Form-of-the-Week: Agent Employment Agreements – Employee or Independent Contractor – Forms 505 and 506

Licensed employees of the broker

A California Bureau of Real Estate (CalBRE) 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)]

All CalBRE licensed brokers are in a distinctly different category from licensed salespersons, also known as agents. Brokers are authorized to deal directly with members of the public to offer, contract for and render brokerage services for compensation, called licensed activities. Sales agents are not. [Calif. Business and Professions Code §10131]

A real estate agent is limited in their dealings with the public to representing themselves as an agent of their employing broker. Agents cannot contract in their own name or on behalf of anyone other than their employing broker. Thus, an agent cannot be employed by any person who is a member of the public such as a buyer or seller — they are not a broker. This is why an agent’s license needs to be handed to the employing broker, who retains possession of the license until the agent leaves the employ of that broker. [Bus & P C §10160]

Only when acting as a representative of the broker may the agent perform brokerage services which only the broker is authorized to contract for and provide to members of the public, whether they are clients or customers. [Grand v. Griesinger (1958) 160 CA2d 397]

Further, a sales agent may only receive compensation for their real estate related activities from their employing broker. An agent may not receive compensation directly from anyone else (e.g., the seller or buyer, another licensee, mortgage lender, landlord or tenant). [Bus & P C §10137]

Thus, brokers are legally the agents of the members of the public who employ them, while a broker’s sales agents are the agents of the agent — the individuals who render services for the broker’s clients by acting on behalf of their broker. [CC §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]

The agent’s right to compensation
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 their agents.

Thus, 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.

A real estate broker is required to have a written agreement with each of the licensees acting on their behalf. The agreement covers material aspects of the employment relationship between the broker and the salesperson or broker-associate.

Realty Publications, Inc. (RPI) publishes two employment agreements used by a broker employing a licensee to perform agent duties on their behalf. These employment agreements are:

  • Broker-Agent Employee Agreement [See RPI Form 505]; and
  • Independent Contractor Employment Agreement — For Sales Agents and Associated Brokers. [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 CalBRE 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 independent 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;
  • duties owed to clients and the public; and
  • agent compensation. [See RPI Forms 505 and 506]

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 CalBRE 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.