A New York Times front-page article on the IRS cracking down on companies that blur the line between independent contractors and employees caught my eye. Some brokerage firms nudge that line all the time.
Although I’m constantly surprised by how many consumers don’t realize it, the fact is that the overwhelming number of real estate sales agents/brokers are independent contractors.
That means we are in business for ourselves but are affiliated with brokerage firms for the benefits they provide. The benefits may include record keeping to comply with state law, exposure on a Web site that receives prominent display in Internet searches, managers who offer advice, forms, training, desk space, limited free advertising, use of office machines such as copiers, and back-office support such as information technology.
In return, depending on the brokerage, their agents and brokers share their commissions with the firms – often as much as 50 percent and rarely as little as 25 percent. In addition, the firm often charge the agents a monthly fee, which commonly totals $1,200 a year and may reach $5,000, plus errors and omissions insurance against the possibility of having to fight a lawsuit.
To a disconcerting degree, the largest firms also insist on having their independent contractors promote the firms’ brand to the exclusion of the agents’. They require use of the company’s template business card, for example, and they discourage individuals Web sites that don’t fit the company’s design.
When an agent doesn’t meet the firm’s sales goals, wouldn’t you know that the individual loses desk space but is saddled with the monthly fee anyway.
No matter what the firms offer, agents pay for their own health insurance; their retirement contributions; taxis and subway fares; gifts; any meals, drinks and entertainment for customers; advertising expenses beyond the firms’ limits; help from other agents at open houses; additional support such as that from assistants; business cards; brochures; floorplans; photos; individual Web sites; software; and virtually all other marketing expenses.
I have worked “for” three brokerages, Long & Foster in Washington, D.C., where I began my real estate business and thrived; Prudential Douglas Elliman in New York; and, since January last year, Charles Rutenberg Realty, where I am happy to say I have been thriving once again.
My apologies for feeling the need to lay down such extensive background, but I suspect many readers do not appreciate what it means to be both an independent contractor and an agent connected to a brokerage.
I’d like to suggest that some brokerages don’t know the differences either. To be fair, they certainly do know the differences but prefer to ignore them.
I decided to go to the source by researching the gray area that tries to define between employee and independent contractor. In a guide for employers, the IRS says:
Generally, a worker who performs services for you is your employee if you have the right to control what will be done and how it will be done. This is so even when you give the employee the freedom of action. What matters is that you have the right to control the details of how the services are performed.
The IRS says business owners need to know that it evaluates three characteristics to determine the relationship between businesses and workers: Behavioral control, financial control, and the type of relationship.
Behavioral control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means. (The italicized material reflects my experience.)
Manager: “All new agents must complete the training.”
Manager: “I haven’t seen you at a sales meeting for a while.”
Financial control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
Manager: “For any listing price below $1 million, you are required to charge a 6 percent commission.”
Type of relationship factor relates to how the workers and the business owner perceive their relationship.
Manager: “We’re going to have performance reviews.”
Manager: “You have to use our business card design.”
Manager: “You need to look professional, so dress like one.”
If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees, the IRS explains. (An op-ed piece yesterday explores the ramifications of calling a de facto employee in the technology sector an independent contractor.)
The distinction between employee and independent contractor is admittedly ambiguous and open to argument. What makes it especially a gray area for brokerages is a state requirement for them to be responsible for ensuring that their independent contractors comply with the law.
“If you can direct or control only the result of the work done-and not the means and methods of accomplishing the result-then your workers are probably independent contractors,” the IRS says.
See, the loopholes are many and and as big as king-size bed.
It was precisely because its business model represents a novel approach to the firm’s sales personnel that I was initially attracted to Charles Rutenberg Realty, and my results have proved to me that my choice was perfect.
The firm explicitly recognizes that we are independent contractors, encouraging us to brand ourselves, attend sales meeting voluntarily, take full responsibility for the growth of our businesses, use the modest office as needed without having assigned desk space, call on the broad experience of the firm’s founders and sales manager, and always have access to the city’s broker database.
We, too, are charged a monthly fee ($99), but the firm takes no more than $2,000 from any sales commission. It doesn’t pay for advertising either, but it does obtain a substantial discount for brokers to list properties on the New York Times database.
Is it any wonder that the fledgling firm is the fastest growing in Manhattan and the tenth largest (according to the Real Deal)?
Unlike the behemoth brokerages, Charles Rutenberg Realty draws a bright line between independent contractor and employee. In other words, the firm treats us like grownups, not infants who need to be coddled, coaxed and cajoled into making more money not for us, but for them.
I’m way too old to be treated any other way.
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022
I’m working on a similar article regarding the muddied waters in determining the distinction of an independent contractor and an employee. After reading your column, which I believe to be quite accurate based on my research, I can only assume that your new broker does not have any joint ventures or marketing agreements with title companies and mortgage lenders, and that there is no difference in benefits to you no matter what companies you refer your clients to.
My article is based more on the puppet strings that now exist which more or less brow beat the independent contractor to use certain companies or face, as you wrote, “that the individual loses desk space but is saddled with the monthly fee anyway.”
I have worked for a joint venture title partner of a major real estate broker here in the Maryland market and truth be told, the broker’s clients were charged higher settlement fees realizing that the title insurance premium was going to be reduced significantly by the broker’s take. That venture definitely didn’t benefit the client; it didn’t then and I still believe that it doesn’t now.
The joint ventures and marketing agreements are getting out of control and there is no enforcement to these illegal arrangements. That same major broker has now established a management compensation package where 1/3rd of the manager’s compensation will be based on the conversion rate of the use of the joint venture partners by these so called “independent contractors.” How can the IRS just sit by and watch this happen? I would love to see the effect of the employee status slapped on these broker’s agents and would love to see how fast the broker’s dump their “partners.”
I am not affiliated with anyone and have no marketing agreements (which I believe are nothing more than the title company paying the broker for contracts) and have survived in a very difficult business environment. I still believe in relationship marketing; doing business with people you like and respect. While this has allowed me to continue to stay in business, the closed doors of these many brokers and lenders have made it more difficult to succeed.
I am now a subscriber to your posts and look forward to reading more of them. Good luck in your continued success.