‘Independent contractor’ abuse is scrutinized

There’s a flurry of activity in the nation’s capital to clamp down on U.S. workers that are misclassified as independent contractors, a category under which all but a tiny minority of real estate agents fall.

According to Realtor magazine, a publication of the National Association of Realtors (NAR), the government says far too many businesses are using incorrect employee classifications to avoid paying Social Security, Medicare and unemployment insurance taxes.

Congress last year started looking into misclassification of employment status in an attempt to get a handle on a problem that the U.S. Department of Labor says is huge – possibly applying to as much as 30 percent of the country’s workforce.

This year, the government’s focus intensified: In early February, the Obama administration included money in its fiscal year 2011 budget proposal to fund an effort by the Department of Labor and the U.S. Treasury to ramp up investigations of employee misclassification, with potential audits of as many as 6,000 businesses.

And Sen. John Kerry (D-Mass.) and Rep. Jim McDermott (D-Wash.) have introduced legislation that would help eliminate ambiguities in the definition of independent contractor, among other effects.

What does this new emphasis mean for those who work in the real estate industry? The article contends nothing at all.

Much, if not all, of any stepped-up enforcement would likely bypass real estate, NAR analysts say.

But I maintain that real estate brokerages often nudge the line between employee and contractor. They do so by requiring them to be present at specified times (e.g. to answer consumer inquiries – floor duty – and to attend sales meetings) and imposing restrictions on them (e.g. to forgo promotion of their individual brand in favor of the company’s).

According to the magazine, a unique provision of the Internal Revenue Code provides three very clear criteria by which brokers are to classify that their associates are independent contractors.  When sales associates are hired they must:

  1. Have a valid real estate license;
  2. Be made aware they’ll be treated as an independent contractor;
  3. Acknowledge that their compensation isn’t based on hours worked but on commissions earned.

When I created a team in D.C. several years back, I consulted a lawyer about the members who basically functioned as employees.  My attorney gave me a much longer list of criteria and made sure that the agent on our team would not be categorized as an employee, even though the office manager was.

“The IRS understands sales associates are in business for themselves,” says J.D. Rinehart, vice-chair of the NAR’s Federal Taxation Committe. “The government isn’t trying to catch people who are doing it right, just those who are doing it wrong.”

If he’s right – and I suppose he is – maybe I should have hired a different lawyer instead of jumping through hoops that she put in my way.  Or just maybe the feds should take a closer look at what I believe to be the abuses that I have witnessed in the real estate industry.

Subscribe by Email

Malcolm Carter
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022

M: 347-886-0248
F: 347-438-3201

Web site

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s