Over the past few years, a question has been bubbling around the real estate community: should agents be legally treated as employees or independent contractors? This question has sparked several lawsuits around the country as agents grapple with this legal gray space.
The reason this employee vs. independent contractor issue has been such a difficult one to traverse in the real estate industry is because there is no clear cut answer.
Due to the requirement that agents work beneath a broker, they don’t exactly fit into the independent contractor bubble – those with freedom to run their business without supervision. However, many agents do retain some common independent contractor practices, and their brokers file them as so. This means agents often find themselves landing in a gray mid ground.
According to an NAR white paper, both federal and state legislatures have worked to recognize the unique aspects presented by the real estate industry by addressing the independent contractor issue directly through statutory carve outs.
The real estate industry is far from the only sphere navigating this legal playground; in 2013, four San Francisco Uber drivers sued the ride-sharing company, which refused to reimburse them for their business expenses. Uber believes it is not required to compensate for gas or car-maintenance since drivers are not employees, but rather independent contractors.
California real estate professional Paul Argueta, founder and CEO of Real Estate Heaven, notes that the Uber lawsuit has definitely caught the attention of any business owner that employs independent contractors including real estate brokers.
“Real estate agents, like Uber drivers, set their own hours and work schedules, are responsible for their own tools and supplies necessary to be proficient, and are subject to little direct supervision,” says Argueta.
This brings us to Bararsani v. Coldwell Banker, a 2012 class action lawsuit that accused Coldwell Banker Residential Brokerage Co. of legally misclassifying some of its agents, reporting them as independent contractors while treating them as employees as defined by the California Labor Code. The plaintiffs argued because of this mislabel, they did not receive necessary employee benefits including fair wages, payroll taxes and expense reimbursement.
In 2013, a year after the case was opened, Coldwell Banker filed a demurrer stating it had properly classified the plaintiffs by following “widespread industry practice for many decades.” Coldwell Banker also argued they had met California’s three-part test for classification of real estate professionals as independent contractors.
The Bararsani lawsuit was finally settled this month for $4.5 million; $1.5 of the settlement will go to lawyers, with the rest being distributed to plaintiffs.
“The independent contractor relationship between brokers and salespeople is a unique and longstanding tradition in the real estate industry,” says NAR General Counsel Katie Johnson. “Classification of salespeople as independent contractors has been legally recognized by the federal government and many states, including California. Regarding the Barasani settlement, we understand that class action lawsuits are excessively expensive to defend, regardless of the likelihood that the defendant will ultimately prevail.”
Since the Barasani case, there has been an increase in real estate related litigation throughout the country, and NAR cautions that “An unfavorable outcome in these cases could lead to a drastic shift in the way the real estate industry has historically done business in those states.”
Johnson notes that the National Association of REALTORS supports the right of brokers to choose whether to classify real estate salespeople as employees or as independent contractors, despite the supervisory obligations imposed by state laws.
