Some members of Congress and the Obama administration are taking a hard look at abuse of the independent contractor employment classification.
And while an executive for the National Association of Realtors has said that the real estate industry’s use of the classification for sales associates appears to be safe (see "Crackdown on independent contractors") from scrutiny, it is important to highlight how vital independent contractor status has been for brokerages across the country.
The first column in this series examined some of the macro-level changes that could result from a massive, hypothetical overhaul to independent contractor status. The list below describes eight issues that individual agents could face if this actually came to pass.
1. Reduced agent costs coupled with lower splits/salaries
Productive agents who lack broker’s licenses would most likely be forced into employee relationships. This would mean a huge shift in how an agent does business. When you become an employee, you typically become salaried. (Many commercial brokerages use this model, normally relying on a "draw against commission.")
As an employee, your broker would have to provide you with health insurance, workers’ compensation insurance, unemployment insurance, and make matching contributions to FICA (Social Security) that you currently pay in full. Failure to cover your draw and expenses normally results in termination.
2. Lack of independence
As an employee, you would be subject to your broker’s "employee guidelines" that can include attendance at all office meetings, minimum production standards, regular work hours, mandatory "up" or "floor time," plus requirements to use particular mortgage, title and other services. For agents who choose the employee model, the days when you would be able to conduct your business "your way" will soon become a distant memory.
3. The industry shatters into thousands of pieces
Agents who have a broker’s license and who do not want to become employees will be forced into setting themselves up as a new brokerage. The result would be a huge resurgence in the "mom and pop" model of real estate.
4. Challenges in setting up new brokerages
There are numerous challenges that this next wave of new brokers will face. Most will be very proficient at selling property, but will they be able to cope with the brokerage side of the business in addition to their sales responsibilities?
To begin with, the broker will have to go through his or her state’s approval process to set up as a separate entity. This involves getting a federal taxpayer ID, setting up to do state and federal withholding of taxes (if required), plus setting up the necessary accounting systems to do the required tracking. The newly minted brokers would also have to establish a trust fund account and join the local Realtor association and MLS as a broker member.
5. A mountain of startup costs
New brokers would have a wide variety of additional startup costs. First, they would need to either set up an entirely new website or alter the one they’re currently using to reflect their new brand. They would also have to change their yard signs, open house signs and name riders to reflect their company’s new brand. Additional costs could also include a new business phone number, customized transaction forms, stationery, copy and fax machine, etc. …CONTINUED
6. Will your clients follow you?
Virtually all agents who change brokerage firms report that their production drops for about six months after the change. A primary challenge is that most agents are not that good at keeping up with their past clients. Many lack an organized database that would allow them to notify past clients of the change. The result is that many hard years of building a strong, sustainable business could be decimated by a forced move to another firm.
7. Kinko’s as your assistant?
Many top producers rely on an assistant to handle various parts of their business. The challenge an individual agent who strikes out on his or her own will face will be the same issues that the brokerages face in terms of having employees. Will the agent decide to hire an employee or will he or she scale back their production to handle the administrative tasks that their assistant used to handle?
A different choice is to outsource the work to a virtual assistant who is a separate business entity. In terms of having a buyer’s agent, even if the buyer’s agent is set up as a separate business entity, it could still be deemed as an employee relationship.
8. Are you compliant?
Most agents have no idea how much time and energy is required for businesses to stay compliant with various state and local laws. This can include trust fund audits, payment of monthly business taxes, as well as keeping up with various federal, state and local real estate laws. As long as the agents worked for a brokerage, they didn’t have to contend with these issues. Staying up to speed will require additional time away from production.
Would a change to the employee model be good for the business? It certainly would wreak havoc in a tremendous number of areas. On the other hand, brokerages would be more selective in terms of the agents they hire. If agents were not profitable, they would soon find themselves out of the business.
This could bode well for improving the professionalism and the quality of the business. Given the severity of the potential impact, however, let’s hope that this is one change that never makes it to the president’s desk.
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, trainer and author of "Real Estate Dough: Your Recipe for Real Estate Success" and other books. You can reach her at Bernice@RealEstateCoach.com and find her on Twitter: @bross.
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