Real Estate Agents in California: Independent Contractors or Employees?

Are California real estate agents still independent contractors?

Lawsuits against companies who are accused of misclassifying workers as independent contractors are on the rise in the wake of last year’s landmark California Supreme Court decision, Dynamex v. Superior Court, which announced a new standard for determining if a worker is an employee or independent contractor. In fact, since that decision, companies have paid millions of dollars in judgments and settlements after finding themselves on the receiving end of class action lawsuits brought by groups of workers who allege they were improperly classified, and as a result, were deprived of the benefits and protections afforded employees under California labor laws. Real estate agents have traditionally been treated as independent contractors, but in the wake of Dynamex, this has been questioned. Should real estate agents be classified as employees and are real estate brokerage firms vulnerable to class action lawsuits? The new standard under Dynamex makes it very difficult for real estate brokerage firms to establish that their real estate agents are independent contractors.

Under the new “ABC test”, adopted by the California Supreme Court in Dynamex, all California workers are presumed to be employees. A worker may be classified as an independent contractor only when the company hiring the worker can prove each of the following conditions:

(A) that the worker is free from the control and direction of the hiring company in connection with the performance of the work, both under the contract for the performance of the work and in fact; and
(B) that the worker performs work that is outside the usual course of the hiring company’s business; and
(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

The hiring company has the burden of establishing the presence of all three of these conditions. If the company is unable to establish any one of the conditions the worker will be classified as an employee. In the case of a real estate agent, the second element is troubling since the usual course of a real estate brokerage firm’s business is in marketing and selling real estate, and real estate agents perform that same work. The first element of control may also be problematic and is certainly a heavily litigated element in class action lawsuits alleging misclassification.

Some argue that Business and Professions Code section 10032 allows brokerage firms to classify real estate agents as employees or independent contractors. While there is no court decision on point since Dynamex, because section 10032 focuses on defining liability of a brokerage firm for the acts or omissions of its real estate agents, rather than the determination of whether an agent is properly classified as an independent contractor or employee, it is unlikely that a court would find that 10032 trumps the Dynamex decision.

Why Maintain The Independent Contractor Façade?

It is important to know why realtors are classified as independent contractors when arguably, they operate more in the role of an employee. As with most carrier choices, it boils down to money and flexibility.

Realtors generally receive a commission rather than payment for hours clocked, which translates to schedule flexibility. Also, an independent contractor‘s status is attractive for those who desire the ability to work secondary jobs due to flexible hours which may not be acceptable if they worked a traditional job as an employee. Moreover, realtors acquire certain tax deductions when classified as an independent contractor. These deductions mean larger checks without any federal withholding and agents themselves are held accountable to IRS based on their stated income.

As such, a brokerage typically delineates expectations in an express written agreement identifying the realtor as a statutory nonemployee for federal tax purposes. For the industry in general, switching gears from independent contractors to employees means changing the entire landscape of how a real estate professional is viewed. If realtors are classified as employees, brokers may be forced to incur more expenses and costs for accounting, medical, supervision or human resources. There is also the added risk that boutique brokerages could decline when faced with mounting costs and pressures to keep up with hiring and maintaining employees rather than independent contractors.

Past Lawsuits

When taking into account the flexibility for both a brokerage and realtor, one should not discount the expenses involved with being a realtor which would typically be reimbursed by an employer. For instance, many realtors are required to bear the expense of work-related smartphones, GPS, laptops, marketing materials, while missing out on various wage benefits.

The 2013 California class action lawsuit, Bararsani v. Coldwell Banker, caused waves in the community when Coldwell Banker Residential Brokerage (“Coldwell”) was sued for improperly classifying affiliated sales associates as independent contractors when they were actually employees of the broker. The plaintiffs alleged violations of the California Labor Code for failing to reimburse business expenses and maintain proper records. Coldwell‘s defense counsel argued the claims lacked merit because of the same California Business & Professions Code 10032 discussed above, claiming it sets out the relevant three-part test for classification of real estate professionals as independent contractors, which defendants alleged were satisfied. Procedurally the Court denied granting an early dismissal, stating that 10032 does not require a specific classification but rather gives real estate professionals deference to be treated as independent contractors. Ultimately, the case settled with Coldwell reportedly agreeing to pay a large sum, distributed among certified class members.

Glimmers of Hope

Within the last few months, a California appellate court held that the Dynamex ABC test only applies to the rights and obligations identified in the California Wage Orders. Wage Order 4 applies to real estate sales agents and requires employers to comply with labor laws governing basic minimum working conditions such as minimum wage, maximum hours worked, overtime, rest and meal periods, wage statements, etc. Other labor laws such as the requirement that an employer reimburses employees for work-related expenses, employee leaves of absence, paid family leave, and workers compensation are outside the Wage Orders. Thus, the appellate court in Garcia v. Border Transportation Group held that the Dynamex ABC test applied to obligations defined by the California Wage Orders, but the pre-Dynamex, multi-factor test that focuses on whether the hiring company had the “right to control” applies to obligations that are defined outside of the Wage Orders.

Moreover, recognizing the broad implications of the Dynamex decision to many industries including real estate, the business community is lobbying the California Legislature to address the fallout from Dynamex including its impact on brokerage firms and real estate agents. Currently, there is competing legislation pending in Sacramento relating to Dynamex. One bill, supported by labor, seeks to codify Dynamex, while a second bill, supported by business organizations including the California Chamber of Commerce, seeks to revert to the pre-Dynamex multi-factor test that focuses on whether the hiring company had the “right to control” to determine independent contractor status. The result, after significant negotiations that are on-going, may be a compromise between these two positions. A proposal excepting real estate agents from the Dynamex ABC test is part of these negotiations, but to date, there is no such exception in the proposed legislation, and Dynamex continues to be the law of the land. Stay tuned as this issue will continue to be front and center in the 2019 California Legislative year.

This article also appears on Law360.com. For more information, please contact Jennifer Morin.