At first blush, the California State Supreme Court Dynamex decision seemed to have the potential to disrupt the real estate business as we know it by bringing minimum wage requirements to real estate in California. While that may not be case after all, what steps would you have to take if minimum wage requirements came to your state?
In virtually every state, the employment laws prohibit the supervision of independent contractors while the real estate law requires brokers to supervise their agents. Until this underlying conflict is resolved, Independent Contractor (IC) status in real estate is at risk due to the extensive litigation on misclassification of ICs in other industries that could bleed over into real estate.
California Real Estate Dodges a Bullet on Dynamex Decision
After reviewing numerous articles on the impact on the Dynamex decision, it seemed that the new ABC test for IC status could be the decision that resulted in a minimum wage requirement for real estate.
June Barlow, General Counsel for the California Association of Realtors, explains why this may not be the case.
According to Barlow, the Dynamex decision does NOT close the door on IC status for the following reasons:
- Under the rules of legal analysis, specific targeted laws generally take priority over generalized pronouncements. In other words, the specific laws governing the relationship between brokers and salespersons should provide an exception to the non-real estate employment law case.
- California differs from most states in that brokers must pay workmen’s compensation for their salespersons.
- While there have been lawsuits over IC status in California, these suits have all been dismissed, settled to avoid additional litigation costs, or sent to binding arbitration.
Consequently, unlike many industries that may be strongly affected by the Dynamex decision, it appears that real estate IC status may not be impacted by this decision. Because this ruling is so new, there is no way of knowing for sure. Nevertheless, there are steps you can take now to protect yourself.
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 alike to cope with such a change.
CAVEAT: Before implementing any of the changes outlined below, please check with your attorney to determine what is legal under the real estate and the employment laws in your state.
Agents: Begin Working on Obtaining Your Broker’s License Now
No matter what happens, if you have your broker’s license, you at least have the option of going out on your own, provided you have the financial wherewithal to do so. Consequently, if you have the required amount of experience in your state to become a broker, begin studying for your broker’s license now. Remember, your clients have a relationship with you, not the company brand.
If you don’t have enough experience to become a broker or don’t want the hassle, then it’s time to double down on training plus upping the number of hours that you prospect so you can make the cut-off mark to become a profitable employee.
Part-Time Agent Options
If you don’t make the cutoff, you still have the option to become an hourly-rate or part-time employee. Your role could be that of a buyer’s agent, someone who holds open houses, transaction coordinator, marketing specialist, or social media manager.
Penny Nathan, President and CEO of Ascent Real Estate, has created a vibrant model in her company that could serve as a blueprint for how part-timers and full-time employee 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.
Nathan’s salespeople have fully embraced this model because they only pay for the hours they use. Moreover, because Nathan supervises these employee agents, there is no conflict with IC law.
The Referral Agent
Licensees who work part-time or who have gone into partial or full retirement, could join a referral agent program. These agents would receive training on how make referrals to the company’s active agents and would receive either a flat fee per referral or a percentage of the commission.
Workable Brokerage-Employee Models ARE Available
In terms of how a shift to employee status could work, brokers have a number of choices from which to choose. Commercial real estate, mortgage, and law firms all have models that allow them to handsomely compensate their employees and still retain real estate’s entrepreneurial spirit.
Broker Association or Consortium Model
In the C.A.R. 2017 Women’s Initiative White Paper, Ann Pettijohn of Oak Tree Realtors described her experience working at a “broker association.”
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. [Read More]
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 be a model for other brokerages. These services could be available on a subscription, retainer, or per transaction basis.
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.
Will It Come to Pass?
Many remain optimistic that the current legal structure will hold. Nevertheless, whether you’re a broker, manager, agent, or agent team leader, now is the time to check with your legal counsel and put together “Plan B,” just in case a new ruling comes down that changes the IC rules for everyone.