Is Your Real Estate Team Violating Federal Law?

We are all familiar with the idea of a real estate team. These groups of several or more agents provide efficient and coordinated real estate services to clients. Many teams hire personnel (licensed or unlicensed) that handle various phases of a transaction. Anything from marketing to showing. They also act as the transaction facilitator or the closing coordinator. One question surfaces about these teams. Are these team members independent contractors or employees under federal law? If considered employees, the brokerage and real estate team members can be personally liable for violations of federal minimum wage and overtime laws.

Wage and hour litigation in the real estate industry has exploded over the last five years.  This exposes professionals to double damages and attorney’s fees for violations. In most instances, the litigation can be debilitating and result in the closure of the brokerage and financial ruin. Because teams oftentimes hire their own personnel, they may be running afoul of federal law and exposing both their brokerage and themselves to liability.

There are strategies to avoid wage an hour litigation. First, you must determine whether your team personnel are employees or independent contractors. Pursuant to the U.S. Department of Labor (DOL) Fact Sheet #13, under the Fair Labor Standards Act (FLSA), workers who are economically dependent on the business of the employer, regardless of skill level, are considered employees. Independent contractors are workers with economic independence who are in business for themselves.

Whether a worker is an employee or an independent contractor is determined, largely, on a case by case basis. But, the DOL has provided some factors for consideration:

1. The extent to which the work performed is an integral part of the employer’s business. Does the worker provide a service that the employer is in business to provide (i.e. marketing, contract facilitation or closing services)? If so, the worker is likely an employee.
2. Do the worker’s managerial skills affect his or her opportunity for profit and loss. Does the worker supervise other workers? Does the manager’s success increase the worker’s opportunity for profit? If the worker’s supervision and management directly impact profit or loss, the worker is likely an employee.
3. The relative investments in facilities and equipment by the worker and the employer. Has the worker made an investment in the business (comparable to employer’s investment) or provided their own tools and equipment? If the worker and employer are investing and sharing the risk of loss, then the worker is likely an independent contractor.
4. The worker’s skill and initiative. To be an independent contractor, the worker’s skill should demonstrate that he/she exercises independent business judgment. Do you require real estate team members to use certain software or attend mandatory weekly meetings? Does the worker have assigned duties, like attending open houses or managing all team marketing? Does the worker take the initiative to operate the business or does the worker take direction from other team members? If the worker is dependent on the employer for instruction and assignments, the worker is likely an employee.
5. The permanency of the worker’s relationship with the employer. Permanency suggests the worker is an employee.
6. The nature and degree of control by the employer. Who sets the pay amounts, work hours and how the work is performed. If the employer does, the worker is likely an employee. An independent contractor works free from control of the employer or the employer’s clients.

Some factors are not relevant in determining a worker’s status. Such as, whether the worker works from home, whether they’ve signed a contract, or whether their job title has a particular label. Courts will look to the worker’s duties and the relationship with the employer in evaluating whether the worker is indeed an independent contractor or employee.

If you have identified some of your team members as employees, you next need to evaluate whether their compensation is compliant with the FLSA. Under the FLSA, an employee must be paid the federal minimum wage per hour and overtime for any hours in excess of 40 hours per week. Because exempt workers are not entitled to overtime pay, it is important to make sure your employees are correctly classified. Generally, if an employee is an executive, they are exempt from overtime. Qualifying executive factors include managing two or more full-time employees, having authority to hire/fire employees, and be paid an annual salary. More information about exempt employees and recordkeeping requirements can be found at the DOL website.

The consequences of violating DOL rules are significant to any team. There have been many large payouts only within the last 5 years. ZipRealty in California settled a DOL case for $4.8 million in unpaid wages. Coldwell Banker paid $4.5 million to thousands of California real estate agents. There’s a pending settlement with Redfin; accused of misclassifying employees as independent contractors. If you believe a team member may be misclassified as independent contractors rather than employees, consult with an employment lawyer. They can aid you in navigating the best business practices for your real estate team.