Real estate salespersons operating as independent contractors have been a settled area of law for years. However, in three lawsuits filed last year, two in California and one in Massachusetts, salespersons alleged that they were employees of their brokers, not independent contractors. In Massachusetts, the Superior Court ruled that the brokers properly classified the salespersons as independent contractors, but the case is now on appeal, and the California lawsuits are still pending. For more information on these cases, go to: http://speakingofrealestate.blogs.realtor.org/2014/03/27/lawsuits-challenge-independent-contractor-status/
So what is the law in Arizona?
Salespersons are “Statutory Non-Employees” for Tax Purposes
The Internal Revenue Code provides a statutory classification for real estate salespersons as “statutory non-employees” for federal income and employment tax purposes. If the employing broker satisfies all the statutory requirements, he or she is not required to withhold federal taxes for the salesperson’s compensation. To qualify for “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 http://www.law.cornell.edu/uscode/text/26/3508
Real estate brokers are, in effect, exempt from Arizona withholding tax requirements as well. State 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). Since the federal tax code does not require withholding of income taxes, the Arizona withholding statute does not require withholding either.
Real estate salespersons are also exempt from Worker’s Compensation and Employment tax. The Workers’ Compensation Act exempts real estate salespersons from its provisions when: (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). http://www.azleg.gov/ArizonaRevisedStatutes.asp?Title=23
Salespersons are “Employees” for Regulatory and Civil Liability Purposes
Salespersons are considered employees for other purposes. The Commissioner’s Rules require the broker to maintain close supervision and control over salespeople. R4?28?1103(A) provides: “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. Reasonable supervision and control include the establishment and enforcement of written policies, procedures, and systems . . .” Further R4?28?1103 (D) provides: “An employing broker is responsible for the acts of all associate brokers, salespersons, and other employees acting within the scope of their employment.” http://www.azsos.gov/public_services/Title_04/4-28.htm
With regard to civil liability, 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). http://www.leagle.com/decision/1990669164Ariz505_1565.xml/SANTIAGO%20v.%20PHOENIX%20NEWSPAPERS,%20INC. Therefore, an agreement stating that the salesperson is an independent contractor does not determine the relationship. The court uses a variety of factors to determine whether an employer/employee or independent contractor relationship exists. The courts look for indicia of the “right to control” in determining whether a person is acting as an independent contractor or employee. Smith v. Goodman, 6 Ariz. App. 168, 430 P.2d 922 (1967) (citing Restatement (Second) §2, 220). As a result of the right to control factor, the employing broker is generally held liable for the acts of salespersons 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.
Because of statutory exemptions, if there is a properly drafted independent contractor agreement, the broker/salesperson relationship is not treated as an employment relationship for the purposes of federal and state tax withholding, unemployment compensation contributions or workers’ compensation insurance. However, for regulatory and civil liability purposes the real estate broker/salesperson relationship is generally one of employer/employee.
About the author:
AAR Chief Executive Officer Michelle Lind is a State Bar of Arizona board certified real estate specialist and the author of Arizona Real Estate: A Professional’s Guide to Law and Practice; (excerpts, Kindle Locations 1560-1631). Hillcrest Media Group). https://www.aaronline.com/azre-book/
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.