Who’s responsible?

As all real estate practitioners know, real estate brokers who hire other licensees to act on their behalf enter into written agreements with each of the associate-licensees they employ to act as their agents.

The employment agreement covers material aspects of the employment relationship between the broker and their sales agent or broker-associate, and sets the parameters for the conduct of all participants.

Any sales agent or broker licensed by the Department of Real Estate (DRE) who acts on behalf of a broker is both an employee and an agent of their employing broker. Thus, any licensee hired by a broker interacts with members of the public under assumed broker supervision, whether they are a salesperson or broker-associate. When acting as an agent of the broker, a licensee represents their employing broker, and never acts independently — except for broker-associates if permitted by their employing broker. [Calif. Civil Code §2079.13(b)]

All DRE-licensed brokers fall into categories distinct from licensed salespersons. Only brokers are authorized to deal directly and independently with members of the public. Only they may offer, contract for and render brokerage services on the client’s behalf for compensation, called licensed activities.

This is not the case for sales agents and broker-associates. [Calif. Business and Professions Code §10131]

A sales agent or broker-associate is required to present themselves as an agent acting on behalf of their employing broker. Agents of an employing broker may not contract in their own name or on behalf of anyone other then their employing broker — again, with the sole exception of broker-associates whose employment agreement permits it. [Grand v. Griesinger (1958) 160 CA2d 397]

Further, a sales agent may not be employed by a person who is a member of the public — only a broker. This is why a sales agent’s or broker-associate’s employing broker retains possession of their license until the licensee leaves their employ — unless the broker-associate has been authorized to work with other brokers under their employment agreement. [Bus & P C §10160]

Additionally, sales agents and broker-associates may not receive compensation for real estate-related activities directly from anyone other than their employing broker (e.g., an owner, buyer, another licensee, mortgage lender or tenant) — much less illegal kickbacks. [Bus & P C §10137]

Thus, an agent or broker-associate of the employing broker may not pursue collection of a fee from the client — only the employing broker may. However, employing brokers are responsible for all the activities their sales agents and broker-associates carry out within the course and scope of their employment with the broker. [Gipson v. Davis Realty Company (1963) 215 CA2d 190]

Compensation nation

Most sales agents and broker-associates receive compensation from their employing broker based on a negotiated percentage of contingency fees the broker receives for completed sales or leases, as well as mortgages solicited, negotiated or processed by employed licensees.

Here, an agent’s or broker-associate’s right to a fee arises under the licensee’s written employment agreement with their broker, not a listing agreement with the client. Even when the listing agreement is negotiated by the agent or broker-associate, their employing broker holds ownership of the listing and its commercial advantage, not the employed licensee who negotiated the listing.

A real estate broker is required to have a written employment agreement with each licensee acting on their behalf  — available on audit by the DRE. The agreement covers material aspects of the employment relationship between the broker and their sales agents or broker-associates.

Realty Publications, Inc. (RPI) publishes two employment agreements used by a broker employing a licensee to perform agency duties on the broker’s behalf. These employment agreements are:

  • Sales Agent and Broker-Associate Employee Agreement [See RPI Form 505]; and
  • Independent Contractor Employment Agreement — For Sales Agents and Broker-Associates. [See RPI Form 506]

Brokers typically negotiate fee sharing arrangements structured as an independent contractor (IC) agreement to document their employment of agents. [See RPI Form 506]

Alternatively, brokers may choose other pay and tax withholding arrangements documented by an employee agreement form. [See RPI Form 505]

An IC employment agreement, in contrast with an employee agreement form, is used solely to avoid federal and state withholding and employer contributions by real estate brokers. [See RPI Form 506 §2.13]

Regardless of which written employment agreement is entered into, the broker and agent need to comply with all DRE rules and regulations.

Despite the labels given to these employment forms, an agent or broker-associate is always an employee of the broker under both California labor law and real estate law. Thus, the broker is liable as an employer for any wrongful conduct by the agent as a function of their employment.

Even if the broker uses an IC agreement to document the employment, a sales agent may not act independently of the broker when rendering services that require a broker’s license. Conversely, the employing broker is not released from the duty to supervise their agents and broker-associates, as well as the labor law requirement that they maintain a worker’s compensation policy. [See RPI Form 506]

Both RPI employment agreements include provisions covering:

  • broker supervision of associate-licensee activities;
  • associate-licensee obligations owed to their broker, including providing auto insurance coverage and naming the broker as an additional insured;
  • broker obligations owed to the associated licensee, including maintaining membership in professional organizations agreed to, providing workers’ compensation insurance;
  • the broker’s obligation to notify the DRE in writing of the employment and termination of the broker-licensee hired as a broker-associate;
  • duties owed to clients and the public; and
  • associate-licensee compensation. [See RPI Forms 505 and 506]

Both types of employment agreements require all documents and funds received on listings and sales negotiated for a client on behalf of the broker to be entered into and taken in the name of the broker.

Also, all advertising and business cards identify the agent as acting for the broker as an associate-licensee.

Further, DRE-licensed real estate brokers who employ broker-associates are required to notify the DRE in a mailed, printed writing regarding:

  • agreements they have entered into with individual brokers employing them as associates to act on behalf of the employing broker in the capacity of agents [See RPI Forms 505 §3.10 and 506 §3.10]; and
  • termination of the employment of a broker-associate. [Calif. Business and Professions Code §10161.8(a)-(b); see RPI Forms 505 §3.10 and 506 §3.10]

To notify the DRE a broker-associate has been employed or is presently in the broker’s employment, the employing broker fills out and mails DRE Form RE 215. [See RE Form 215; see RPI Forms 505 §3.10 and 506 §3.10]

Related article:

Your guide to the new CalBRE broker-associate reporting requirement

Presently, no California real estate law or DRE regulation limits a broker-associate’s ability to work for multiple employing brokers, or for their own account as an independently operating broker.

Instead, employment agreement provisions limiting brokerage activities determine the extent to which a broker-associate’s involvement in fee-generating brokerage services, other than on behalf of the employing broker, are permitted. [See RPI Forms 505 and 506]

This article was originally posted November 2017, and has been updated.