While U.S. tax law supports the current definition of an “independent contractor,” recent changes to U.S. labor law call it into question, and that could potentially impact Realtors.

WASHINGTON – Recent legislation challenges the classification of real estate professionals.

The U.S. Department of Labor’s (DOL) recent final rule regarding how workers should be classified under the Fair Labor Standards Act (FLSA) could pose a risk to real estate professionals’ classification as independent contractors, according to the National Association of Realtors® (NAR).

As written, the DOL rule may be misinterpreted and lead to greater litigation and confusion regarding how certain workers should be classified, NAR says. The rule also could threaten workers’ ability to be classified as independent contractors, including most real estate professionals.

NAR has long advocated for laws to protect practitioners’ independent contractor status and will continue to vigorously work to protect this status for real estate professionals, including working to advance HR 5419, the Direct Seller and Real Estate Agent Harmonization Act, to get a carve-out for real estate agents under FLSA.

If a new federal or state law reclassifies real estate pros, the result could burden agents and brokerages with “increased costs, fines, tax withholding, payment of a minimum wage and disappoint the many salespeople who want to have control over their work,” says Matt Troiani, NAR’s senior counsel and director of legal affairs, in the latest “Window to the Law” video.

Under the current Internal Revenue Code, real estate professionals can be classified as independent contractors by their brokerage – but under the new DOL rule, which is labor law, the classification could be impacted. NAR says it’s grown increasingly concerned about regulations, legislation and proposed tests for determining employee status that could jeopardize certain classifications, whether at the federal or state levels.

Currently, about 89% of NAR members are classified as independent contractors, with a majority affiliated with an independent real estate company, according to NAR data.

“Many salespeople prefer to work as independent contractors so they can determine when, how and where to perform their work,” Troiani says.

“Being classified as an independent contractor is why many individuals are attracted to the real estate industry – it empowers entrepreneurship, maximizes flexibility and promotes autonomy,” NAR and the Direct Selling Association wrote in a letter to lawmakers last fall.

Preventing Misclassifications

The most common tests to determine whether a worker should be classified as an “employee” versus “independent contractor” are known as the ABC Test, Economic Reality Test or Common Law Test, according to NAR. But “even though salespeople are often highly independent, state law typically requires broker supervision of salespeople, creating tension with these worker classification tests,” Troiani says.

The new DOL rule adopts the Economic Reality Test, which includes several factors that must be considered in assessing whether a worker is an employee or independent contractor under the FLSA.

In the “Window to Law” video, Troiani explains how brokerages can help lessen scrutiny from regulators and courts by ensuring their salespeople classification takes into account the following:

  • Use an independent contractor agreement. The agreement should clearly define the salesperson’s worker status and specify for federal tax purposes whether they are an independent contractor
  • Pay salespeople on a commission basis
  • Require salespeople to cover their own business expenses, such as insurance, phone bills and gas. Also, require them to provide their own business equipment, such as cars, phones and computers
  • Do not refer to salespeople as “employees” if they are designated as an independent contractor

© 2024 National Association of Realtors® (NAR), Melissa Dittmann Tracey

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