Broker-Salesperson Commission Disputes
Posted on March 19, 2012 by Michelle Lind, Esq.
On occasion, a broker and salesperson will get into a dispute over the payment of commissions. These disputes often occur when the salesperson leaves the brokerage firm or when the brokerage firm ceases doing business.
Only the Broker May Be Paid a Commission from a Client
Under Arizona law, only a real estate broker, not a salesperson, may directly earn a commission from a real estate transaction. See, Sherman v. First Am. Title Ins. Co., 201 Ariz. 564, 38 P.3d 1229 (2002). Further, pursuant to A.R.S. § 32-2155(A), a real estate salesperson may accept compensation “only from the legally licensed broker to whom the licensee is licensed.” See also A.R.S. § 32-2153(A) (7) (allowing suspension or revocation of salesperson’s license for accepting compensation “from any person other than the licensed broker to whom the licensee is licensed.”) Additionally, the broker is generally liable for the business activities of the salesperson and the broker is required to supervise all salespeople and is liable for their business activities. A.A.C. R4-28-1103(A) states in part: “An employing broker and a designated broker shall exercise reasonable supervision and control over the activities of brokers, salespersons, and others in the employ of the broker.”
These laws reflect that there is a “hybrid” relationship between a broker and salesperson. The relationship is an independent contractor for some purposes, an employer-employee relationship for others and “statutory non employees” for tax and worker’s compensation purposes. See, www.aaronline.com/documents/ind_contr.aspx for more information on this issue.
One of the requirements for the tax and workers compensation and “statutory non employee” exemption is a written contract with the employing broker that provides that the salesperson will not be treated as an employee for these purposes. Thus, most real estate salespeople enter into an independent contractor agreement with their employing broker.
The Independent Contractor Agreement Generally Governs the Payment of Commissions from the Broker to the Salesperson
Independent contractor agreements (ICAs) vary widely from broker to broker. ICAs generally address the obligations of the salesperson to the broker and the broker to the salesperson. These provisions generally include the obligation of the employing broker to compensate the salesperson. The ICA may also address the payment of commissions on pending transactions upon departure of the salesperson. If the ICA addresses these issues, the ICA will govern if there is a commission dispute. If the ICA does not address these issues, the payment of commissions may have to be determined by the employing broker’s policy manual, the course of dealings in the past, and verbal agreements. Obviously, to avoid ambiguity and disputes, an ICA should be specific in regards to commission payment issues.
Resolving a Broker-Salesperson Commission Dispute
In the event of a commission dispute between the employing broker and salesperson, the parties must read the ICA and understand their rights and obligations before taking any action. The parties should also consider consulting legal counsel. Attorneys may be located through the State Bar at www.azbar.org/LegalResources/findlawyer.cfm (search “labor & employment” or “real estate/property”).
Some ICAs contain an alternative dispute resolution (ADR) provision requiring the parties to mediate or arbitrate any dispute. The ADR provision may require mediation or arbitration within the brokerage firm, through the Arizona Association of REALTORS® (AAR) or other third party ADR provider. These ADR provisions are generally binding and enforceable, but if in doubt, consult legal counsel. If the ICA does not contain an ADR provision, and both parties agree, AAR or another third party can still facilitate a voluntary mediation or voluntary arbitration. For more information on AAR mediation and arbitration, go to www.aaronline.com/Disputes.
If mediation or arbitration is not an option, litigation may be the only alternative. If an employing broker fails to pay wages due, the salesperson may be entitled to file a wage claim and potentially recover treble the amount of unpaid wages in a civil action. See, A.R.S. § 23-350 et seq. Commissions are wages for purposes of the wage statutes. A.R.S. §23-350(5) states: “'[w]ages’ means nondiscretionary compensation . . . for labor or services rendered . . . whether determined by a time, task, piece, commission or other method of calculation. Wages include . . . commissions . . . .” See, Sanborn v. Brooker & Wake Property Management, 178 Ariz. 425; 874 P.2d 982 (App. 1994).
In the unfortunate event that the employing broker files for bankruptcy, the salesperson will be required to file a claim in bankruptcy court. For information on bankruptcy claims, go towww.azb.uscourts.gov/default.aspx?PID=14.