Why this matters: Learn how brokers oversee agents, the office policies a broker puts in place to comply with their duties owed to clients and the Department of Real Estate (DRE), and how licensee status relates to labor regulations, taxation and issues of liability.
Agency: acting on behalf of and advising another
Broker services became more prevalent in California in the mid-20th century. The availability of services caused the consumers of real estate services to demand greater consistency and competence in the rendering of these services.
To avoid damage to consumers by licensees, the legislature began standardizing and regulating:
- who is eligible to become a licensee and perform broker services;
- the duties and obligations owed by licensees to consumers of real estate services; and
- the procedures for soliciting and rendering services by licensees acting on behalf of a consumer-client.
Collectively, the state standards set the minimum level of conduct expected of a licensee when dealing with consumers, such as competency and honesty. The key to embedding these professional standards in licensees is their education and training.
Individuals who become real estate brokers are issued a broker license by the Department of Real Estate (DRE). This achievement only comes after completing extensive real estate related course study and meeting minimum real estate experience requirements.
On receiving a broker license, the individual is presumed sufficiently competent in their skill and diligence to serve consumers. Brokers are expected to equal or exceed the level of competence generally available from brokers in the local market. Agents are charged with meeting that standard when employed by a broker before they provide services to consumer-clients on behalf of the broker.
For these reasons, the individual licensee representing a buyer or seller, landlord or tenant, owner or lender, acts on the client’s behalf in a real estate transaction — but only when licensed by the DRE as a real estate broker; in a word, professionals.
A licensed real estate agent is employed by and represents a broker when rendering licensed real estate services. Here, the buyer, seller, tenant or landlord agreeing a licensed agent is to assist them must first enter into an employment contract with the agent’s broker, called a representation agreement.
Broker vs. agent
Brokers are in a distinctly separate category from licensed salespersons who are always called agents. Brokers are authorized to directly and indirectly act on behalf of members of the public to offer, contract for and render broker services for a fee, called licensed activities. Agents as licensed salespersons are limited to acting on behalf of the broker when representing a client. [Calif. Business and Professions Code §10131]
A real estate agent renders real estate licensed activities by acting as an “agent of their employing broker.” Agents may not agree to or perform licensed activities for consumers in their own name or work for a licensee other than the broker who employs them.
Consumers of real estate services employ brokers, not salespersons, and become the client of the broker, not the salesperson who acts on behalf of their broker. Accordingly, an agent hands their license to their employing broker who retains possession of the license until the agent leaves the employ of the broker. [Bus & P C §10160]
Only by acting as a representative of the broker may the agent perform the broker services a broker is authorized to perform, and always under a representation agreement entered into between the broker and a consumer, called a client. [Grand v. Griesinger (1958) 160 CA2d 397]
Further, an agent may only receive a fee for real estate related activities from the employing broker. An agent may not receive a fee or any form of compensation or valued benefits directly from anyone else, such as a seller or buyer, landlord or tenant, lender, another licensee, or any provider of other real estate services. [Bus & P C §10137]
Thus, it is a broker who is the agent of the client who employs the broker. In turn, a broker’s agents are the agents of the agent, the individual licensees who, on behalf of the broker, render services due the broker’s clients. [Calif. Civil Code §2079.13(b)]
As a result, brokers are responsible for all the activities their agents carry out within the course and scope of their employment. [Gipson v. Davis Realty Company (1963) 215 CA2d 190]
Related video:
Read more about this topic here.
Responsibility for continuous supervision
When an agent is employed to act on behalf of a broker, the broker exercises reasonable supervision over the activities performed by the agent to comply with their duty owed to the DRE. Brokers who do not sufficiently supervise their agents risk suspension or revocation of their license by the DRE. [Bus & P C §10177(h)]
Here, the employing broker’s duties owed to the DRE and consumers of broker services include:
- on-the-job training for their agents in the procedures and practices sought by their broker; and
- continuous oversight and guidance by their broker to assure agents comply with the duties the broker owes to consumer-clients, such as property owners, buyers and tenants.
An agent’s duties owed to the broker’s clients, and others in a transaction, are equivalent to the duties owed the clients and others by the employing broker.
The duties owed by a broker to the various participants in a transaction, carried out by an agent under the employing broker’s supervision, oversight and management, include:
- the utmost care, integrity, honesty and loyalty in dealings with a client; and
- the use of skill, care, honesty, fair dealing and good faith when interacting with any participant in a transaction in the disclosure of information which adversely affects the value and desirability of the property involved. [CC §2079.16]
Related video:
Read more about this topic here.
The employing broker’s management
To ensure a broker’s agents diligently comply with the duties owed to clients and others, employing brokers need to establish office policies, procedures, rules and systems relating to:
- soliciting and obtaining buyer, tenant and seller representation agreements, and negotiating real estate transactions of all types;
- the documentation arising out of licensed activities which may affect the rights and obligations of any party, such as agreements, disclosures, reports and authorizations prepared or received by the agent;
- the filing, maintenance and storage of all documents affecting the rights of participants in transactions;
- the handling and safekeeping of trust fund items received by the agent for deposit, retention or transmission to others;
- advertisements, such as flyers, brochures, press releases, multiple listing service (MLS) postings, etc.;
- agent compliance with all federal and state unlawful discrimination laws in dealings with individual consumers; and
- the receipt of regular periodic reports from agents on their performance of activities within the course and scope of their employment. [California Department of Real Estate Regulations §2725]
To begin the oversight process, the broker develops a business model setting out the activities required to implement the proper supervision of employed agents. As intended, the broker outlines the means and manner by which agents solicit and represent clients. Also, how transaction agreements are negotiated, documented and closed.
The creation of a plan for office operations logically starts by establishing categories for itemizing administrative and licensed activities. Each item is distilled into a written presentation of the conduct required of agents to achieve the broker’s objectives.
Business and licensed activities
Categories of business and licensed activities include:
- administrative rules, covering a description of the general business operations of the broker office, such as office routines, phone management, sign usage, budgetary allocations for agent support activities (such as advertising and FARMing), agent interviews, goal setting and daily work schedules;
- procedural rules, encompassing the means and methods an agent uses to obtain measurable results (for activities such as client representation, property sales, leases and mortgages);
- substantive rules, focusing on the forms needed to document client representation, purchase transactions, lease agreements or mortgage originations, and fulfillment of duties owed by the broker to clients and others;
- compliance checks, consisting of weekly and event-driven reports to be prepared by the agent, and review of the agent’s files and performance schedules by the broker, office manager or assistants, such as client representation agreements and transaction coordinator involvement; and
- supervisory oversight, an ongoing and continuous process of training agents and managing their activities occurring within the course and scope of the agent’s employment.
A written employment agreement between the broker and the agent entered into at the time of employment includes the rules and procedures established by the broker to manage and oversee the conduct of their agents acting on the broker’s behalf.
The written employment agreement details the duties of the agent and the agent’s compliance with the broker’s office manual. The office manual contains the broker’s policies, rules, procedures and other conduct the broker deems necessary to fulfill their responsibility for supervision.
Also, the written employment agreement details the fee the agent receives for representing the broker in soliciting and negotiating representation agreements, purchase agreements, leases and mortgages. [DRE Regs. §2726]
Related video:
Read more about this topic here.
The (not so) independent contractor
Most transaction agents receive fees from their broker as a negotiated percentage of contingency fees the broker receives for completed sales, leases or mortgages solicited, negotiated or processed by the agents.
Whether the broker withholds state and federal income tax on payment of an agent’s fee depends on the type of employment agreement the broker and agent enter into:
- an employee-employer agreement; or
- an independent contractor (IC) format. [See RPI Form 505 and 506]
An agent licensed by the DRE and employed by a broker under an independent contractor (IC) agreement is paid on the broker’s receipt of a contingency fee attributable to the agent. As an IC type employment, the agent is an employee, except for purposes of income tax withholding, payroll contributions and unemployment. [Internal Revenue Code §3508]
The chief advantages for a real estate broker to use an IC agreement is the simplification of their bookkeeping and reduction of costs of employees. An IC agreement avoids withholding for income taxes, Medicare and social security benefits from the agent’s fee while also avoiding employer contributions by the broker.
In turn, the broker files a 1099 report with the Internal Revenue Service (IRS) naming each agent and stating the fee amount each received as an employee of the broker under a contingent-fee IC agreement.
To further simplify disbursement of the agent’s share of the fee, some brokers instruct and authorize escrow to disburse directly to the agent the amount of fees due the agent from the broker. These fees always accrue to the broker on the close of a transaction. However, this system of payment of the agent through an escrow disbursement leaves the broker without adequate records for IRS 1099 and workers’ compensation reporting and audits.
Business income
For agents entering into an IC agreement, they report their fees received from their broker as business income (Schedule C). In turn, the agent expenses all the business-related costs of their operations incurred while acting within the course and scope of their employment with the broker. Of course, the agent pays any income tax due, and all contributions not withheld or paid by the broker.
It does not matter what degree of control the broker exercises over the agent’s activities, be it none, enough, or more than sufficient to satisfy DRE supervisory requirements of total oversight.
However, even though the agreement is called an “independent contractor” agreement — a misnomer for an arrangement designed solely for income tax reporting — the agent is an agent of their employing broker. In no way is the agent an independent operator acting at any time as a licensee separate from their broker.
The IC provision in the broker-agent employment agreement does not change the agent’s classification as an employee of the broker under California real estate and labor laws. [Gipson, supra]
A broker using an IC agreement may not delude themselves to believe that somehow the agent may permissibly act independent of the broker, no supervision required.
The broker’s liability for an agent’s misconduct
Consider an agent employed by a broker under an IC agreement. The broker gives the agent total discretion in handling of clients and documentation of representation agreements and transactions.
As risk management, the IC agreement includes a provision calling for the agent to hand the broker a binder for liability insurance coverage for the agent’s car, naming the broker as an insured.
The IC agreement also requires all documents and funds received on representation agreements and in transactions to be agreed to and accepted in the name of the broker. Also, all advertising and business cards identify the agent as acting for the broker as an associate licensee.
One day, while the agent is driving to consult with an owner of property, the agent collides with another vehicle, injuring the driver. The driver makes a demand on the agent’s broker to pay for the driver’s money losses incurred due to the agent’s negligence.
The broker rejects the demand, claiming the agent is an independent contractor, not the broker’s agent (much less an employee). Thus, the broker claims to have no liability for the losses inflicted on the driver by the agent.
The driver claims the broker is liable for their losses since the agent is a representative of the broker and was acting within the course and scope of their employment with the broker when the injuries occurred.
Can the driver injured by the agent’s negligence recover their money losses from the agent’s broker?
Yes! The agent is the employee of the broker by law, without concern for the type of employment agreement they entered into. [Gipson, supra]
The IC: an agent of the broker
A broker hires agents who use their own vehicles to conduct broker activities by going to and from appointments, meetings and properties. To protect a broker from liabilities created by their agent, the broker needs to be a named insured on the agent’s car insurance policy as a matter of minimum risk management.
The employing broker also needs to maintain general comprehensive business liability insurance and professional liability coverage called errors and omissions insurance. Claims of tortious conduct of all sorts may arise out of an agent representing clients and negotiating transactions on behalf of the broker. Coverage is needed to defend or pay these claims. As an employer, the broker must maintain a workers’ compensation insurance policy.
In part, supervision is critical to the reduction of the broker’s exposure to risks of liability for the failure of their agents to inspect, disclose, advise and act on behalf of clients.
Related video:
Read more about this topic here.
Unemployment insurance benefits
An agent is considered both a licensed agent and an employee when acting within the course and scope of employment with a broker. [Grand, supra]
However, as with state and federal income tax withholding, an agent is not always treated as an employee.
For example, licensed real estate agents, as well as associate brokers, are excluded employees for purposes of the California Unemployment Insurance Law.
Even though an agent is an employee under California real estate law, a broker avoids making contributions to the state unemployment insurance fund. In turn, the agent may not collect unemployment benefits from the state when their employment with their broker terminates.
Contingency fees received by a broker and paid to a licensed real estate agent under any employment agreement are the only test required for the broker to avoid paying unemployment benefits. When the agent is paid a contingency fee, and thus not a salary or hourly wage, the agent is denied unemployment benefits regardless of the level of supervision and control the broker exercises over the agent’s real estate activities. [Calif. Unemployment Insurance Code §650]
Minimum wage exclusion of employed agents
An agent, to be entitled to payment of minimum hourly wages by their broker, requires classification as an employee under California labor laws. The employee classification for labor law is unrelated to tax law classification of an employee or IC.
For analysis, the classification of an agent as a labor law employee is determined by the broker’s conduct with the agent, not an agreement to pay contingency fees for IC tax treatment. Here, labor law looks to real estate law and its requirement that an employing broker must maintain constant supervision and total control over the agent’s means, manner and mode of engaging in activities requiring a real estate license.
Further, most agents employed by a broker — by the nature of daily scheduling for appointments, property viewings and document preparation — have a high level of discretion and control over when and where they conduct different aspects of their business. But what they do and with whom and how they do it is the broker’s DRE-mandated concern. The agent’s discretionary work is especially true of the hours spent outside of their broker’s office.
Typically, an agent’s time in the office spent at the desk, or on the phones or floor, rarely takes up more than one day a week, usually less than twenty percent of the time spent representing clients and arranging transactions. Little additional time is spent in the office at staff meetings.
As a result of half their time out of the office, agents are not employees for minimum wage treatment, in contrast to California real estate law controlling their conduct as a licensee.
When an agent works as an outside agent who regularly works more than half of their time away from their place of employment negotiating representation agreements, locating buyers or property, and negotiating transactions, the real estate agent is barred from collecting a minimum wage from their broker. [Calif. Labor Code §1171]
An employee under the labor law
Consider an agent employed by a broker under an IC agreement with a fee provision calling for fees to be paid on contingent fee transactions when they close. The broker does not have a policy manual, training program or any requirements as to what forms to use and what duties are to be fulfilled by the agent — a dereliction of the broker’s duties of supervision.
Once a month, the agent reports to the broker by preparing and presenting a transaction log noting the clients they represented and transactions the agent negotiated during the month.
During the employment, the broker disburses funds to the agent as an advance draw against fees yet-to-be-earned by the agent. Any amounts advanced and not reimbursed from fees earned are payable by the agent on termination.
After several months of employment and no closed contingent fee transactions, the broker terminates the agent. The broker calls due the amounts advanced and unpaid on termination. Demand is made on the agent for payment at the time of termination.
The agent claims they are entitled to an offset as an employee of the broker for a minimum wage for hours worked as an agent. The amount at minimum wage exceeds the advances received by the agent. The agent makes a demand on the broker for unpaid wages at the minimum rate per hour worked.
However, no hourly wage is due an agent unless the agent demonstrates their working relationship with the broker was that of an employee under the labor code. This test is different from determining whether an agent is an employee of a broker under real estate law.
Means, manner and mode of conduct
To continue the previous example claiming a minimum wage, the agent must demonstrate the relationship while employed by the broker was one of total control by the broker. The level of broker control includes all means, manner and mode of conduct of the agent when carrying out licensed activities on behalf of the broker. The control must indicate the agent was nearly without discretion to make decisions about how to and when to operate on their own.
Here, the broker’s supervision and management of the agent by implementing policies and procedures for the negotiation of real estate transactions were nearly nonexistent.
While the agent was an agent of the broker, the broker’s control over the agent did not render the agent a servant hired to perform as directed under the DRE constant supervision rules. Thus, the agent was not an employee for the purposes of the labor law and was not entitled to receive a minimum wage. [CC §2079.13(b); Lab C §1171; Grubb & Ellis Company v. Spengler (1983) 143 CA3d 890]
Further, and controlling, the issue of being an employee unable to collect a minimum wage based on the agent’s classification as an outside salesman is the underlying reason a minimum wage may not be collected. [Grubb & Ellis Company, supra]
An employing broker does have control of an agent’s activities, hours, scheduling and production of representation agreements and closings. However, an agent still is outside the office when more than half of the hours spent working for the broker are not in the office. Thus, an agent who spends half of their working time outside the office when classified as an employee under the labor law is excluded from collecting a minimum wage due to their labor law status as an outside salesman.
Related article:
Letter to the editor: Do real estate brokers need to offer their employees 401k plans?
Workers’ compensation coverage for employees
The relationship between a broker and their agents can be compared to a licensed arborist’s hiring and supervision of laborers and a property owner. The arborist hires the help who climb and trim or cut down the tree, not the property owner who contracts with the arborist and not the arborist’s workers.
Here, the arborist needs workers’ compensation coverage, not the property owner. The arborist is the employer of the workers, not the property owner. Likewise, in real estate brokerage, due to the broker’s hiring and supervision, their agent is the employee of the broker to solicit and negotiate transactions. The agent is not the employee of the broker’s client for whom they provide services.
Consequently, the broker must carry workers’ compensation insurance coverage for their agents, premiums paid solely as the broker’s operating expense. [Lab C §§3200 et seq]
A broker who is unlawfully uninsured, or forces agents to carry their own workers’ compensation insurance, faces:
- a stop order from the Department of Industrial Relation’s Division of Labor Standards Enforcement, preventing the broker from conducting business until proof of insurance is offered up;
- civil penalties and fines up to $100,000; and
- reimbursement claims from current and former agents for premiums they paid. [California Department of Real Estate Bulletin, Fall 2004, Page 10]
A broker employing one or more agents additionally carries other business, vehicle and professional liability errors and omissions insurance. Insurance coverage indemnifies the broker by providing a financial safety net against agent-imposed liability. The coverage shifts the risk of loss created by employees (in spite of supervision) to the insurer — for payment of a premium.
In these ways, the well-advised real estate broker, concerned about the inherent risks of operating a brokerage office, provides an enduring professional environment in which their transaction agents flourish.
Related article: