In the broker’s hands
The only person permitted to receive compensation — fees — in a real estate transaction or for related services is a licensed broker. An agent involved in a transaction receives compensation directly from their employing broker. [Calif. Business & Professions Code §10137]
A broker may not compensate anyone for real estate-related activities requiring a license who is not employed by the broker at the time of payment and is not licensed by the California Department of Real Estate (DRE). [Bus & P C §10137]
When the transaction involves the origination of a mortgage, things get a more nuanced. Under the Real Estate Settlement Procedures Act (RESPA), when the broker or their agent involved in such a transaction already acts as a transaction agent (TA) for a fee, the broker may not give or receive a referral fee — with two major exceptions. [24 United States Code §2607(a); 12 Code of Federal Regulations §1024.14(b)]
The two exceptions in consumer mortgage transactions which allow fee sharing include:
- referral fees paid to or received from other brokers (not in the broker’s employ), excluding any fee from a mortgage broker or lender who processes or originates the consumer mortgage [12 CFR §1024.14(g)(1)(v)]; and
- fees paid by an employing broker to their licensed sales agents, broker associates or unlicensed finders — which excludes any other person connected with the consumer mortgage transaction. [12 CFR §1024.14(g)(1)(vii)]
Similarly, the DRE limits fee splitting to:
- payments between brokers (who then split the fee with their employees); or
- payments by a broker to their employees, licensed or unlicensed. [Bus & P C §§10130 et seq.]
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Thus, a licensed agent may only receive a fee or other compensation for acts requiring a DRE license if they are employed by a broker.
From the broker to their agents
Although an employing broker is in direct control of fees received by their sales agents, an agent may instruct their employing broker to pay some or all of an earned fee to another entity or individual, such as:
- a corporation owned by the employed licensee;
- a creditor of the agent; or
- an unlicensed entity or individual who has not engaged in any licensed activity. [Bus & P C §10137]
A fee is considered earned when the licensee performs licensed real estate activity on behalf of their employing broker. Even when an agent agrees to give up their share of a fee, their employing broker disburses the compensation, not the agent.
In addition, when the broker pays the agent’s fee to a corporation owned by the sales agent, the corporation may not contract with the employing broker to render the services of the agent.
An escrow company may distribute an agent’s share of the brokerage fee on behalf of the broker when authorized to do so. A broker may also authorize the escrow company issue a check directly to someone who did not perform acts for which a license is required. In the interest of transparency, the escrow company needs to disclose any disbursement authorized by a broker to all participants. [Bus & P C §10138]
Out with the old, in with the new
Real estate agents often seek new employment opportunities with different brokers for numerous reasons, such as:
- higher splits and marketing support;
- better training and offices; or
- closer proximity to geographic locations in which the agent has marketed their brand.
However, an agent may not be employed by two brokers at the same time — all licensed activity by the agent needs to be directed and controlled by one responsible employing broker.
Since only an agent’s employing broker may compensate them for licensed activities, an agent who leaves one employing broker to work for another may only be paid by their new broker. The agent’s prior employing broker will send any compensation owed the agent to their new employing broker. [Bus & P C §10137]
Upon receipt, the current broker either:
- hands (endorses) the check to the agent; or
- pays the agent their share of the fee as stated in their employment agreement. [Bus & P C §10137]
When a real estate agent formerly employed by a broker is not presently employed by a different broker, the broker may directly pay the fee to the agent. [See “Unlawful Employment and Payment of Compensation,” DRE Real Estate Bulletin, Spring 2012, Page 1]
Conversely, a licensed broker acting as an agent on behalf of a broker –– a broker-associate –– may perform licensed activities for multiple brokers simultaneously, unless prohibited by their employment contracts. [Department of Real Estate Regulations §2726; Bus & P C §10132; See RPI Form 505 and 506]
A broker-associate may be compensated by either their former or current employing broker. However, the broker-associate’s compensation needs to comply with the terms of their current employment agreement.
Sharing is caring
A real estate licensee may share or split their earned fee with any unlicensed entity or individual not in their employ, provided:
- the fee sharing does not involve a consumer mortgage transaction [12 CFR §1024.14]; and
- the person or entity receiving the shared fee has not engaged in any activity requiring a real estate license. [Bus & P C §10137]
Commonly, unlicensed participants in real estate transactions are finders who identify and refer potential real estate clients or participants to a broker, agent or principal in exchange for a fee. This fee is always paid by the broker, since the finder is considered to be in the employ of the broker, even when hired by a sales agent. [See RPI Form 115]
However, an individual performing acts that require a real estate license needs to be a licensee to receive a share of the fee. For example, a broker employing a licensed assistant who oversees a portion of the broker’s duties may share their fee with the assistant as compensation. This is not the case for an unlicensed individual. [Bus & P C §10137]
The unlicensed finder
Licensed brokers and sales agents owe fiduciary duties to the principals they represent. Fiduciary duties require licensees to perform on behalf of their client with the utmost care and diligence.
An unlicensed finder has no such fiduciary duty. A finder’s function as an “agent” is limited to soliciting, identifying and referring potential real estate clients or participants to brokers, agents or principals in exchange for the promise of a fee. [See RPI Form 115]
The conduct of a finder comes with several limitations. For starters, a finder lacks legal authority to participate in any aspect of property information dissemination or transactional negotiations. [Tyrone v. Kelley (1973) 9 C3d 1; 78 Attorney General Opinion 71 (1995)]
For the most part, anyone may be a paid finder — unless they are barred by professional regulation or conflict-of-interest policies controlling an individual’s conduct. A licensed sales agent, for example, is employed to conduct licensed real estate activities on behalf of their broker, not others. In turn, only their broker receives any fee generated by their agent’s real estate activities, and splits it with the agent under the terms of their written employment agreement. [Bus & P C §10132; DRE Regs §2726; See RPI Form 505 and 506]
Finder’s entitlement to a fee
A finder is entitled to a fee as an unlicensed individual if they solicit, locate, place, introduce or deliver names of prospective clients to a broker or principal. [Tyrone v. Kelley (1973) 9 C3d 1]
A finder’s fee agreement needs to be in writing and signed by the principal who employed the finder. Otherwise the finder won’t be able to enforce their fee agreement with the principal. [Calif. Civil Code §1624(a)(4)]
However, the principal’s use and benefit of a finder’s referral under an oral finder’s fee agreement, such as closing a sale with an individual referred by the finder, will substitute for a written agreement. [Tenzer v. Superscope, Inc. (1985) 39 C3d 18]
This substitution-for-a-writing rule does not apply to brokers employed by a client. [Phillippe v. Shapell Industries, Inc. (1987) 43 C3d 1247]
Finders are also entitled to a fee for referrals under RESPA, dependent upon the relationship of the finder to the broker promising the fee.
An unlicensed person, such as a friend or past customer, who provides a referral to a broker or their agent is considered an unlicensed finder. However, on a RESPA-controlled transaction, the unlicensed finder needs to be under contract as an employee of the broker to receive a finder’s fee. [See RPI Form 115]
Thus, a bona fide employee of a broker is allowed to collect a fee or salary from their employer-broker — since employed individuals are exempt from RESPA’s referral fee prohibition.
This article was originally posted December 2014, and has been updated.
Hello,
Can a licensed broker (an individual with no other salespersons employed) direct escrow to pay commissions to a corporation controlled by the broker (rather than to the licensed individual) in a similar manner as a salesperson can instruct their broker to pay their commission to a corporation?
Thank you,
Hello,
Can a Broker pay a salesperson’s commission to the salesperson’s LLC? or just a corporation?
Rick,
Thank you for your inquiry. A licensed salesperson may instruct their employing broker to pay some or all the fee they have earned to an unlicensed entity or individual, at the request of the salesperson, as long as the unlicensed entity or individual has not engaged in any licensed activity. This includes LLCs.
Regards,
ft Editorial Staff
Can a person unlicensed to practice real estate brokerage receive finder’s fees in any state of the U.S. ? What is considered a finder’s fee and can it be paid from a buyer directly or from the broker of the seller directly to the finder ? Can a California licensed broker receive compensation for brokerage in any state of the U.S. using his California license ?
Loren,
Thank you for your inquiry. Typically, a broker is able to refer clients to a broker in another state and receive a fee. However, we are unable to comment regarding state laws governing unlicensed activities such as finders outside of California.
For additional information on broker-to-broker referral and finder’s fees, please see the first tuesday article Brokers refer clients – finders solicit.
Regards,
ft Editorial Staff
I have a question regarding paying co-op fee to a agent with an expired license and no current employing broker but remains on a brokers email systems. TO my understanding it is a clear violation of the BP code and no fee can be paid or earn and no suit can be filed to seek compensation . Can the former employing broker claim fee must be paid to them? Please reference section if applicable.
Daniel,
Thank you for your inquiry. A co-op fee is always agreed to between the brokers and paid directly to the co-op broker, not the salesperson. The Salesperson’s license status is irrelevant to the co-op agreement. Thus, when a salesperson’s license expires or they are no longer employed by their broker, the broker is still entitled to compensation under the co-op agreement. [Bus & P C §10132]
Thank you,
Editorial staff
It seems to be a common practice among TEAMS that licensed agents are receiving commissions from their team leader, however, the team leader does not have a broker’s license. For example a property is co-listed with a team leader and one of his team members. They both work with the seller performing duties requiring a license. When the closes escrow the team leader receives a commission from his broker of $10,000. He has an agreement with an agent on his team to split the commission so the team leader writes a personal check to the team member for $5,000. At the end of the year, the team leader sends a 1099 to the IRS and to the team member for all compensation paid. Is this legal under California law?
Judy-Lynn, Thank you for your inquiry.
This activity by a team leader is not legal. California Business and Professions Code §10137 states: “No real estate salesperson shall be employed by or accept compensation from any person other than the broker under whom he or she is at the time licensed. It is unlawful for any licensed real estate salesperson to pay any compensation for performing any of the acts [requiring a real estate license] to any real estate licensee except through the broker under whom he or she is at the time licensed.”
Thank you,
Editorial staff
Thanks
After re-reading particular parts of this article noted below, it appears that it is in compliance with CA Code to compensate an agent or an entity that an agent instructs their employing broker to compensate out of escrow.
Note: An escrow company may distribute a salesperson’s share of the brokerage fee on behalf of the broker if authorized to do so.
a licensed salesperson may instruct their employing broker to pay some or all the fee they have earned to another entity
Hi Fernando,
Excellent article and very informative. As a Broker I was discussing with another Broker how an agent in my employ wishes to be compensated his split directly out of the escrow closing in a purchase transaction. Your article appears to reaffirm that the disbursement of commission must flow from escrow to the Broker then from the Broker to the agent in his employ. [Calif. Business & Professions Code §10137]. It seems it would be a violation for the split of commission to come directly out of escrow. Can you please comment on this as your insight in appreciated.
Thank you,