A.R.S. §32-2155 provides that only “a broker shall employ and pay active licensees, and a licensee shall accept employment and compensation as a licensee only from the legally licensed broker to whom the licensee is licensed.”  Effective on September 24, 2022, HB 2172 allows a real estate licensee to hire another licensee as a W-2 employee, pending their broker approval, and other conditions.  The new law reads as follows:

               A. A broker shall employ and pay only active licensees, and a licensee shall accept employment and compensation as a licensee only from EITHER OR BOTH OF THE FOLLOWING:

1. The legally licensed broker to whom the licensee is licensed.

2. AN EMPLOYER OTHER THAN THE LEGALLY LICENSED BROKER AS DESCRIBED IN PARAGRAPH 1 OF THIS SUBSECTION IF ALL OF THE FOLLOWING APPLY:

(a) THE EMPLOYER HOLDS A LICENSE.

(b) THE LICENSEE IS THE EMPLOYER’S EMPLOYEE AND RECEIVES A FEDERAL FORM W-2 WAGE AND TAX STATEMENT.

(c) THE EMPLOYER HAS THE SAME EMPLOYING BROKER AS THE LICENSEE.

(d) THE EMPLOYER OBTAINS WRITTEN PERMISSION FROM THE EMPLOYING BROKER TO PAY THE LICENSEE.

So, what does this mean for brokers and real estate licensees?

Q1. Does the employing broker have to allow the licensee to pay another licensee?

A1. No.  The employing broker does not have to allow a licensee to pay another licensee.  However, if the broker does allow a licensee to pay another licensee, the licensee must obtain written permission from the employing broker to pay another licensee.

Q2. What if licensee A employs licensee B but licensee B works for a different broker than licensee A?

A2. Per A.R.S. §32-2153, a licensee cannot represent a broker other than the broker to whom the licensee is licensed.  In addition, under A.A.C. R4-25-306(A)(2), an agent can only perform real estate services on behalf of the agent’s employing broker.  Therefore, licensee A may not hire licensee B while licensee B works for a different broker.

Q3. What is an employee?

A3. The Internal Revenue Service (IRS) has very specific guidelines for classifying workers into employees or contractors.  In general, the amount of control (behavioral and financial) and the relationship of the parties determines if that person is an employee.

Q4. What is a W-2 employee?

A4. A W-2 employee is a worker who receives a W-2 tax form from their employer.  Per the IRS, “[e]very employer engaged in a trade or business who pays remuneration, including noncash payments of $600 or more for the year (all amounts if any income, social security, or Medicare tax was withheld) for services performed by an employee must file a Form W-2 for each employee.”

Q5. Is payment of compensation limited to employees that are paid an hourly rate or can a licensee pay another licensee their commission?

A5.  As long as licensee A has the employing broker’s written permission and licensee B is a W-2 employee of licensee A, licensee A may pay licensee B pursuant to the parties agreed upon employment arrangement.  Note: For information on proper classification of employees as 1099 independent contractors or W-2 employees, visit the IRS website.  Additionally, visit the Department of Labor’s website for information on proper wages and compensation for employees and other labor-related requirements.

Q6. Is the employing broker still required to supervise the real estate licensee that is employed by another licensee?

A6. Yes.  Even though the real estate licensee employs and compensates another licensee, it does not relieve the broker’s duty to supervise both licensees.

Q7. How should the employing broker address the obligations of its licensee who is paying another licensee?

A7. The employing broker should first update their policies and procedures to address whether the employing broker allows for a licensee to pay another licensee.  The Arizona REALTORS® plans to update the Team Toolkit to assist brokers and agents with matters to consider should the employing broker allow a licensee to pay another licensee.

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