California Real Estate Salesperson: Employee or Independent Contractor?

Whether a real estate salesperson ("agent") will be considered an employee or independent contractor  ("IC") is often a question of fact, dependent upon the particular circumstances of each case.

In California,  an agent is normally classified as a non-employee either under the common law "control" rule or as an outside salesperson,  and the minimum wage laws are not applicable.  The less control exerted by the broker, the more likely the agent will be considered an IC, and the relationship should be defined in a written IC Agreement.

Under California's Business & Professions Code and the Unemployment Insurance Code ("UIC"), most agents who enter into an IC Agreement with a broker will be considered an IC.  B&P Code § 10032 provides that the determination of whether an agent is an employee or an IC is determined by UIC  §§ 650, and 13000 to 13054. 

UIC § 650 applies a three part test:

1.         Agent must be a licensed real estate salesperson;

2.         Substantially all of the agent's remuneration must be directly related to sales or other output, including the performance of services, and not to the number of hours worked; and

3.         The agent's services must be performed pursuant to a written agreement between the broker and agent that states that the agent is not an employee for federal tax purposes.

California's Code of Regulations, Title 22 § 4304-2, provides 22 basic guidelines in determining the status of an agent, including:

1.         IC Agreement:  Written agreement between broker and agent specifying IC status should include many of the issues listed below.

2.         Broker Policies:  Broker should have written policies regarding IC activities, with proof of their delivery to existing and new agents, and the credibility of the policies is enhanced if they are up-dated periodically. 

3.         No assignments other than licensed activities: All assignments should be related to licensed activities.

4.         No required educational requirements, training and skills:  A licensed IC should not require mandatory training, and the broker should not require such training or the agent may be considered an employee. Voluntary attendance at in-house training is not evidence of employee status.

5.         Reasonable charge for desk and office space: IC Agreement should specify payments to broker for agent's use of desk and office equipment, including any secretarial or receptionist services, at reasonable charges based upon the actual value of the facilities and services. 

6.         Business cards and advertising require IC's name:  In addition to the broker's name, the IC's name should be on the business cards used by the IC, and if the cards are provided by broker, IC should be reasonably charged.  Agent may advertise with or without broker, and by cost sharing with broker.

7.         No mandatory assignments in office: The agent's presence and activities in the office must be voluntary, or the agent may be considered an employee.

8.         No imposed requirements re open houses:  Imposed requirement to attend open houses based upon specified hours may cause agent to be classified as an employee.  Any such requirements should be disavowed in the IC Agreement.

9.         No required attendance at sales meetings:  Any requirement that an agent attend sales or agent meetings may cause agent to be classified as an employee.

10.       No assigned territory:  Any division of territory or "farm" among agents is broker control of the manner and means by which the agent practices, and will be considered evidence of employment.

11.       No minimum hours or work days:  An IC should have sole control and discretion over the hours and work schedule.

12.       Method of payment:  Payment should be limited to agreed share of commissions.  Payment by salary, minimum compensation, draws or advances against commissions, unless secured and applied against expected commissions from open escrows, will be considered employee compensation.

13.       Participation in benefit plans:  An agent's participation in programs for health, medical, life, or retirement insurance are not evidence of employment, so long as the IC is required to and pays all premiums necessary for participation in the programs.

14.       Workers compensation insurance: The IC Agreement should specify that workers compensation insurance is for broker's benefit, or mutual benefit.

15.       Insurance and fidelity bonds:  Any broker requirement that agent provide a fidelity bond or malpractice insurance should be at agent's expense.

16.       MLS Services:  The IC agreement should require agent to reimburse broker in whole or in part for MLS services.

17.       Business licenses:  Agent should pay for any business license that the agent may be required to have by the governmental authority.

18.       Separate operations:   The agent and broker should keep their respective operations and services separate.

19.       Termination of IC agreement:  Termination should be based on 30 days notice by either party,  unless due to breach of ethics, statutory or regulatory requirements,  or for the protection of the public.

20.       Limited purpose agreements:   The IC  agreement may provide for agent's services for limited transactions, specified developments or building tracts,  or for other limited purposes.

21.       IC should not be manager:  Managers such as sales,  office, and general managers are considered employees of the broker.

22.       IC receives FORM 1099 (federal) and Form 599 (California):  Agent should receive tax forms 1099 (federal) and 599 (California) specifying compensation paid.

The federal Fair Labor Standards Act excludes independent contractors from coverage.  For federal tax purposes, if the broker classifies the agent as an IC, the broker files a 1099-MISC for payments to the agent in excess of $600.  If the agent is classified as an employee, the broker files a FORM W-2 and withholds the appropriate taxes

If the broker is unclear about an individual's classification, the broker can file a

FORM SS-8 to obtain a determination of worker status for purposes of federal employment taxes and income tax withholding.  The IRS will review the facts and circumstances and officially determine the agent's status, but this review may take over six months.

The agent's relationship with the broker should be subject to, and the terms specified in, a written independent contractor agreement that should include most of the issues listed above, and should be tailored for the particular policies and circumstances of the broker's office.