There are various types of employees. All employees ultimately work under an employer who tells them what to do. Most employees are under strict time constraints, meaning they must get to work by a certain time and accomplish tasks within an allotted period of time. While many employees have a lot of flexibility in terms of what they can or cannot do or the time periods in which they work, all employees must answer to a manager.
Employee of a Broker
An employee is an individual who works for, and under the supervision of, an employer in return for a salary, hourly wage, or commission.
From a liability standpoint, real estate agents are considered employees of a broker/brokerage. This is because agents technically work under a broker’s supervision. Agents use a broker’s office, contracts, and resources to execute real estate transactions, and brokers verify that agents follow all procedures properly.
However, agents render services on behalf of their principals, not their brokers. Agents create their own business and company policy, and manage their clients and schedules as they wish. Thus, brokers have no say in how an agent conducts himself or herself (as long as an agent’s actions are legal or ethical).
That is why for tax purposes, agents are characterized as self-employed independent contractors.
Independent Contractor
An independent contractor is a party that provides some exchange of time, money, or service on behalf of another party on a per job basis, or when required. The terms of an independent contractor’s work are based on a verbal or written agreement, and are subject to the law of agency.
Three main criteria determine whether a real estate agent is an independent contractor:
the agent is licensed
the agent is paid commissions in place of an hourly wage or a salary
the agent has a written agreement with a broker indicating the agent’s independent contractor status
If all of these criteria apply, the IRS will tax the agent as an independent contractor.
A broker must indicate an agent’s status as an independent contractor. This allows an agent to avoid paying federal withholding taxes, and to contribute to such things as mandatory employee social security tax and worker’s compensation coverage.
An agent’s independent contractor status precludes him or her from claiming unemployment insurance. California’s Unemployment Insurance Act currently bars commission-based workers from receiving unemployment benefits.
Employee in Real Estate
In the context of real estate, a broker is typically not an employee, unless he or she is a wage earner or is the recipient of a salary disbursed by another broker. Brokers, at a basic terminological level, are special agents of the principal and are hired to perform a specific task. Execution of that task results in a commission.
Failure to execute the specific task successfully (i.e. buying or selling real property) results in no commission or payment for the broker. Because brokers are not paid for work that does not lead to the execution of a transaction, brokers are not considered employees. Employees, by the true definition of the word, are individuals who receive payment for their time rather than a specific end result, which is the opposite of agents and brokers, who get paid nothing if their work yields no results. Brokers are authorized to act on behalf of the principal by soliciting or negotiating a transaction for the principal.
The relationship between a broker, and agent who works under him or her, is that of a principal and an agent and employee (Business and Professions Code Section 2079.13(b)). details on this point will be offered later in this chapter.
A broker is typically not an employee, unless he or she is a wage earner or salaried for another broker. Brokers in the common sense of the word are special agents of the principal and are hired to perform a specific task. Execution of that task results in a commission.
