Bob Dylan’s song “Shelter from the Storm” was originally called “Up to Me,” and it allegedly began with three chords and a clear melody. At some point, Dylan changed the title and rewrote the lyrics, leaving us all listening to him sing about a safe place and a safe harbor where he once found respite but was gone.
In 2016, the WRA worked on legislation to create a specific safe harbor for real estate independent contractors. This article provides insight as to why this safe harbor is so important to you and your practice and why you want to stay in that place of reprieve from certain laws applying to your business, if maintaining your independent contractor status is important. Follow the safe harbor law to get “Shelter from the Storm.”
What is a safe harbor law?
A safe harbor law is language placed into statute to create a peace of mind, or protection, for individuals or businesses in a field. As it relates to real estate practice, Wis. Stat. § 452.38, creates a safe harbor for real estate agents and firms protecting the independent contractor relationship.
What is an independent contractor relationship?
The relationship between the firm and the licensees associated with the firm can be either an independent contractor relationship or an employer/employee relationship. Independent contractors are persons who engage in an independent trade, business or profession in which they offer their services to the public. The general rule, at least for federal tax purposes, is that an individual is an independent contractor if the company has the right to control or direct only the result of the work and not the means and methods of accomplishing the result. Independent contractor status may be determined three different ways in Wisconsin:
- The common law 20 factor test.
- The federal tax law independent contractor safe harbor.
- The new Wis. Stat. § 452.38 safe harbor.
This article focuses on the Wis. Stat. § 452.38 safe harbor.
Compliance with the new § 452.38 safe harbor establishes a licensee’s status as an independent contractor regarding various state laws and in the eyes of many state agencies. Compliance with the Internal Revenue tax code test establishes the licensee’s status for the purpose of federal income taxes. Thus, compliance with both is generally desirable.
Why should you care about keeping your independent contractor status?
Historically, real estate agents have been independent contractors rather than employees. Therefore, if you were designated as an employee, your tax withholdings would be impacted as well as the benefits the firm would be required to offer.
The determination of whether an individual is an employee or independent contractor is important for several reasons. Federal and state income tax is generally withheld from wages paid to employees but not from compensation paid to independent contractors. The employee/independent contractor status also determines Social Security and Medicare payments, federal and state unemployment compensation, Wisconsin worker’s compensation, tax on self-employment income, and the deductibility of business expenses.
However, over the last several years, the concept of independent contractor status has been challenged aggressively nationwide. In both Massachusetts and California, real estate agents challenged their classification as independent contractors, arguing they were employees of the real estate firm.
How do you protect your independent contractor status?
As of July 1, 2016, Wis. Stat. § 452.38 provides a safe harbor for real estate independent contractors consistent with federal IRS regulations — see 26 U.S. Code § 3508 — if certain statutory tests are met
- A written agreement has been entered into that provides the licensee shall not be treated as an employee for federal and state tax purposes.
- Seventy-five percent or more of compensation paid by the firm to the licensee during a calendar year is directly related to the brokerage services performed by the licensee on behalf of the firm.
If you meet this test as a licensee, then for all intents and purposes, you are an independent contractor.
Do I have to have a written agreement to be an independent contractor?
Firms can use written independent contractor agreements (ICA), such as the WRA Real Estate Independent Contractor Agreement, to qualify associated licensees as statutory independent contractors for federal and state tax purposes as well as other state law purposes as provided in the Wis. Stat. § 452.38 safe harbor. In most cases, such an agreement should indicate that the licensee will not be treated as an employee for federal or state tax purposes, and most of the licensee’s compensation should be commissions earned for providing real estate services. If there is no written agreement between the firm and the licensee, firms must observe the more restrictive common-law test to qualify licensees as independent contractors.
A statutory safe harbor for those who wish to be deemed independent contractors is an important step. Wis. Stat. § 452.38 tries to close any gaps where a court could look at the relationship in any manner other than as an independent contractor relationship.
Do you have to be an independent contractor to be a real estate agent?
No. The law does not dictate whether a firm has employees or independent contractors. If a firm hires employees, then the firm will be required to treat the individuals as such for taxes and benefits. Agents and firms can always enter an employer-employee relationship.
Wisconsin’s law retains this option and ensures, for the most part, that the decision about which relationship to adopt should be made by the firm and agent — not by the court.
What if I don’t have an ICA with my firm?
Every firm should have ICAs with all licensees associated with the firm who are intended to be independent contractors. Each agreement should specify that the licensee will not be treated as an employee for state or federal tax purposes. In addition, most of the typical agent’s compensation and/or commissions must be directly related to the provision of real estate services and to sales or other output, including the performance of services, rather than to the number of hours worked. Fulfillment of these criteria should satisfy both the federal tax law and the Wis. Stat. § 452.38 independent contractor safe harbor.
In addition to risking your independent contractor status, failing to have a written ICA as an agent will complicate many practice matters. The relationship between a firm and an agent is governed by the ICA between the two and any company policies.
A written ICA that serves as evidence of the agreement regarding commissions if a dispute later arises is prudent practice. For example, when an agent leaves an office with pending transactions, an ICA that addresses the issue is tremendously helpful in resolving the discussion.
Does the WRA have an ICA?
Yes. The WRA created an ICA form that may be used as a template to meet the Wis. Stat. § 452.38 written agreement requirement. The WRA created an ICA form, the Real Estate Contractor Agreement, which addresses many areas of the broker/agent relationship, including compensation due while the agent is with the firm, the process and procedures for termination, and the compensation due post-termination. It is important for both the agent and firm to maintain copies of the ICA in the event a dispute arises.
Do teams need to be worried about the safe harbor?
Yes. Real estate licensees who are part of a team need to meet the safe harbor requirements of Wis. Stat. § 452.38 if they want to maintain independent contractor status. Wisconsin law does not treat licensees who are part of a team any differently.
Can a firm or team leader require mandatory meeting attendance under the safe harbor?
No. Wis. Stat. § 452.38 identifies that a firm’s supervision requirements under Wis. Stat. § 452.132 are permitted under the safe harbor. Anything outside of the supervision requirements that could be perceived as controlling by the firm or a team leader could place the safe harbor at risk. Speak to private legal counsel if you have questions about the requirements or behaviors not clearly covered under the safe harbor of Wis. Stat. § 452.38.
What are the statutory supervision requirements of Wis. Stat. § 452.132?
The firm must ensure the agents associated with the firm are:
- Supervised as to their brokerage services.
- Provided reasonable access to a supervising broker for consultation as to practice issues.
- Provided with a written statement of procedures under which they are to operate with respect to handling transactional paperwork and records; this is often accomplished by way of an office policy manual.
- Notified where a copy of the administrative code of the rules promulgated by the REEB as to conduct, ethical practice and licensee responsibilities can be found; this is often also included by reference in the office policy manual.
- Confirm the agent holds a valid license before an agent becomes associated with a firm and at the beginning of each biennium.
A firm that is a licensed business entity must delegate a supervising broker. For a nonlicensed business entity firm, if a delegation is not made, then supervision defaults to the firm, which basically means it falls to the licensed broker of the firm. The delegation to supervise may be assigned to more than one broker. Delegation must be: in writing, signed by or on behalf of the delegating firm, identify the duty delegated, and signed by the broker to whom the delegation is made.
The supervising broker must review agency agreements, offers, leases and records relating to the transaction used by the licensee and submitted to the firm, including trust account records. The statutory standard of review by the supervising broker involves:
- Confirmation that written disclosure to the customer or client was given.
- Confirmation that any applicable form approved by the board has been used
- Forms have been completed by filling in the blanks in a manner consistent with the structure of the form
- Communicate to the licensee any error in how the forms were completed that was:
- Apparent on the face of the document.
- Known to the supervising broker reviewing the document.
What does Wis. Stat. § 452.38 say about independent contractors?
View the full text of Wis. Stat. § 452.38 online at docs.legis.wisconsin.gov/statutes/statutes/452/40/1/b.