This is the final episode in our new video series covering office management principles. The prior episode covers the contents of a written employment agreement containing all material aspects of a licensee’s employment.

This episode covers business liability insurance, professional liability coverage and unemployment insurance benefits, as well as workers’ compensation coverage for employees.

Business liability insurance, professional liability coverage and unemployment insurance benefits

In spite of the independent contractor (IC) employment agreement allowing total discretion to the agent in the conduct of handling of listings and sales, the agent is continuously subject to supervision by the broker. Sales agents are agents of the broker, without regard to the tax purpose of their employment agreement.

The broker who hires agents who use their own vehicles to conduct brokerage activities needs to be a named insured on the agent’s car insurance policy as a matter of the broker’s risk management. The employing broker also needs to maintain general comprehensive business liability insurance and professional liability coverage, also known as errors and omissions insurance, or simply, E&O insurance.

In part, supervision is critical to the reduction of the broker’s exposure to risks of liability for their sales agents’ failure to inspect, disclose, advise and care for clients.

Under real estate law, a sales agent is considered both an agent and an employee when acting within the course and scope of employment with a broker. [Grand v. Griesinger (1958) 160 CA2d 397]

However, an agent is not always treated as an employee under state and federal income tax withholding rules.

For example, licensed real estate sales agents, as well as broker-associates, are excluded employees for purposes of the California Unemployment Insurance Law. Even though a sales agent is considered both an agent and an employee under California real estate law, a broker does not have to contribute to the state unemployment insurance fund on behalf of the agent. In turn, the agent cannot collect unemployment benefits from the state if terminated from the employ of the broker.

Receipt of compensation by a licensed real estate agent under an employment agreement, paid as a contingency fee for closing transactions, is the only test required for the broker to avoid paying unemployment benefits. When the agent is paid a contingency fee, not an hourly wage, the agent will be denied unemployment benefits regardless of the level of supervision and control the broker exercises over the agent’s real estate related activities. [Calif. Unemployment Insurance Code §650]

A sales agent is entitled to payment of minimum hourly wages from a broker if the agent is classified as an employee by California labor laws. This labor law classification is unrelated to tax law treatment. A labor law employee comes about due to the broker’s conduct, including constant supervision and total control over the agent’s means, manner and mode of engaging in activities requiring a real estate license.

However, as agents of their broker, most agents by the nature of daily scheduling for appointments, property viewings and document preparation have a high level of discretion and control over when they conduct different aspects of their business. This is especially true of the hours spent outside of their broker’s office.

Typically, the agents’ time in the office spent at the desk, or on the phones or floor, rarely take up more than one day a week, usually less than 20% of the time spent on real estate related listings and sales. Little additional time is spent in the office at staff meetings. As a result, agents are rarely considered employees, except for the public policy purpose of judging their conduct as a licensee under California real estate law.

As an outside salesperson who regularly works more than half of their time away from their place of employment, selling items or obtaining contracts for services, a real estate sales agent is excluded from collecting a minimum wage from their broker. [Calif. Labor Code §1171]

Workers’ compensation coverage for employees

Brokers often ignore or are unfamiliar with workers’ compensation requirements for their agents. Erroneously, employing brokers often believe real estate agents and broker-associates working for them under IC agreements are not employees.

However, under labor laws,  a broker’s employees include:

  • their licensed sales agents (including ICs);
  • other brokers working under their license as broker-associates; and
  • their licensed and unlicensed administrative staff. [Lab C §2750.5]

A broker who is unlawfully uninsured or forces their employees to carry their own workers’ compensation insurance faces:

  • a stop order from the Division of Labor Standards Enforcement (DLSE) under the California Department of Industrial Relations (DIR), preventing the broker from conducting business until proof of insurance is provided;
  • civil penalties and fines up to $100,000; and
  • reimbursement claims from current and former agents for premiums they paid for workers’ compensation coverage. [California Department of Real Estate Bulletin, Fall 2004, Page 10]

For a broker who employs one or more agents, the broker’s workers’ compensation insurance policy is in addition to policies for any business, vehicle and E&O insurance coverage.

Exclusions under workers’ compensation law

Arrangements exist which exclude workers’ compensation insurance requirements for:

  • broker-owners; and
  • corporate officers and directors.

The broker-owner of a sole proprietorship is not required to obtain workers’ compensation coverage for themselves. They are not an employee, they are the self-employed owner.

When a broker and their spouse (or child or parent) are the sole owners of the individually owned or corporate brokerage company, workers’ compensation insurance coverage for the owners is not compulsory. Thus, only immediate family members who are the sole owners of the company are excluded from workers’ compensation coverage for themselves. However, the broker’s spouse or relative needs to be clearly defined as part owner, either as a general partner or as an officer of the corporation. [Lab C §4150]

Immediate family members (a spouse, child or parent), licensed or unlicensed, who are not co-owners and are employed by the broker are required to be covered by workers’ compensation — as are all other employees of the broker. This includes the spouse of the broker who is a licensee under their supervision, whether or not the broker employs any other person. [Lab C §3700]

Officers and directors of a corporation are not required to have workers’ compensation coverage for themselves if they are paid only as owners of the corporation.

However, an officer or director is to be covered by workers’ compensation insurance if:

  • they render services as an agent of the corporation for a fee (e.g., taking a listing, negotiating for clients); and
  • the corporation is also owned by non-officer owners. [Lab C §3351(c)]

Here, when officers or directors are the sole owners of the corporation, an officer rendering real estate-related services for a fee need not be covered by workers’ compensation insurance.