The agent’s present broker first receives all fees, then disburses
A fee earned for rendering real estate services may only be received by a licensed broker. In turn, a licensed salesperson may only receive compensation — fees — for their real estate related services from their employing broker. [Calif. Business & Professions Code §10137]
A licensed broker is also barred from compensating an unlicensed person for rendering real estate services which require a California Bureau of Real Estate (CalBRE) license. This parallels the prohibition against a broker compensating a licensed salesperson for licensed real estate services when the salesperson was not in the broker’s employ at the time of payment. [Bus & P C §10137]
Further, the splitting of fees and the payment of referral fees in a sales transaction involving a consumer mortgage origination — the sale of a one-to-four unit residential property to a buyer-occupant contingent on purchase assist financing — is regulated by the Real Estate Settlement Procedures Act (RESPA). Here, if the broker or their agent is already involved in a sale as a transaction agent (TA) for a fee, the broker is prohibited, with two major exceptions, from giving or receiving a referral fee. [24 United States Code §2607(a); 12 Code of Federal Regulations §1024.14(b)]
The two exceptions in consumer mortgage transactions which allow fees to be shared include:
- referral fees paid to or received from other brokers (not in the broker’s employ), a horizontal disbursement from one broker to another, excluding the receipt of any fee from a mortgage broker or lender who is or will be processing or originating the consumer mortgage [12 CFR §1024.14(g)(1)(v)]; and
- fees paid by the employing broker to their licensed sales agents, broker associates or unlicensed finders, a vertical disbursement within the broker’s office, which bars payment of a fee to other providers or persons connected with the consumer mortgage transaction. [12 CFR §1024.14(g)(1)(vii)]
Although the RESPA exceptions in a consumer mortgage transaction allow fee-splitting activity, the CalBRE limits fee splitting to:
- payments between brokers (who then may split the fee with their employees); or
- payments by a broker to their employees, licensed or unlicensed. [Bus & P C §§10130 et seq.]
Accordingly, a licensed salesperson may only receive a fee or other compensation for acts which require a CalBRE license if they are employed by a broker.
So how does a broker properly compensate a licensed salesperson for real estate services rendered before the salesperson leaves their employ but prior to the broker receiving the earned fee?
The broker’s disbursement of compensation
An employing broker directs and controls the distribution of fees due a salesperson in their employ. However, a licensed salesperson may instruct their employing broker to pay some or all the fee they have earned to another entity or individual, such as:
- a corporation owned by the employed licensee;
- a creditor of the salesperson; 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. When a salesperson agrees to pay another entity or individual a portion or all the salesperson’s share of the fee, the payment needs to be disbursed by the employing broker, not the salesperson. In addition, if the broker pays the salesperson’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 salesperson.
An escrow company may distribute a salesperson’s share of the brokerage fee on behalf of the broker if authorized to do so. A broker may also authorize the escrow company issue a check directly to a third party who did not perform acts for which a license is required. To promote full transparency, the escrow company needs to disclose any disbursement authorized by a broker to all parties. [Bus & P C §10138]
Employing broker pays compensation
Salespersons 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 farmed geographic locations.
However, the CalBRE does not allow a salesperson to be employed by two brokers at the same time. This ensures all licensed activity by the salesperson is directed and controlled by one responsible employing broker.
Since a licensed salesperson may only be compensated by an employing broker for licensed activities, a salesperson who leaves one employing broker to work for another may only be paid by their new broker. The prior employing broker is to send any compensation owed the salesperson to the saleperson’s new employing broker. [Bus & P C §10137]
Upon receipt, the salesperson’s current broker either:
- hands (endorses) the check to the salesperson; or
- pays the salesperson their share of the fee as stated in their employment agreement. [Bus & P C §10137]
When a salesperson formerly employed by a broker is not presently employed by another broker, the broker may directly pay the fee to the salesperson. [See “Unlawful Employment and Payment of Compensation,” CalBRE 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. [California Bureau of Real Estate Regulations §2726; Bus & P C §10132; See first tuesday Form 505 and 506]
A broker-associate may be compensated by either their former or current employing broker. However, receipt of a fee from a broker-associate’s prior employing broker needs to comply with the terms of their employment agreement with their current broker.
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]
Consider an unlicensed individual who enters into a finder’s fee agreement with a sales agent to introduce the agent to prospective buyers or sellers in return for 10% of their share of fees received on transactions negotiated for or with the “lead.” [See first tuesday Form 115]
The finder introduces the agent to prospects who close transactions with the sales agent. Upon closing a transaction, the unlicensed finder is entitled to a fee as agreed with the sales agent. However, this fee is paid by the broker, not the sales agent, since the finder is considered to be in the employ of the broker as hired by the sales agent.
Now consider a TA who goes on vacation and requests their unlicensed assistant oversee a sales transaction currently in escrow in exchange for 20% of the TA’s earned fee. The duties left pending while the TA is on vacation include:
- reviewing statutory disclosures;
- making repair requests; and
- reviewing the loan terms from competing lenders with the buyer.
Is the TA allowed to share their fee with an unlicensed assistant for overseeing these duties while on vacation?
No. The duties above are activities requiring a real estate license. Thus, the person performing licensed acts needs to be a licensee to receive a share of the fee. When the assistant is licensed and employed by the supervising broker, the TA may share their fee with the assistant as compensation for overseeing the transaction. As required, the distribution of the licensees’ earned fees to others participating in the transaction is always handled by the broker. [Bus & P C §10137]
The unlicensed finder
Three classes of real estate “agents” have been established in California:
- licensedsales agents; and
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 first tuesday Form 115]
A finder working for a principal is distinguished from a licensed broker working for a principal. Limitations are placed on the conduct of a finder. A finder lacks legal authority to disseminate property information or enter into other transactional negotiations. [Bus & P C §§10130 et seq.]
Anyone may be a paid finder, unless they are barred by professional regulation or conflict-of-interest policies controlling an individual’s conduct.
For instance, a licensed sales agent registered with the CalBRE as an agent of a broker cannot be a finder. The agent 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. On the employing broker’s receipt of a fee, the fee is split with the agent under the term of their written employment agreement. [Bus & P C §10132; CalBRE Regs §2726; See first tuesday Form 505 and 506]
Entitlement to a fee under state law
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 entered into between a finder and a principal regarding the finder’s referral services needs to be in writing and signed by the principal who employed the finder. If not, the finder cannot 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]
Entitlement to a fee under RESPA
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 first tuesday Form 115]
Thus, a bona fide employee of a broker is not barred from collecting a fee or salary from their employer-broker since employed individuals are an exception to RESPA referral fee prohibition.