The labor market in the US is set for monumental changes in the coming months, with laws such as the AB-5 in California, and the Labor Department of the Federal Government announcing early last month that it was going to unveil a new rule that would reclassify independent contractors as employees. Although aimed at app workers and the gig economy, the real estate industry remains leery.
While there has long been a push to end the misclassification of workers as contractors to deprive them of benefits across various industries, in real estate, such laws and rules can fundamentally upend the nature and operations of brokerages. Everything from the structure of brokerages, to the payments, incentives, and commission systems remain on the line with these changes.
In light of these changes, real estate brokerages, especially up-and-coming firms have to head back to the drawing board to understand the implications, and come up with measures to effectively overcome, or circumvent the challenges that come with it.
Understanding The Law & Exemptions
This battle between unions, employers, and other stakeholders on the classification of workers as contractors or full-time employees has been raging for decades. However, more than half the states in the US specifically offer exemption to real estate agents from workers compensation laws, and most other restrictive labor rules and requirements.
Similarly, the AB-5 and even the IRS offer certain factors, criterions, or tests to determine if a worker meets the suitable requirements to be classified as an independent contractor. This is referred to as the ABC test for the AB-5,
A - Is the worker free from the control and direction of the hiring entity, both under the contract, and in fact?
B - Does the worker’s job involve tasks that lie outside the usual course of an employer’s business?
C - Is the work done by someone with their own independently established business or trade doing that kind of work?
Based on these parameters alone, it might seem as if the role of a real estate agent can no longer be classified as an independent contractor, especially in California. However, federal laws that guarantee an agent’s right to work as an independent contractor will take precedence in this regard.
Moreover, even in California, real estate agents, doctors, securities brokers, and a few other professions have since been exempt from this law. So for the time being, there is no tumultuous upheaval for the real estate brokerage business, at least when it comes to their core operations.
Transaction Coordinators & Other Support Staff
Following this, there is the issue with other support staff that provide a crucial service in real estate transactions, this includes transaction coordinators, appraisers, inspectors, and more. Brokerage companies have long relied on independent contractors even for these roles to minimize overheads, and save costs incurred on overtime, and benefits, among other things.
Unlike for agents, there are no specific exemptions pertaining to coordinators in federal laws, nor does it meet the requirements to be classified as independent contractors as per AB-5. This brings with it substantial overheads for a brokerage, especially since they will be required to pay half the FICA fees on a quarterly basis for all employees going forward.
Workarounds & Loopholes
There are, however, loopholes and workarounds in this regard, using which brokers can effectively circumvent the new regulations, without breaking any laws.
This includes creating a degree of separation between agents and the brokerage, while passing on the additional costs down to the agents. Another option is outsourcing transaction coordination, and other ancillary services to companies like REBO.
Overall, the impact of these new laws on the real estate industry remains minimal, and with the right approach, it can even be a net positive for the industry in the long run.