Independent Contractor Issues
Although most real estate salespeople work as independent contractors, affiliated with a brokerage, there are many others in this business—managers, receptionists, assistants—who are considered employees under federal and state employment laws. Whether you’re a broker who hires management and support staff or a salesperson with one or more assistants, you need to know how employment laws governing wages, overtime, and record-keeping pertain to you.
Many of these laws aren’t new, but the recent issuance of new regulations defining exempt and non-exempt employees makes this a good time to review key provisions of federal labor law.
Are your sales agents ‘independent contractors’?
Unlike real estate licensees working as independent contractors, who are covered by special Internal Revenue Service regulations, workers in other aspects of the real estate business aren’t considered independent contractors unless they meet extensive tests created by the IRS. Some of the principal factors that determine whether a worker is an employee include the amount of control the company has over the worker’s hours, where the worker does the job, and the manner in which the work is performed.
Generally speaking, if an employer gives specific directions as to when and how work is to be done, the worker is an employee.
To help companies determine whether a worker is an independent contractor, the IRS has created Form SS-8 available online in pdf format at www.irs.gov. The form, which is necessary to complete only if you have a question about the tax status of a worker, poses a series of questions on the work performed and the behavioral and financial controls the company has over the worker.
Behavioral-control criteria include how the work is assigned, the location where the work must be done, and who determines how the work should be done. Financial-control criteria include who provides equipment for the worker; how expenses are reimbursed; and whether payment is made as a lump sum, commission, or hourly wage.
Whether there is sufficient control to meet this standard depends on all the facts and circumstances. These facts fall into three main categories:
Behavioral Control – Facts indicated by questions such as:
Does the payer provide training or instructions?
Does the worker carry government identification?
Does the worker receive an evaluation of performance?
Financial Control – Facts indicated by questions such as:
Does the worker have a financial investment in the operation?
Does the worker offer services to the general public?
Does the worker have un-reimbursed expenses?
Relationship of the Parties – Facts indicated by questions such as:
Can the worker be terminated or quit at any time?
Does the worker receive benefits?
Are the services performed a key aspect of the regular business activity?
No fact by itself is decisive, and all facts must be considered in making a determination. For a more detailed discussion of the common law tests, see IRS Publications 15-A, Employer’s Supplemental Tax Guide, and Publication 963, Federal-State Reference Guide.
If employees don’t qualify as exempt, they’re entitled to overtime pay for work time exceeding 40 hours in any workweek. The Fair Labor Standards Act requires that you pay non-exempt employees one and one-half times their regular pay rate for overtime.
7 Items Every Independent Contractor Agreement Should Have
1. A statement that the salesperson’s compensation will be solely in the form of commissions
2. A place where the salesperson can acknowledge licensure and agree to be responsible for all licensing fees and requirements, such as continuing education
3. A statement that all documents and correspondence relating to transactions or prospects remains the property of the brokerage company
4. A description of what expenses—insurance, association dues, Internet connection—each of the parties will pay
5. A statement that the salesperson is not an employee
6. A description of how the agreement can be terminated and what the responsibilities of each party are at that time
7. A statement that the salesperson will conduct business in accordance with the state’s license law and regulations
TIP: Have your associates sign an affidavit each year restating their responsibilities for paying such expenses as mileage and car expenses, client entertainment costs, and all self-employment taxes. —Leo Chervenic, Geneva Chervenic Realty, Stow, Ohio, in Real Estate Broker’s Inside, Alexander Communications, February 15, 1997
Know Your State Laws
State laws differ in their treatment of independent contractors with regard to taxes, workers’ compensation insurance, and unemployment compensation. In some states, real estate licensees are not eligible to receive unemployment or workers’ comp.
|No Unemployment Compensation||No Workers’ Compensation|
|Arizona||Missouri||Dist. of Columbia||Michigan|
Reprinted from Don’t Risk It: A Broker’s Guide to Risk Management, NATIONAL ASSOCIATION OF REALTORS®, 2000, and used with permission.