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Read on to understand the tasks, obligations and liabilities undertaken by a broker when employing agents, working for another broker or acting independently.

So, you have a lot of the experience under your belt, you completed the additional education and passed the California state exam – now you’re the proud holder of a California Bureau of Real Estate (CalBRE) broker license. What next?

Here’s what you need to know about the responsibilities and obligations assumed by a licensed broker, whether acting as a broker employing agents to work on their behalf, an associate-broker employed by another broker or an independent broker.

Broker, defined as the intermediary

Brokers are in a different legal category from sales agents. Unlike sales agents, brokers are authorized to independently deal directly with members of the public to offer, contract for and render brokerage services for compensation, called licensed activities. [Calif. Business and Professions Code §10131]

Conversely, a real estate sales agent is never independent; they are strictly an agent of the employing broker. A sales agent cannot contract in their own name or on behalf of anyone other than their employing broker. This is why a broker retains possession of an agent’s license until the agent leaves the broker’s employ. [Bus & P C §10160]

Further, only a broker may receive direct compensation from members of the public – participants and others in a transaction. Conversely, a sales agent may only receive compensation – fees – arising out of the efforts in real estate transactions from their employing broker. Thus, fees bargained for by sales agents are always agreed to and paid by the employing broker. [Bus & P C §10137]

Thus, brokers are the agents of the members of the public who employ them to render brokerage services. In contrast, 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 the broker. [Calif. Civil Code §2079.13(b)]

As a consequence, brokers are responsible for all the activities their agents carry out within the course and scope of their employment.

Continued supervision and risk management

Becoming a broker creates a duty to properly manage and supervise all employed sales agents. Brokers who do not actively supervise their agents risk having their licenses suspended or revoked by the CalBRE. [Bus & P C §10177(h)]

Here, the employing broker’s responsibilities include:

  • on-the-job training of an agent in the procedures and practice of real estate brokerage; and
  • continuous policing by the broker to assure agent compliance with the agency duties owed by the broker to participants in real estate transactions entrusted to an agent.

The duties owed to various participants in a transaction by a sales agent under their broker’s supervision 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 in dealings with all parties to a transaction in the disclosure of information which adversely affects the value and desirability of the property involved. [CC §2079.16]

Brokers oversee agent compliance with real estate agency law and industry standards of conduct, as well as supervise agents through the broker’s assessment and reduction of risk of loss and liability. To comply, brokers maintain a risk reduction program to identify and evaluate activities that pose a risk of loss to the broker or transaction participants. Initially, the broker identifies risks by setting out as policy acceptable practices and implementing reports to track an agent’s compliance.

As a buffer against agent-originated liabilities, a broker purchases negligence insurance, called errors and omissions insurance (E&O coverage). E&O coverage protects brokers from the full cost of defending against a negligence claim made by participants in transactions the agent negotiated.

Related article:

Brokerage Reminder: E&O insurance and the preferred forms standard

Brokerage Reminder: Managing liability exposure – components of a risk reduction program

Similarly, the agent is to carry liability insurance naming the broker to cover claims resulting from their agent’s negligent use of their vehicle while conducting activities within the course and scope of the broker’s real estate business.

With or without insurance, brokers are still responsible for setting the parameters for an agent’s conduct acceptable to the broker. This oversight includes limiting the brokerage activities the agent is authorized to undertake and adopting guidelines to keep the agent’s conduct within acceptable bounds.

During the employment, broker responsibility includes tracking their agent’s performance progress, as well as providing continuous support to properly groom the agent’s conduct and motivate them to comply with the broker’s policies.

Related article:

Tracking transactions handled by a broker’s agents

Implementing office policies

Employing brokers are responsible to the CalBRE for their agents’ diligent compliance with the duties owed to clientele and others. As evidence of properly undertaking this responsibility, written office policies are established related to:

  • soliciting and obtaining employment by members of the public, calling listings, and negotiating real estate transactions;
  • documentation arising out of soliciting, marketing property and negotiating which may affect the rights and obligations of any participant, such as agreements, disclosures, reports and authorizations prepared or received by the agent;
  • filing, maintenance and storage of all documents affecting the rights of the participants;
  • handling and safekeeping of trust funds 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 state and federal unlawful discrimination laws;
  • safety standards and procedures for the benefit of their agents; and
  • receipt of routine periodic reports from agents setting forth the activities they have performed within the course and scope of their employment. [California Bureau of Real Estate Regulations §2725]

Further, an employing broker sets guidelines for licensed activities of their agents, including:

  • administrative rules, covering a description of the general business operations of the brokerage office, such as office routines, phone management, sign usage, budgetary allocations for agent-support activities (advertising, farming, etc.), agent interviews, goal setting and daily work schedules;
  • procedural rules, encompassing the means and methods to be used by agents to obtain measurable results (listings, sales, leases, mortgages, etc.);
  • substantive rules, focusing on the documentation needed when negotiating listings, sales, leases or mortgages and fulfilling the duties owed by the broker to participants;
  • compliance checks, consisting of periodic (weekly) and event-driven reports (a listing, sale, lease or mortgage transaction) to be prepared by the agent, and the review of files and performance schedules by the broker, office manager or assistants, such as listing or transaction coordinators; and
  • supervisory oversight, an ongoing and continuous process of training agents and managing their activities within the course and scope of their employment.

The broker may create an office manual containing policies, rules, procedures and other conduct the broker deems necessary to fulfill their responsibility for their supervision of agents. All rules and procedures established by the broker also need to be agreed to in an employment agreement entered into by the broker and agent. [See RPI Forms 505 and 506]

The written employment agreement spells out the duties of the sales agent and the compensation the agent is to receive for representing the broker in soliciting and negotiating listings, purchase agreements, leases and financing. [CalBRE Regs. §2726]

Building an empire: agent recruitment

Brokers need to assess their business goals to determine the most suitable way to find agents and support staff to keep their office running. A recruitment plan created by the broker determines:

  • how many agents and staff members they want to hire;
  • how they will reach out to potential agents;
  • what types of agents they will target; and
  • what source they will use (i.e. co-op agents on recent closings, multiple listing service (MLS) rosters or CalPaces).

Part of office management includes developing standards for selecting new agents and providing them with sufficient training to ensure they are prepared to become involved in the broker’s business. Standards vary by the type of individual the brokers is recruiting and the types of real estate transactions handled by the office.

Related article:

Brokerage Reminder: Setting standards for recruiting agents

Brokerage Reminder: Unlicensed assistants – supervision required

Employment matters to be covered

Most agents and associate brokers hired by a broker enter into independent contractors (IC) agreements to document the employment. The IC agreement is solely for income tax withholding and unemployment insurance avoidance, for a sales agent can never hold themselves out as independent of a broker. Under California real estate and labor laws, they are employees requiring the broker to provide them with workers’ compensation coverage. [Calif. Labor Code §2750.5; see RPI Form 506]

Employees the broker needs to cover with workers’ compensation include:

  • sales agents;
  • other associate brokers working under the broker; and
  • any non-licensed staff.

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 (DLSE), preventing the broker from conducting business until proof of insurance is delivered;
  • civil penalties and fines up to $100,000; and
  • reimbursement claims from current and former agents for premiums they paid. [California Bureau of Real Estate Bulletin, Fall 2004, Page 10]

Trust fund handling

Active brokers establish a trust fund account to handle all funds received during a real estate transaction. Funds received in the course of rendering services the form of cash or checks payable to the broker are:

  • deposited into the broker’s trust account;
  • held undeposited as instructed; or
  • endorsed and handed to others entitled to the funds.

The broker needs to regularly account to the owner on the status, expenditure and location of the negotiable trust funds, called an owner’s statement. They also need to maintain a trust fund ledger separate from the trust account identifying:

  • the location of any trust funds received but not deposited in the trust account; and
  • the date the funds were returned or forwarded, such as a check, cashier’s check, cash or promissory note that is not deposited in the broker’s trust account. [CalBRE Reg. §2831(a)(6)]

A broker need not keep records of checks made payable to others for services, such as escrow, credit reports and appraisal services, if the total amount of all such checks for any one transaction does not exceed $1,000. [CalBRE Regs. §2831(e)]

However, the broker is to account for the receipt and distribution of these checks on request from:

  • the CalBRE; or
  • the maker of the check exempt from entry in the trust fund ledger. [CalBRE Regs. §2831(e)]

Lack of proper accounting records is grounds for suspension or revocation of the broker’s license. [Apollo Estates, Inc. v. Department of Real Estate (1985) 174 CA3d 625]

If a broker deposits trust funds into an account used to receive and disburse personal or business funds, the broker has improperly commingled the funds. Similarly, improper commingling occurs when the broker places or leaves personal funds in a trust account. [Stillman Pond, Inc. v. Watson (1953) 115 CA2d 440]

The improper commingling of trust funds exposes the broker to a complaint and revocation or suspension of their license. [Bus & P C §10176(e)]

 Related article:
Brokerage Reminder: Trust fund(amentals) 

Recordkeeping

Brokers are required to keep all records of their agent’s activities in connection with any transaction requiring a real estate license for three years. The three-year period for retaining an activity file for CalBRE review begins to run on the closing date of a sale or from the date of the listing if a sale does not occur. The records are to be made available for inspection by the Commissioner of Real Estate or their representative, or for an audit the Commissioner may order. [Bus & P C §10148]

Typically, an agent who produces a listing or an escrow (and thus their broker’s right to a fee) becomes the agent in the broker’s office who is responsible to the broker for the care and maintenance of the client’s file.

Everything that occurs as a result of the client employment is to be retained in the file. This includes listings, deposit receipts, canceled checks, trust records, notes/messages, billings, correspondences via fax or email, disclosure sheets, worksheets, advertising copy, tear sheets, copies of offers/counteroffers and rejections and any other related documentation or paperwork.

The file belongs to the broker, not the agent, although it will likely remain with the agent until close of a sale on the listed property or the listing expires un-renewed. The agent hands the broker the entire file on close of escrow, usually made a condition precedent to payment of the agent’s share of the fee received by the broker.

Associate brokers: status without responsibility

An associate broker is a licensed real estate broker who, rather than operating an independent office, chooses to work under the employ of another broker. Think of an associate broker as an advanced sales agent with more credentials and, typically, more knowledge and experience.

Broker associates enter into employment agreements with their employing brokers just as sales agents do. They are obligated to comply with the terms of their employment, earn fees based on a fee-splitting structure agreed to with their broker and work with the public on behalf of their broker as the broker’s agent. [See RPI Forms 505 and 506]

Importantly, though an associate broker is qualified to work directly with the public independently, they may not act alone in any transaction undertaken through their brokerage office while under an employment agreement. Here, the associate broker is limited to acting solely as an agent of the broker during any activities included in the scope of their employment.

In practice, associate brokers may seem no different than sales agents. However, there are perks to working as an associate broker. For one, a higher professional designation and the higher level of education required to obtain the license provide associate brokers with a useful status boost. It is assumed – by clients especially – that those holding a broker license are more experienced, knowledgeable and qualified to assist clients in buying or selling real estate.

Thus, due to their status, associate brokers are in an advantageous position to:

  • negotiate a higher fee split with their employing broker; and
  • secure the trust and confidence of clients more readily by highlighting their expertise gained as a licensed broker.

Further, though associate brokers are bound by their employment agreement to act only on behalf of their broker in transactions covered by the terms of their employment, associate brokers have the unique advantage of working independently in transactions not subject to their employment agreement.

For example, consider an associate broker who works for a brokerage office that exclusively deals with residential sales – all stated in their employment agreement. A seller solicits the associate broker to help sell their commercial property. Here, the associate broker may act independently as the seller’s broker and receive compensation directly since:

  • their broker license authorizes them to work with sellers directly; and
  • the employment agreement with their broker only obligates them to undertake residential sales through their brokerage office.

When liabilities arise

Associate brokers need to be aware of when their conduct creates liabilities.

When an associate broker holds themselves out as an independent broker and undertakes activities not included in their employment agreement, they assume all liabilities and duties owed the public by an employing broker. Here, rather than acting as an agent of the broker employed by the client, they are directly employed by the client.

Thus, they are responsible for their own compliance with real estate law, proper delivery of documents and disclosures, and timely performance of all acts during the transaction – with no guidance from an employing broker. Acting independently also excludes them from coverage under their employing broker’s E&O insurance plan. Thus, any E&O insurance coverage is their responsibility to obtain. Prudent practice suggests a broker will carry E&O insurance at all times to cover for any claim arising out of their negligence.

Further, an associate broker who independently undertakes real estate activities included in their employment agreement without supervision by their broker or payment to their broker is liable for their employing broker’s loss of compensation in the transaction. Remember, associate brokers are bound by their employment agreement, which requires them to carry out all activities within the scope of their employment as an agent of their employing broker.

The independent broker

Much like an associate broker who undertakes real estate activities outside of their employment, a broker who acts as an independent broker renders real estate services alone and receives compensation directly.

Here, the independent broker does not employ sales agents to represent the broker in real estate transactions, nor does the broker enter an employment agreement with another broker on whose behalf they will act. An independent broker solicits employment with the public directly, providing all real estate services as an autonomous broker without the supervision of an employing broker.

Acting independently provides a broker full control and discretion over how they practice real estate. Further, it relieves them of any responsibility to oversee sales agents or fulfill obligations as an employer.

However, as with associate brokers who act alone, independent brokers are fully responsible for their own compliance with all real estate law and agency duties owed their clients. They are solely in charge of managing the risk of loss and liabilities arising from their transactions. To protect their independent business, they are also responsible for obtaining E&O insurance.