Are real estate agents employees or independent contractors? In many cases, agents are classified as contractors. However, some agencies and brokers misclassify their employees as contractors. This misunderstanding can result in confusion and even lawsuits. Thus, knowing the distinction between these roles can help you navigate your way through this career field.
What is an employee?
Many agencies hire real estate agents as employees. An employee works for a business or other person for payment. Subsequently, the worker earns a salary or per hour wage.
A person’s employment status is determined by how much control the employer has over the worker. Their status pertains to how much the employer controls the manner in which the worker fulfills his or her duties and responsibilities.
Working as an employee does include some perks. Typically, you have fixed working hours. Human resources calculate your federal, state and local taxes withholdings for you. Plus, you earn a predictable, steady paycheck, unlike independent contractors whose income can fluctuate.
A few other benefits include:
- Health, life, dental, vision, disability, and accidental death insurance
- Vacation, holiday and sick pay
- 401k plan or a pension program
As an employee, you don’t have much control over your schedule. Also, you don’t get many tax advantages. Tax laws favor employers, so you don’t have many tax deductions at your disposal. While it seems you have more job security, an agency can terminate your employment at any time.
What is an independent contractor?
A real estate agent that’s an independent contractor provides services to a real estate agency. In this role, you have greater latitude than an employee. You determine where, how and when you perform your job. Additionally, you’re responsible for having the equipment or tools necessary for carrying out your duties.
Independent contractor advantages
Independence is the name of the game. You set your work schedule. Equally important, you have the flexibility to arrange meetings or appointments around your personal needs.
For example, if you have to schedule a client meeting around your doctor’s visit, you can do that. No supervisor is watching your every move. Not having a micromanager looking over your shoulder is an ideal role for anyone who’s mature, self-disciplined and requires minimal supervision.
Independent contractor disadvantages
Alternatively, since you’re not an employee, you don’t receive the same benefits that come with that status. Furthermore, you must have Errors and Omissions insurance coverage.
This policy protects the seller or buyer if an agent misrepresents information or mistreats either party unfairly. Even if the agency provides this coverage to its independent contractors, you may be required to pay all or a portion of the insurance policy.
Many real estate agencies and brokers mislabel employees as independent contractors. Depending on how much influence a real estate agency has over your work, it’s possible that from a legal standpoint you may function as an employee. If this is the case, you won’t receive the benefits you’re entitled to, such as:
- Family and medical leave
- Unemployment insurance
- Civil rights protections.
How do you know whether an agency is treating you like an employee instead of an independent contractor? Unfortunately, there aren’t any hard and fast rules. However, there are questions to consider that can help you determine what your role is. A few of these questions include:
- Is there a written contract detailing the working relationship between the real estate agent and real estate agency?
- Does the agency require compliance with its procedures and policies?
- Does the agency provide training for the agent?
- Is the agent given instructions by the agency, such as where to purchase supplies, what tools to use, and where and when to work?
- To what extent do the real estate agent’s services play in the agency’s regular business?
- To what extent does the agent have unreimbursed business expenses?
- Does the agent have the right to control how results are achieved?
- Is there permanency of the relationship?
The improper classification of realtors and real estate agents has resulted in numerous lawsuits. To illustrate, a well-known example is Bararsani v. Coldwell Banker.
In this case, the agents were treated as employees even though the company labeled them as independent contractors. Eventually, the case settled for $4.5 million in favor of the plaintiff class of real estate agents.
Independent realtors frequently have extensive out-of-pocket expenses, such as brochures, business cards, websites, videos, and insurance. If you’re an employee, agencies are legally responsible for reimbursing you for the business-related costs. Often, these expenses can tally up to thousands of dollars per year.
An independent contractor should avoid engaging in certain activities when working with an agency. These include:
- Receiving training from the agency
- Obtaining materials and tools from the agency
- Attending mandatory staff meetings
- Performing services at a specific location
- Providing services during set work hours.
Are you an independent contractor or an employee? Sometimes this isn’t always an easy question for real estate agents to answer.
If you’re an employee labeled as a contractor, you miss out on lots of benefits. Therefore, understanding the difference between the two roles reduces the likelihood of being wrongly classified.
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MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.