Real Estate Salespersons - Independent Contractors or Employees? The Answer is Not as Simple as You Might Think.

 

Are you as a real estate salesperson an independent contractor or an employee?  Or, perhaps, a little of both? 

 Independent Contractors:  An independent contractor is a person who contracts with another to do something but is not controlled by the other or subject to the other’s right to control with respect to the performance of the undertaking. An independent contractor is responsible only for the goal to be achieved, not how the goal is accomplished.

 Employees:  An employee must comply with another’s instructions about when, where, and how to work.  The Arizona Supreme Court has held that the agreement between two people does not determine whether a person is an independent contractor or employee, rather the nature of the relationship is determined based upon the facts and circumstances.  The courts use a variety of factors in determining whether an employer/employee or independent contractor relationship exists, such as the extent of control exercised by the broker over the details of the salesperson’s work and the degree of supervision.

 The Independent Contractor Agreement

Most real estate salespersons enter into independent contractor agreements with their employing broker. An independent contractor agreement (commonly known as an “ICA”) may address:

 

• Obligations of the salesperson to:
• Remain licensed
• Maintain REALTOR^® membership
• Abide by all laws and rules
• Abide by broker’s policies and procedures
• Pay any amounts due to the broker as set forth
• Work diligently

• Obligations of the broker to:
• Remain licensed
• Compensate the salesperson in the manner set forth
• Provide office space

 

• Other important terms, such as:
• Independent contractor status
• E&O insurance
• Allocation of expenses
• Teams
• Payment of commissions on pending transactions upon departure of the salesperson
• The files and documents that the salesperson may take upon departure
• Dispute resolution between broker and salesperson as well as between two salespersons within the brokerage
• Liability and indemnification

 However, an independent contractor agreement stating that a real estate salesperson is an independent contractor does not necessarily determine the relationship in all situations.

 Salespersons are Often Considered “Employees” for Regulatory and Civil Liability Purposes

Despite entering into an independent contractor agreement, salespersons are often considered “employees” for regulatory and civil liability purposes.

Regulatory Liability:  For regulatory purposes, the Arizona Department of Real Estate Rules require the broker to maintain close supervision and control over salespeople. R4‑28‑1103(A).   Further R4‑28‑1103 (D) provides: “An employing broker is responsible for the acts of all associate brokers, salespersons, and other employees acting within the scope of their employment.”  Therefore, an employing broker can be sanctioned by the ADRE for the failure to exercise reasonable supervision and control “over the activities of salespersons . . . under the broker’s employ . . ..”  A.R.S. §32-2153(21). 

Civil Liability for Negligent or Fraudulent Conduct:  As a result of the right to control, the employing broker is held liable for the acts of salespersons in court lawsuits under the doctrine of “respondeat superior” which literally translates to “let the master answer.”  This court doctrine dating back to the 17^th century, provides that an employer can be held liable for damages caused by the employee acting within the scope of employment.  Thus, a broker is generally held liable for damages resulting from the negligent or fraudulent conduct of the broker’s salespeople acting within the scope of their “employment”.

 Scope of Civil Liability - Wrongful Death:  The issue of scope of employment was addressed by the court in the wrongful death case of Santorii v, MartinezRusso, LLC, 240 Ariz. 454, 381 P.3d 248 (App. 2016).  In this case, a real estate salesperson returning from a real estate sales appointment crossed the center line in the car he was driving and struck the Plaintiff’s husband’s vehicle – unfortunately, both men died in the accident. 

 In the resulting lawsuit against the salesperson’s broker, the Court considered whether Arizona's real estate statutes and regulations established as a matter of law that the relationship between the broker and their salesperson was one of employer and employee. If the salesperson was an employee in the course of employment, the broker could be held liable for the alleged wrongful death. 

 In the case, the Court noted that:

·         The salesperson was a licensed professional who had nearly complete discretion in the time, manner, and means in which he traveled to meet clients.

·         The ICA expressly characterized the salesperson as an independent contractor who was “free to devote” his time, energy, effort, and skill as he saw fit.

·         The salesperson “was not required to keep specific hours, attend sales meetings, or meet any sales quotas.

·         Although the broker “provided optional office space, administrative services, sales leads, and training,” the salesperson was charged a monthly fee for these services.

·         The salesperson “chose the territory where he worked, created his own advertisements, prospected for clients, drove his own car, worked from his home office, worked purely for commission, and set up his own appointments.” 

The defendant broker “had a degree of control” over the salesperson but only as it related to real estate transactions, which were not at issue in the wrongful death auto accident case. And although the defendant broker required the salesperson to carry auto insurance, that requirement did not dictate a right to control his driving and the defendant broker did not tell the salesperson “which houses to visit, what routes to take, or when to meet clients.”

 Thus, the Court concluded that “although the statutes and regulations impose on a broker the responsibility to closely supervise a real estate transaction and the documentation of that transaction, they do not establish the requisite control over other aspects of a salesperson's activities (such as driving to and from sales appointments), and thus do not dictate an employer-employee relationship as a matter of law.”  In other words, whether a salesperson is considered an employee or independent contractor for civil liability depends upon the facts of the case. 

 

Salespersons are “Statutory Non-employees” for Tax Purposes

The Internal Revenue Code provides a statutory classification for real estate salespersons as “statutory non-employees” for federal income and employment tax purposes. To qualify for “statutory non-employee” status, the real estate salesperson must:

• Be licensed as a real estate agent.      
• Receive substantially all compensation based on sales or other output, rather than the number of hours worked.
• Have a written contract with the brokerage firm that provides that the salesperson will not be treated as an employee for federal tax purposes. 

I.R.C. §3508

Additionally, real estate brokers are exempt from Arizona withholding tax requirements. Since the federal tax code does not require withholding of income taxes, the Arizona withholding statute does not require withholding either. A.R.S. §43‑401.

The Workers’ Compensation Act exempts real estate salespersons from its provisions when:

·         Substantially all income received for services is directly related to sales rather than the number of hours worked.

·         The services performed by the salesperson are performed pursuant to a written contract between the salesperson and broker.

·         The contract specifically provides that the salesperson is not treated as an employee for federal tax purposes or for the purposes of the Workers’ Compensation chapter.

A.R.S. §23‑910.

 The Employment Security Act exempts real estate salespeople from its provisions if all income is received solely by way of commission. A.R.S. §23‑617(14). 

 Therefore, most real estate salespersons are treated as “statutory non-employees,” i.e., independent contractors, for tax purposes. 

 Conclusion

Because of statutory exemptions, if there is a properly drafted independent contractor agreement, the broker/salesperson relationship is not treated as an employment relationship for the purposes of federal and state tax withholding, unemployment compensation contributions or workers’ compensation insurance. However, for regulatory and civil liability purposes the real estate broker/salesperson relationship may be one of employer/employee depending upon the facts and circumstances.   

 

K. Michelle Lind, Esq. is an attorney who currently serves Of Counsel to the Arizona REALTORS®.  She is the author of the book - Arizona Real Estate: A Professional's Guide to Law and Practice (3rd Ed.) . 

For more real estate related articles, visit Michelle’s Blog at Arizona Real Estate – A Professional’s Guide to Law & Practice. (arizonarealestateprofessionalguide.blogspot.com)

This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.  1/24/23