The following questions have been asked about how brokers classify their agents for tax purposes, the use of personal assistants, broker supervision rules and independent contractor agreements.
The time to clearly negotiate and set forth the relationship between the broker and the agent is at the outset of the affiliation. Comprehensive office policies, independent contractor agreements and compensation agreements will provide protection for both the broker and the agent when it comes to tax purposes, litigation, dispute resolution, commissions, etc. Having inclusive written agreements regarding employment expectations will pave the way to a successful long-term relationship and will guide the process for termination of the relationship when the time comes.
Independent contractor or employee?
The broker has heard the IRS is auditing companies to determine if employees are properly classified as independent contractors. What can the broker do to assure compliance with IRS rules?
The classification of agents as independent contractors or employees dictates whether the broker withholds for income tax purposes, pays social security and pays unemployment taxes on wages. Brokers can take affirmative steps to ensure that their real estate agents’ status as independent contractors (statutory non-employees per IRS terminology) is protected if an audit occurs. The time to make sure that company policies and independent contractor agreements are in good order is before the IRS conducts an audit of your company.
The Internal Revenue Code §3508(B) classifies real estate agents as statutory independent contractors if the following three criteria are met: licensure, compensation based on sales or output, and a written agreement with the person for whom the service is performed. Per IRS audit training materials, the auditor will look for these elements. Brokers entering into a well-written agreement that specifies the method of compensation and the rights and obligations of the parties with respect to work performed should be in good shape.
For more information about statutory independent contractors, see the March 2008 Legal Update, “Running a Real Estate Office,” at www.wra.org/LU0803.
Workman’s compensation
If the agent is classified as an independent contractor, doesn’t this exempt the broker from paying workman’s compensation?
The Wisconsin Worker’s Compensation Act requires most employers to maintain worker’s compensation insurance for all workers classified as employees. Covered employers include every employer who usually employs three or more employees or who has paid wages of $500 or more per calendar quarter.
The Department of Workforce Development maintains that all real estate agents working for a broker/company are employees because of the broker/company’s supervisory duties. Generally speaking, all real estate brokers, salespeople and personal assistants working for a broker/company are considered employees for worker’s compensation purposes. The DWD’s interpretation of the relationship between a broker/company and its agents appears online at www.dwd.state.wi.us/wc/employers/realestate.htm. More information may be obtained from the DWD’s Worker’s Compensation Division at 608-266-1340, 608-267-0394 (fax) or www.dwd.state.wi.us/wc.
Unemployment insurance
What obligation does the broker have to pay unemployment insurance for agents?
Brokers are generally not required to pay Wisconsin Unemployment Insurance contributions for their real estate agents. A UI law exemption in Wis. Stat. § 108.02(15)(k)7 for services provided by a real estate agent or salesperson who is paid solely by commission for his or her services will make real estate agents exempt.
Broker supervision
What written polices or procedures are required between an employing broker and licensees?
A broker is required by license law to provide written policies regarding the handling of leases, listing contracts, offers to purchase and other transaction documents. According to the broker supervision rules contained in Wis. Admin. Code § RL 17.08, this is technically the only written policy that must be provided. However, a comprehensive office policy also spells out the lines of authority and the process for dispute resolution, and otherwise lays out the expectations and obligations of each of the parties. An agent should make sure to request a written copy of these policies and a written independent contractor agreement that delineates the compensation agreement, which is crucial if there are issues about the payment of commission post-termination. The Wisconsin REALTORS® Association Office Policy Manual Guide may be used as a template. The Guide is available online at www.wra.org/officepolicymanual.
Commission post-termination
The agent has left his former broker and the broker has not paid the agent for a pending transaction. How can the agent pursue commission?
Wisconsin real estate statutes and administrative rules do not address commission policies between an employer/broker and a salesperson. The agent’s right to commission(s) in each transaction depends upon the compensation agreement entered into between the agent and the former broker (i.e., independent contractor agreement, company policy and procedures manual). If the contract does not cover the situation, prior actions of the broker in this regard will be considered. Generally, each transaction creates an independent claim for commission where an agent may bring a separate action in small claims court for each commission due. The agent may request mediation or arbitration from the local association; however the former broker’s participation would be voluntary.
Personal assistants
The broker has an agent selling and listing with the company. Another broker in the company would like to hire the person to be a personal assistant. How should payment be handled? Can the assistant get an hourly salary and a commission?
Licensed personal assistants (personal assistants who perform licensed activities) must be employed by the salesperson’s broker. When a licensed personal assistant is being compensated for performing a service that requires a license, he or she may only be compensated by the broker. Pursuant to Wis. Stat. § 452.14(3)(f), any commission or other compensation for licensed real estate services paid to the licensee, and any referral fee paid to the licensee, must only be received from the employing broker. Licensed personal assistants will be treated much like any other salesperson for purposes of the Department of Regulation and Licensing and the local board of REALTORS®.
Brokers have reported the IRS conducting audits and challenging whether a licensee can be engaged to provide services as an independent contractor for the broker while also being an employee. Before entering into such a situation, the broker should consult with a tax advisor to ensure that the structure of the relationship and commission complies with accounting principles, tax law and other employment law. See the January 1998 Legal Update, “New Personal Assistant Rules & Forms,” at www.wra.org/LU9801for more information about personal assistants.
Unlicensed personal assistants
The broker is thinking of hiring an unlicensed assistant. What services would the assistant be able to provide? What would the assistant be prohibited from doing?
An unlicensed assistant of a licensee may not perform the following activities for which a real estate license is required. This list is intended to be illustrative and declarative of existing law and is not intended to increase or decrease the scope of activities for which a license is required. An unlicensed personal assistant of a licensee may not:
1) Host open houses, kiosks, home show booths or fairs, except that an unlicensed personal assistant may assist a licensee at such locations; 2) show property; 3) interpret information on listings, titles, financing contracts closings, or other information relating to a transaction; 4) explain or interpret a contract, listing, lease agreement or other real estate document with anyone outside the licensee’s firm; 5) negotiate or agree to any commission, commission split, management fee or referral fee on behalf of a licensee; or 6) perform any other activity for which a license is required.
Tracy Rucka is Director of Professional Standards and Practices for the WRA.