Reviewed May 2016
Under common law, a real estate salesperson is generally categorized as an employee. Therefore, under common law, the brokerage firm would be responsible for withholding state and federal income taxes and would be required to participate in state unemployment and workers’ compensation programs. However, if the brokerage firm and the real estate salesperson comply with certain requirements, primarily a written independent contractor agreement, the real estate salesperson will be treated as an independent contractor and the brokerage firm will not be responsible for withholding taxes and will not be required to participate in unemployment and workers’ compensation programs.
Inasmuch as a real estate salesperson is generally categorized under common law as an employee, the brokerage firm is generally liable for the business activities of the real estate salesperson. In addition, the Commissioner’s Rules require the brokerage firm to supervise all real estate salespeople and to be liable for the business activities of real estate salespeople.
Finally, if the real estate salesperson executes an independent contractor agreement with the brokerage firm and otherwise complies with the requirements for exemption from withholding taxes and unemployment and workers’ compensation programs, the amount of control exercised by the brokerage firm over the real estate salesperson is unimportant. In other words, the benefits of the exemptions are available even if the brokerage firm requires attendance at sales meetings, certain designated hours of floor time, and attendance at educational classes.
Qualified real estate salespeople are “statutory non-employees” for tax purposes
For federal tax purposes, the Internal Revenue Code provides a statutory classification for qualified real estate salespeople that allows their treatment as self-employed “statutory non-employees” for federal income and employment tax purposes. If the salesperson is a “statutory non-employee” the broker is not required to withhold federal taxes. To qualify for this “statutory non-employee” status, the real estate salesperson must:
- Be licensed as a real estate agent;
- Receive substantially all compensation based on sales or other output, rather than the number of hours worked; and
- Have a written contract with the brokerage firm that provides that the salesperson will not be treated as an employee for federal tax purposes. I.R.C. § 3508.
As a result of the “statutory non-employee” status provided under federal tax law, real estate brokers are, in effect, exempt from Arizona withholding tax requirements as well. The Arizona tax law provides that employers must withhold an amount from compensation paid to employees based on a percentage of the federal tax withheld under the federal tax code. A.R.S. § 43-401(A). Inasmuch as the federal tax code does not require withholding of income taxes for qualified real estate agents, the Arizona withholding statute does not require withholding.
Qualified real estate salespeople are exempt from Workers’ Compensation and Employment Security Acts
The Workers’ Compensation Act exempts real estate salespeople from its provisions when, like the federal tax exemption: (1) substantially all income received for services is directly related to sales rather than the number of hours worked, (2) the services performed by the salesperson are performed pursuant to a written contract between the salesperson and broker and, (3) the contract specifically provides that the salesperson is not treated as an employee for federal tax purposes or for the purposes of the Workers’ Compensation chapter. A.R.S. § 23-910. The Employment Security Act exempts from its provisions licensed real estate and cemetery brokers and salespeople if all income is received solely by way of commission. A.R.S. § 23-617(14).
Brokers are not exempt from civil liability for acts of salesperson “employees”
The exemptions of real estate salespeople and brokers from withholding tax, Workers’ Compensation and Employment Security Act requirements do not create a general independent contractor status for the real estate salesperson/broker relationship. In determining whether a work relationship is employer/employee or that of independent contractor for other purposes, Arizona courts consider various factors that indicate the control that the employer exerts over the employee’s method of work. In a 1990 case, the Arizona Supreme Court held that the contract language between two people does not determine the relationship of the parties, rather the “objective nature of the relationship, [is] determined upon analysis of the totality of the facts and circumstances of each case.” Santiago v. Phoenix Newspapers, Inc., 164 Ariz. 505, 794 P.2d 138 (1990). Therefore, an agreement stating that the salesperson is an independent contractor does not determine the relationship.
In determining whether an employer/employee or independent contractor relationship exists, a court will evaluate a number of criteria. For example:
- The extent of control exercised by the master (the broker) over the details of the work and the degree of supervision. A worker who must comply with another’s instructions about when, where, and how to work is an employee.
- Where a worker’s tasks are efforts to promote his own independent enterprise, an employer/employee relationship is less likely than when the efforts further the master’s (the broker’s) business.
- A court is more likely to find an employer/employee relationship where the work does not require the services of one highly educated or skilled person.
- If the master (the broker) supplies the necessary equipment and the employment is in a specific area or over a fixed route, an employer/employee relationship is indicated.
- A continuous working relationship indicates an employer/employee relationship. An employer’s right to terminate indicates control in an employer/employee relationship.
- Employees are generally paid by time expended, not by the job.
- A court is more likely to find that a worker is an employee if the work is part of the employer’s regular business.
An independent contractor, on the other hand, is a person who contracts with another to do something, but who is not controlled by the other nor subject to the other’s right to control with respect to the performance of the undertaking. An independent contractor is not subject to the direction and control of another, but is responsible only for the goal to be achieved, not the means by which the goal is accomplished. Barker v. General Petroleum Corp.,72 Ariz. 187, 192-193, 232 P.2d 390 (1951), modified on other grounds, 72 Ariz. 238, 233 P.2d 449. Thus, in determining whether a person is an independent contractor, the courts look for a variety of signposts or indicia of the “right to control,” none of which are conclusive, but when applied to the facts, aid the court in determining whether a person is acting as an independent contractor. Smith v. Goodman, 6 Ariz. App. 168, 430 P.2d 922 (1967) (citing Restatement (Second) §§ 2, 220).
The laws and Commissioner’s Rules governing the real estate profession require the broker to maintain close supervision and control over salespeople. Commissioner’s Rule R4-28-1103(D) provides that designated brokers and employing brokers shall be responsible for the acts of associate brokers, salespeople and other employees acting within the course of their employment. Therefore, the broker’s control over salespeople generally prevents the relationship from being that of independent contractors for purposes of civil liability.
The primary significance of employer/employee status is that the broker is held liable for the acts of salespeople in the course of employment under the doctrine of “respondeat superior,” which provides that an employer can be held liable for damages caused by the employee acting within the scope of employment. The test of liability of an employer for the acts of an employee is whether there was authority, express or implied, for the employee to do the act upon which the liability is based. Therefore, the broker is generally held liable for damages resulting from the negligent or fraudulent conduct of the broker’s salespeople.
Because of statutory exemptions, if there is a properly drafted independent contractor agreement, the broker/salesperson relationship is not treated an an employment relationship for the purposes of federal and state tax withholding, unemployment compensation contributions and workers’ compensation insurance. However, Arizona courts generally hold that the real estate broker/salesperson relationship is one of employer/employee for purposes of civil liability because of control factors both inherent in the relationship and required by law.
Note: This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.