This is the fourth episode in our new video series covering office management principles. The prior episode analyzes the development of a business model to outline the means and manner by which agents produce and service listings, and how purchase agreements are negotiated and closed.
This episode covers the contents of a written employment agreement containing all material aspects of a licensee’s employment.
Agent of the agent
A Department of Real Estate (DRE) licensee acting on behalf of a broker is both an agent and employee of their employing broker. Thus, a licensee who acts under the supervision of a broker, whether they are a salesperson or broker-associate, represents the broker as an agent of the broker. [Calif. Civil Code §2079.13(b)]
An agent’s right to a fee arises under the agent’s written employment agreement with their broker, not a 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 participated. [See RPI Forms 505 and 506]
RPI (Realty Publications, Inc.) publishes two employment agreements covering all material aspects of the employment used by a broker employing a licensee to perform agent duties on their behalf. These employment agreements are:
- Sales Agent and Broker-Associate Employment 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 which call for the use of 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 agreement, in contrast with an employee agreement form, is used to avoid withholding and employer contributions by real estate brokers. [See RPI Form 506 §2.13]
Regardless of the written employment agreement used and signed by the agent, the broker and agent are DRE compliant.
Despite the labels given to these agent employment forms, an agent or broker-associate is always an employee of the broker under California’s labor law. Thus, the broker is liable as an employer for their agent’s wrongful conduct. Even if an IC agreement is used to document the employment, an agent may not permissibly act independently of the broker. 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. [See RPI Form 506]
Both RPI employment agreements include provisions covering:
- broker supervision of licensed agent activities;
- agent obligations owed to their broker, including providing auto insurance coverage and naming the broker as an additional insured;
- broker obligations owed to their agents, including maintaining membership in professional organizations agreed to and providing worker’s compensation insurance; and
- duties owed to clients and the public.
Also, the written employment agreement needs to spell out the compensation the agent is to receive for representing the broker in soliciting and negotiating listings, purchase agreements, leases and financing. [DRE Regs. §2726; see RPI Forms 505 and 506]
Most sales agents receive compensation from their brokers based on a negotiated percentage of contingency fees received by the brokers for completed sales, leases or mortgages solicited, negotiated or processed by the agents.
Both types of employment agreements require all documents and funds received on listings and sales 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, the agent is subject to supervision by their broker since employing brokers are mandated to actively manage their brokerage business. This DRE mandated supervision cannot be contracted away or eliminated by use of an IC agreement. Thus, a broker may not permit their agents to have total discretion in their handling of listings or negotiating sales, leases or mortgages.
The (not so) independent contractor
Whether the broker withholds state and federal income tax on payment of an agents’ compensation depends on the type of employment agreement the broker and agent enter into. [See RPI Forms 505 and 506]
A sales agent licensed by the DRE and employed by a broker under an IC agreement and paid based on the broker’s receipt of a contingency fee will not be treated as an employee for purposes of income tax withholding or payroll contributions. [Internal Revenue Code §3508]
The chief advantage for a real estate broker to use an IC agreement is the simplification of the bookkeeping process. An IC agreement avoids withholding for income taxes or Medicare and social security benefits from the agent’s fee while also avoiding employer contributions.
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 to the agent the amount of fees due the agent from the broker. These fees accrue to the broker on the close of a sales escrow. However, this “through system” of payment leaves the broker without adequate records for 1099 and workers’ compensation reporting and audits.
Business income
A sales agent entering into an IC agreement reports their fees received from their broker as business income (Schedule C). In turn, the agent expenses all the business-related costs of operations incurred while acting within the course and scope of their employment with the broker. It does not matter what degree of control the broker actually exercises over the agent’s activities, whether none, enough to satisfy DRE supervisory requirements or total oversight as needed for first year licensees.
However, even though the agreement is called an “independent contractor” agreement — an arrangement designed solely for income tax reporting purposes — the agent remains an agent of their employing broker and not a separate operator independent of their broker.
When testing the conduct of an agent while engaged in real estate related activities, the IC provision in the broker-agent employment agreement cannot and does not change the agent’s classification as an agent of the broker under California real estate and labor laws. [Gipson v. Davis Realty Company (1963) 215 CA2d 190]
Thus, brokers who use an IC agreement are not to delude themselves to believe that somehow the agent may permissibly act independently of the broker with no supervision.
Agent imposes liability on broker
Consider a sales agent who is employed by a broker under an IC agreement. The broker gives the agent total discretion in handling of clients and documentation of listings and sales.
As a matter of 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 listings and sales to be entered into and taken in the name of the broker, and all advertising and business cards to identify the agent as acting for the broker as an associate licensee.
One day, while the sales agent is driving to list a 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 an agent (much less an employee) of the broker, and thus the broker has 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 when the injuries occurred.
Can the driver injured by the agent’s negligence recover their money losses from the agent’s broker?
Yes! The sales agent is the agent of the broker as a matter of law, without concern for the type of employment agreement they have entered into.