Employee Classification: How do I classify my brokers - as Independent Contractors or Employees? | Chicago Association of REALTORS®

Why does it matter?

Misclassifying an employee as an independent contractor excludes an employee from benefits, overtime and unemployment insurance. As an employer, misclassification can lead to severe employer penalties and fines. Misclassification resulted in a $97 million settlement in Vizcaino v. Microsoft. Estrada v. FedEx resulted in an award of $5 million in compensation and $13 million for attorney fees, and a separate FedEx case concluded with 
a ruling of $319 million in back taxes and penalties.

A Win for the Real Estate Industry

On June 3, 2015, the Massachusetts Supreme Judicial Court ruled that real estate salespeople are, in fact, independent contractors, rather than employees. In Monell v. Boston Pads, LLC, the plaintiff argued that, because the firm required office hours and training, their agents deserved to be classified as employees, not independent contractors. The court disagreed and ruled in favor of the defendant, but had they sided with Monell, the decision would have had a major impact on the industry as a whole, and an immediate effect on the Massachusetts real estate brokerages, as brokers would have been responsible for back pay, benefits and fines.

While the ruling was an overall win for the real estate industry, unfortunately, the court was not asked to decide what rules could be applied to determine whether a person should be considered an independent contractor or employee..

The Key: It’s All About Control

Whether a worker is an employee under the Fair Labor Standards Act is a legal question determined by the economic realities of the working relationship between the employer and the worker, not by job title or any agreement the parties may make.

The amount of control a broker exerts over an individual determines whether they are an independent contractor, versus an employee. The less control a broker exerts over their agents, the more likely that the independent contractor status will prevail.

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Payment and Taxes

Once the determination has been made regarding whether an individual is an employee or independent contractor, you must be sure that they are being paid correctly and that taxes are handled properly.

Employees must:

  • Be paid on a regular basis
  • Report income on W-2
  • Withhold federal, state and local income taxes
  • Withhold and pay social security and Medicare taxes
  • Pay unemployment tax on wages paid

Independent contractors must:

  • Be paid on a commission basis
  • Report income on 1099
  • Be responsible for paying their own taxes

What about assistants, or individuals other than brokers?

The above criteria still applies.

Keep in mind, too, that when in doubt, the safest course of action is to consider the individual an employee.

*Disclaimer: The information provided here should not be substituted for legal advice.

Donna Garcia, MSHR, SPHR, SWP, RCE, Director, Association Strategic Business Planning, National Association of REALTORS®

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