the current legal structure will hold, and it will be business as usual. Nevertheless, whether you’re a broker, manager, agent, or agent team leader, now is the time to check with your legal counsel and to begin putting together a “Plan B,” just in case it’s needed in the not too distant future.