Independent Contractor Agreements Defined
An independent contractor agreement is a written contract that establishes the terms under which an agent will engage the services of an independent contractor. An independent contractor is defined as someone who provides services according to their own schedule without someone controlling what will be done and how it will be done. It is essential that any person providing services as an independent contractor has an independent contractor agreement in place to protect themselves and the company with which they will be associated. It goes without saying that in the real estate industry most agents work as independent contractors who openly recognize the risks of this designation. It is important , therefore, that you have an independent contractor agreement in place to ensure that your legal rights will not be affected and to protect you in this regard.
Real Estate Independent Contractor Agreements: Key Components
The terms of the real estate independent contractor agreement between the broker and the salesperson should be clearly defined and enforceable. As with any contract, under Pennsylvania law an enforceable contract must have valid consideration, mutual assent, and create a legal relationship between the parties. All parties should have a complete understanding of each other’s roles and responsibilities. A clear and concise independent contractor agreement will also limit exposure to liability if a dispute were to arise between either party. The agreement should cover topics such as:
Commission Structure
The most important component of the agreement is the commission structure and how commissions are to be paid to the independent contractor salespersons. A written policy should be provided setting forth the company’s commission structure. There is no required percentage or fraction that can or must be paid. The nature of the salespersons work or the transactions with which they are involved can be the basis for compensation. However, the compensation system should not include a guaranteed minimum salary or regular draw.
Termination
All independent contractor agreements should clearly set forth the procedure necessary for termination of the agreement. Procedures, time periods and notice requirements should be clearly spelled out. It should also be established as to whether there will be any residual commissions owed the independent contractor for sales completed following termination of the independent contractor agreement. In addition, the terms regarding any outstanding advances or shared expenses should be clearly defined.
Expenses
With an independent contract salesperson, the salesperson is responsible for all necessary business expenses. Expenses can include things such as the location expenses, transportation, telephone charges, office supplies, and everything else necessary for the flow of business. If, however, the broker provides them, they may also be deductible on the independent contract salespersons taxes. Where the broker assumes employees expenses, the IRS may consider those expenses part of the employees income. The terms under which these expenses are paid must be specifically detailed in the independent contractor agreement.
Legal Considerations: Compliance and Implications
When it comes to employment and workplace laws, the type of work arrangement a real estate professional has with his or her firm can make a significant difference. Failing to enter into an appropriate agreement with independent contractors can trigger unintended labor law consequences, such as classification liabilities, workplace safety concerns (like OSHA and Workers’ Compensation) and benefit eligibility issues (like ERISA). Real estate firms face both wage and hour related risks and workers’ compensation risks when hiring independent contractor salespeople, because these individuals perform work for the company. Workers’ compensation laws require an employer to provide workers’ compensation insurance for its employees, but the insurance requirements often do not cover independent contractors. Failure to have appropriate workers’ compensation insurance can have devastating implications for a real estate firm.
Advantages of Being an Independent Contractor
The independent contractor status for most real estate agents is a mutually beneficial one. Most agents will agree that they appreciate the flexibility and autonomy that accompanies independent contractor status. A salesperson has several other benefits as well:
Flexibility: The ability for an agent to set his or her own hours and to be able to work around their personal schedule is an obvious benefit. A sales associate that turns into a pumpkin at 8:00 p.m., for example, does not have to worry about rushing through a showing after it gets dark. He or she can easily schedule it during daylight hours. In addition, an agent can more easily take time off for family activities or personal appointments, provided that he or she can get a fellow agent to cover .
Tax Benefits: Being an independent contractor permits a real estate agent to take business deductions that they could not take as an employee. While an agent cannot take a deduction for transportation from home to the office, he or she can take a deduction for travel between appointments. Agents can also take deductions for meals and entertainment, along with office related expenses.
Autonomy: Sales associates can choose which broker to affiliate with, can work as much or as little as they want, and generally have greater control over their work lives. Moreover, agents can use their free time to interview other brokers should their present relationship deteriorate, and can set up their own exit strategy easily.
Common Mistakes and How to Prevent Them
One of the most common mistakes seen in our practice relate to agreements that are intended to qualify the relationship between a salesperson and a broker as one of independent contractor status but fail to do so. This can occur in a number of ways, including:
Failure to use explicit language qualifying the relationship.
Vague descriptions of work to be performed.
Lack of any specificity regarding compensation.
Failure to address how out of pocket expenses will be handled.
In our experience, the specific inclusion of clearly stated terms and conditions helps avoid potential problems that could arise in the event your relationship is scrutinized.
Crafting Your Agreement
As was highlighted above, via the NLRB’s decision in Heller, the undertones of a strong independent contractor agreement start with showing consistent intent that the relationship is independent and not dependent on the company. Although the ability to have a "full time" independent contractor relationship has gone away, the overall policy of the NLRB has always been to allow independent contractor agreements when they are set up correctly. The end goal is for the terms of an agreement to be independently enforced by state and federal courts. To that end, there are several things that can be done to draft a strong independent contractor agreement.
The first step is an analysis of how your firm is organized. Each firm’s structure may vary, so there is no "one size fits all" agreement. For example, the terms of an independent contractor agreement for a small boutique brokerage with only a few agents is going to vary significantly from that of a large national brokerage with thousands of agents. For a smaller boutique firm, the terms may include clauses that are more stringent due to concerns about agents taking clients away from the company and/or competing with the firm after their employment is terminated. Conversely, for a larger firm, since their base of business is much larger, its possible and permissible for them to allow agents some more flexibility with their own book of clients and to have fewer restrictions in the agreement itself .
While the starting point for most of these agreements is the basic form that is typically used (and which was referenced above), the key is to customize the form so that it is tailored to your firm’s needs. There are many things that can be closely drafted to fit your firm, including the following:
To be effective, your agreement must use the proper "magic words" as set forth above. Further, the agreement must also use the correct style. For example, the samples provided are considered long form agreements. These are fairly typical in the industry, as real estate firms need to ensure that the terms of their agreement are stern enough to be enforced by a state court, and as a result, the language is longer and stricter than those that simply give high level terms for the relationship.
As discussed above, drafting an independent contractor agreement is not an easy task, nor is it something that can be done off the cuff. The best option is to speak with an attorney about your specific company needs and how those can be incorporated into the terms of the independent contractor agreement that you need. In the end, the relationship will be a better one and it will survive the test of time (and enforcement via state court).