IRS Forces Exodus of Independent Contractors

Real estate law, which in most states requires brokers to supervise their agents, often conflicts with labor laws governing independent contractors. Furthermore, there are issues concerning the involvement of the IRS and the National Labor Relations Board that present challenges. These conflicts have opened the door for attorneys to bring suit against Boston Pads, Coldwell Banker, Redfin, and ZipRealty, claiming these organizations have misclassified their agents as independent contractors rather than employees. The lawsuits assert that the labor laws controlling independent contractor status should take precedence over real estate law. Employment law defines independent contractors in such a way that broker supervision can appear to undermine a contractor’s independence. One of the widely adopted tests to determine a person’s status is the Economic Reality Test (used by the U.S. Supreme Court) that examines the degree of employer control, the relative investment of both the employee and the employer, the opportunity for profit, the skill required, and the permanency of the relationship.

A decision by the Supreme Court going against the status quo, although unlikely, could have a far-reaching, industry-wide impact, including the transformation of the brokerage revenue model and a significant shift in the operational model. A scenario in which agents are considered employees would initiate a complete reorganization of the existing revenue model. Most brokerage companies would be unwilling to hire agents that will not generate enough business to cover their costs. Employee status also does not necessarily include top wages and benefits for everyone. Consider the case of restaurant workers who exchange access to tips for an additional $2.13 minimum wage. Agents would thus have three primary options: work as an employee for a large company under its operational guidelines, become a broker and work as a sole practitioner, or leave the industry altogether.