This is the final portion of the article series that began in February informing you of all the changes made to Wisconsin Statute Chapter 452. And this finale, like Fourth of July fireworks, is a biggie. This article discusses how the statutory changes better protect your independent contractor status as a Wisconsin real estate licensee. As a reminder, all of the following changes are effective July 1, 2016.
Background
Recently, the concept of independent contractor status has been challenged more aggressively nationwide than in years past. In both Massachusetts and California, real estate agents challenged their classification as independent contractors, arguing they were employees of the real estate firm. Based on the heightened scrutiny of this issue, the National Association of REALTORS® encouraged states to evaluate their laws relating to the independent contractor status of real estate agents.
Historically, real estate agents have been independent contractors rather than employees. Most individuals become real estate agents because they want to have freedom in their work and basically be their own small business owner. If they are designated as employees, this impacts tax withholdings as well as the benefits required to be offered by the firm. There are also many tax benefits to the independent contractor status for the real estate agent, such as finding legal tax loopholes.
Terminology changes
In our quest to protect the Wisconsin real estate licensee’s independent contractor status, we first looked to Wisconsin Statute Chapter 452. And right away we noticed one major item: the statute used terms like “broker-employer” and “employee” when referring to the real estate company and its agents. By using these terms, it was clear the statute needed to be updated; referring to the company and its agents as broker-employer and employees was antiquated. The use of broker-employer and employee were a term of art rather than an attempt to capture the true relationship between the agent and the company, so we changed the terminology.
Now the statute uses “firm” to describe the company, and agents are referred to as “associated with a firm.” Changing the statutory labels by removing the reference to employee and employer and instead referring to firms and agents helps eliminate confusion as to the relationship between the firm and agent.
Wis. Stat. § 452.01(1o)
"Associated with a firm" means to have been engaged by a firm to provide brokerage services to the firm's clients and customers on behalf of the firm and under the firm's supervision, including as an employee of the firm or as an independent contractor, or both.
Wis. Stat. § 452.01(4w) "Firm" means a licensed individual broker acting as a sole proprietorship or a licensed broker business entity.
Independent contractor safe harbor
The next thing we did was incorporate an independent contractor status protection into Wisconsin Statute Chapter 452, also known as an independent contractor safe harbor.
This safe harbor for real estate independent contractors is substantially consistent with federal IRS regulations (see 26 U.S. Code § 3508). Basically, if a Wisconsin real estate licensee meets the following statutory tests, then for all intents and purposes, they are an independent contractor.
- 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.
Workers' compensation
The last part of the analysis came down to what else a court could look at in determining whether the relationship were that of an independent contractor or an employer and employee. While attempting to close any gaps where a court could look at the relationship in any manner other than as an independent contractor, we found ourselves in a discussion about workers’ compensation.
The Department of Workforce Development (DWD) interpreted the relationship between a firm and the agent to be an employer/employee relationship because of the supervisory responsibilities of the firm. Due to this DWD interpretation, the firm was required to carry workers’ compensation insurance for its agents.
The crux of DWD’s interpretation relied on the supervision of the real estate firms. However, real estate firms are legally required to supervise their agents. Because a good number of courts look to the supervision requirements when analyzing the relationship of an agent and firm, we decided to move the supervision requirements from Wis. Admin. Code REEB 17 to Wisconsin Statute Chapter 452 and clarified what those supervision requirements included. See the article, “Supervise This,” in the May issue of Wisconsin Real Estate Magazine at www.wra.org/WREM/May16/Chapter452.
Moving and modifying the supervision discussion, however, did not resolve potential issues with DWD’s interpretation. We became concerned that DWD’s interpretation could be looked at by a court as an illustration that the relationship between the agent and the firm was an employee/employer relationship even if the agent met the newly created independent contractor safe harbor. Moreover, DWD’s interpretation of an employee/employer relationship was unique and inconsistent with other federal and state laws, such as the federal tax code and the Affordable Care Act, which treat agents as independent contractors.
Therefore the discussion turned to whether DWD’s interpretation that required real estate firms to carry workers’ compensation should continue. This discussion was not taken lightly. The idea of pursuing legislation that would no longer allow DWD’s interpretation to be enforced was vetted through our public policy committee, board of directors and an internal member task force. This concept was something looked at from both the agent’s and firm’s perspective.
At the end of the day, we determined the enormity of losing the independent contractor status was too much to risk, and the independent contractor status needed to be protected. It was further determined the requirement to carry workers’ compensation insurance for agents was counterintuitive to the entire concept of an independent contractor. On July 1, 2016, Wisconsin will join 29 other states in exempting real estate agents from workers’ compensation coverage. Workers’ compensation frequently asked questions
Can firms still offer to carry workers’ compensation for their agents?
Yes. The law allows a firm to voluntarily offer workers’ compensation coverage to the agents associated with the firm.
May firms still have employees?
Absolutely. The law in no way changes or dictates whether a firm has employees or independent contractors. If the firm hires employees, then the firm will be required to treat the individuals as such for taxes and benefits.
Can those employees be real estate agents?
Of course. Agents and firms always have the opportunity to enter into an employer/employee relationship. This law retains this option and ensures, for the most part, that the decision about which employment relationship to adopt should be made by the firm and agent, not by the court.
What is the effective date of this change?
July 1, 2016.
452.38 Independent contractor relationship.
(1) Except as otherwise provided in s. 102.078, a licensee shall not, under ch. 102, 103, 104, or 109, under subch. X of ch. 71 or subch. II of ch. 111, under any other law or rule other than those specified under sub. (1m), or in any action or proceeding under the common law, be considered an employee of a firm if all of the following are satisfied: (a) A written agreement has been entered into with the firm that provides that the licensee shall not be treated as an employee for federal and state tax purposes. (b) Seventy−five percent or more of the compensation related to sales or other output, as measured on a calendar year basis, paid to the licensee pursuant to the written agreement referenced under par. (a) is directly related to the brokerage services performed by the licensee on behalf of the firm. (1m) This section does not apply with respect to ch. 108 or any rules promulgated thereunder.
Resources
See the other articles it this article series about the Wisconsin Statute Chapter 452 changes.
Cori Lamont is Director of Corporate and Regulatory Affairs for the WRA.