IRS Independent Contractor Test Still Stands
Independent Contractor Status Still Stands
When last the IRS examined the independent contractor issue in detail, they stated the following:
“The United States Internal Revenue Service (IRS) considers real estate agents to be “statutory non-employees” if three factors are met. First, the real estate agent must be licensed. Second, substantially all payments for the licensed real estate agent’s services must be directly related to their sales or other output rather than based on number of hours worked, and lastly, the real estate agent’s services must be performed pursuant to an agreement that states the real estate agent will not be treated as an employee for federal tax purposes. While satisfaction of the aforementioned IRS test relates only to the federal tax treatment of real estate agents, it demonstrates the federal government’s recognition of the unique nature of the real estate industry and, as such, the need to treat it differently than other industries.”
In 2015, this test was reaffirmed and endorsed when the now famous Bararsani v. Coldwell Banker case was settled in which Coldwell Banker will pay $4.5 million dollars. (Read Trend chapter 5 in the 2016 Swanepoel Trends Report for a detailed analysis of what the contentious points and the legal arguments were).
Some industry pundits are applauding this as a victory for the independent contractor status. However, such celebration is misplaced. Furthermore, many are citing the cost of litigation as the rational behind the settlement. However, the more probable reason behind the decision to settle was the chance that the case could be lost on appeal was pretty even odds. Such an outcome would have impacted not only Coldwell Banker in the lawsuit but also every real estate brokerage (and Coldwell Banker franchise) in the country.
So real estate thankfully wins this round and brokers and agents give a sigh of relief. Leaders however anxiously await the next employee case that will surely come. What may make the next “independent contractor” battle more daunting is the fact that Uber might actually already be paving the way.
What has Uber, the multi-billion dollar digital disruptor of the global taxi business, have to do with real estate you may ask?
Uber currently has operations in 64 countries and over 350 cities. Uber furthermore has over 1.1 million active “driver-partners” – completely non-related to the 1.1 million “agent-member” NAR has.
More importantly Uber is currently capitalized around $62.5 billion (based on its current round of funding), making it the world’s most valuable private start-up and widely referenced global disrupter. And the existing “old paradigm” taxi industry has not taken this disruption lightly.
Uber is constantly, just like real estate, fighting legal battles around the world. Some of these battles are even with its own driver-partners, who are seeking the benefits of traditional workers. For example, driver-partners in California have filed a class-action lawsuit for petrol and maintenance expenses, while driver-partners in the UK want paid vacations and minimum wage protection.
What does that have to do with real estate you ask again?
Unfortunately, there is a striking legal similarity between Uber drivers and real estate agents.
- Both sides state that their drivers/agents are independent contractors.
- Both sides generate leads via corporate or third party sources and them channel the leads to the independent contractors.
- Both drivers/agents get to choose whether they wish to work with the lead or not.
- Both drivers and agents use their own cars and carry the expenses associated in serving the customer.
- Drivers and agents are compensated on a pre-determined formula (usually on a percentage basis).
- On both sides, payment by the consumer is to the brand owner, not to the driver/agent directly.
- On both sides the brand owners lay down certain conditions, instructions and/or systems for participation.
And so on…
All of the issues discussed above lead us to one central reality. The fact is that one or more of the issues will be debated in the Uber class action lawsuit, draws the independent contractor status of agents back into the media and the courtroom.
And then there is the huge threat identified in the D.A.N.G.E.R. Report commissioned by the National Association of REALTORS® and undertaken by the Swanepoel T3 Group (owners of the T3 Navigator). Danger A1 – Masses of Marginal Agents Destroy Reputation of Agents underscores the well known fact that not “all agents are created equal.”
The industry – or any specific brand owner – is unable to offer consistent, quality service, the kind that is expected in todays consumer-drive, transparent knowledge-based economy, if a large portion of their team is not up to par, and they can’t do anything about it.
So if you thought the independent contractor debate was over, sorry, it isn’t. We think it will resurface again and again.