Did you hear the news? Bararsani v. Coldwell Banker, the case that called into question whether agents should be classified as employees or independent contractors, was settled for $4.5M this month. In total, there were approximately 5600 members of the class action lawsuit. After paying the attorney’s fee of $1.5M, I calculate that each agent will receiving a little over $500—much less than a single commission check.
But, what does this mean for the industry? In a January 17 article on his blog, Rob Hahn writes:
The pattern in the past has always been that one lawyer gets a significant settlement, the others see the payday, they smell blood in the water, and then the swarm attacks begin. It’s happened to asbestos, to tobacco, to drug companies, etc. etc. So… it’s going to happen. It’s just a matter of time.
If Hahn’s predictions are accurate and there seems to be an historic precedent, we will be reading more on this topic in the future.
Employee or Independent Contractor?
So, are real estate agents to be classified as employees or independent contractors?
Realty Times reports that “according to federal law (26 U.S.C. §3508 (b)), for federal tax purposes, real estate agents will not be treated as employees if a 3-part test is met: (1) The agent must be licensed, (2) Substantially all payment is made on the basis of sales or output, but not on hours worked, and (3) There must be a written contract between agent and company providing that, for federal tax purposes, the agent will not be treated as an employee.”
The IRS has a different evaluation system
Yet, the Internal Revenue Service has a different evaluation system; it’s a 20-factor test (not a 3-part test) that determines whether the status of an individual worker is that of employee or independent contractor.
So, is it a 3-part test or a 20-part test? And, without specific guidance from the National Association or Realtors®, how should brokers proceed going forward?
Moving forward: Considerations for brokers
With all of this hullabaloo, brokers and brokerages may need to rethink some of their practices. National and local franchises will likely have a dictum that come from their corporate headquarters that will expressly set forth policies and procedures relating to this issue.
But, what about the independent brokerage (which comprises over 80% of our industry)? What immediate steps can independent brokers take to assure that they will not be part of the next class action suit?
- Brokers should get to work right away and review their policy and procedure manuals to assure that they pass the “sniff” test. Specifically, look for language that violates the 20-factor test and make appropriate edits. After all, it’s a new year, so it is probably a good time to update the manual anyway.
- Brokers need to modify their scripting. Instead of telling all the agents that there is a mandatory meeting on Monday at 9:00, it would be better to remind agents of the time. Then, drip in language, which implies that the best producing agents are the ones who attend the meeting. Brokers who receive late night phone calls and texts from frantic agents can set precedent that issues are resolved at the office meetings.
- Cut bait or suggest that certain agents find a new home. Brokers have a duty to supervise their agents. In California, for example, the Real Estate Commissioner Regulation 2725 specifically states, “Reasonable supervision includes, as appropriate, the establishment of policies, rules, procedures and systems to review, oversee, inspect, and manage…” If you have an unmanageable agent, it may be time to cut bait. Look long and hard at your business model and decide whether the cash rogue agents brings in is worth risking the health of your business. At the end of the day, when the state licensing bureau investigator comes a-calling, the broker is usually the ultimate loser as a result of lack of agent supervision.
As I mentioned in a July 2014 article on a similar subject, it is a pickle. Eighteen months later and with a class action settlement on the table, lack of supervision is still a slippery slope. Brokers are required to supervise their agents. Adequate supervision can only happen if agents attend trainings, learn policies and procedures associated with risk management, contracts, and closings. Nevertheless, Bararsani v. Coldwell Banker puts us on high alert.
I’m not sure what the answer is here. But, at least the latest news reminds us that we need to look long and hard at our business practices in order to assure that they are up to snuff.