This article discusses the few pros and many cons to how agents are classified and operate in the workforce.
Agents: Employees or independent contractors?
Real estate salespersons — agents — fall into a middle area in California’s employment status.
An active agent is by definition an employee of their broker, who holds their license. But, while many aspects of the employment relationship are traditional — such as access to workers’ compensation insurance and required employer supervision — other benefits are not required or standard as they are in other professions. That’s because most agents tend to sign independent contractor agreements with their broker.
An agent’s right to a fee arises under the agent’s written employment agreement with their broker (not the listing agreement with the client, which is entered into with the broker). Through the broker-agent employment agreement, the agent is entitled to a share of the fees received by the broker on sales, leases or mortgage originations in which the agent participates.
Agents may choose to enter into one of two arrangements with their broker:
- a Broker-Agent Employee Agreement [See RPI Form 505]; or
- an Independent Contractor (IC) Employment Agreement — For Sales Agents and Associated Brokers. [See RPIForm 506]
Most brokers and agents choose to use IC agreements. An IC agreement, in contrast with an employee agreement form, is used to avoid withholding and employer contributions by real estate brokers.
However, even when operating under an IC agreement, an agent or broker-associate is always an employee of the broker under California’s labor law. Thus, an agent may not permissibly act independently of the broker and the broker is liable for their agent’s wrongful conduct. Further, the broker employing agents using an IC agreement still owes a duty of supervision to the agent as well as a mandated worker’s compensation policy.
But agents who operate as independent contractors lose out on many benefits offered to traditional employees, including:
- health insurance;
- income tax, social security and disability insurance withholding;
- a minimum wage;
- reimbursement for business expenses; and
- standard breaks and mealtimes.
Agents who structure their employment agreements as independent contractors may feel a false sense of independence. In truth, the ways that they are independent are mostly disadvantages.
They lose out on all the normal perks mentioned above that regular employees receive, yet they are still beholden to their employing broker, unable to lawfully branch out on their own without obtaining a Department of Real Estate (DRE) broker license.
Sales agents and brokers have different levels of education, different legal (and social) status, and different duties owed to the DRE. Sales agents are limited to acting solely on behalf of their employing broker. As in a chain of command, agents answer to their broker, brokers answer to the DRE, and the DRE answers to the public. [Calif. Business & Professional Code §10131]
Another, less formal duty is owed from the sales agent to the California Association of Realtors (CAR), as membership is often required by their employing brokers.
Many real estate agents and brokers erroneously believe they need to join CAR through their local Association of Realtors (AOR) branch to practice real estate and place listings on their local multiple listing service (MLS). However, the MLS needs to provide the option to subscribe or participate without becoming a CAR or local AOR member. [Marin County Board of Realtors, Inc. v. Palsson (1976) 16 C3d 920]
An exception: when an agent’s employing broker is a member of an AOR, the agent is required to also be a member, on top of MLS fees. This is because — again — an agent’s license is tied to the broker’s, since the agent acts on their broker’s behalf.
The brokers’ part
When an agent stands back and looks at the big picture, it becomes clear that big brokers are the ones that set the standards, call the shots and hold the power.
Big brokerages, which are beholden to CAR in California and more broadly the National Association of Realtors (NAR), set the fee rates (5%-6%) that are generally accepted. This fee is passed along to the seller and ultimately shouldered by the buyer, who pays for it with a higher price. Of that set fee, the agent receives a standard percent, typically around 50% of the broker’s total fee. This, despite the many hours the agent has put into marketing (FARMing) and producing their crop of buyers and sellers.
The result of the dominance of big players is that there is very little room for innovation, improvement or competition — the same thing that happens in a monopoly.
True, there are some outliers. For example, some real estate brokerages offer 100% commission models to their agents. But these brokerages still charge clients the typical 5%-6% fee and cut away at their agents’ paychecks by charging fees for desk space, signs, printing, lock boxes, use of the brokerage’s name… and the list goes on.
Other brokerages have experimented with salary models, treating their agents as traditional full-time employees. One notable exception has been Redfin, which operates across California but still makes up a tiny slice of the total market.
Other potential fee structures, such as billing hourly or charging for services a la carte, have struggled to make headway.
Will the system ever truly change? Or are agents doomed to continue toiling away with little options, the hardworking serfs in a feudal system with NAR playing the role of king?
In the real estate world, a lawsuit was filed earlier in 2019 and is ongoing against NAR, claiming that NAR worked with big brokerages to fix prices across markets. From a labor perspective, new laws are being created to protect workers in the gig economy who have failed to receive employee benefits due to their independent contractor status, even though they are acting as employees.
Neither of these approaches are going to alter the place of agents in the larger system. But they are an indication that the perception of an agent’s place in the market is shifting.
The real estate industry is a behemoth, slow to change. So far, big brokerages and the trade associations have been safe from the movements of small competitors to innovate in the market. But agents of all brokerages deserve more for their hard work, and their clients deserve more options.