Why are real estate agents independent contractors versus employees?
We’ll demystify this topic in the following video.
My name is Chris at Hauseit.
Hauseit is the largest assisted For Sale By Owner and Buyer Agent Commission Rebate company
in New York City, established 2014.
For starters real estate agents make money based off of commission on deals closed and
that is traditionally the way the industry has operated and is structured.
However, you might ask how can real estate agents be independent contractors if there
are state statutes that specify that a broker must supervise the licensees under his or
her brokerage.
Well, both federal and state legislatures have recognized the unique nature of the real
estate industry and the conflicts posed between specific state real estate statutes and federal
labor laws.
As a result, specific statutory carve outs have been enacted by both federal and state
legislatures that enable real estate brokerages to classify real estate agents as independent
contractors even though they must exercise supervision over the agents due to specific
state statutes.
So let's move on to another question: real estate brokers can certainly classify their
agents as employees if they wish, so why don't they? Well if you really get down to it one
of the main reasons is the onerous process and additional costs associated with setting
up a W-2 or salaried employee versus an independent contractor.
To set up a W-2 employee you need to take into account a variety of different factors
that you wouldn't with an independent contractor.
For example, you need to do research and hire a payroll processor.
Hopefully a payroll provider who is "full service" who will file and pay your taxes
and your withholding on time and on your behalf, who will help you file the necessary
onboarding forms for your specific state as well as I-9 and W-4 forms.
Keep in mind that rules, regulations and fees will vary depending on the state you're in.
States will vary depending on for example the pay periods.
For example, many states might require a minimum of biweekly pay so for example you can pay
someone quarterly.
Most states will also require workers compensation.
In some states the regulations for workers' compensation are so strict that no one is
exempt including sole proprietorships with businesses that have unpaid family volunteers
per New York state laws.
You'll also have additional taxes involved such as state unemployment tax or state unemployment
insurance or state payroll tax.
These are all different names for the same thing.
Essentially, it is a state level payroll tax and besides all of these requirements of course
there are other optional items that you have to think about if you have an employee such
as retirement benefits, health, dental, vision, insurance benefits and so on.
It is quite a lot to take in as a new employer which is why most real estate brokers give
a sigh of relief when they realize that agents are traditionally independent contractors
instead.
In contrast hiring an independent contractor cannot be easier.
All you need to do as a real estate broker is to associate the licensee and e-access
New York that is the online portal by the Department of State in New York for licensing
services.
You can go online and instantly associate an agent under your brokerage then they are
officially licensed and then all you need to do is to e-sign an independent contractor
agreement which will outlay the terms of your relationship with the agent such as commission
splits, desk fees if there are and so on and that's it.
Lastly, we must delve into the reason why agents want Commission in the first place.
Keep in mind that real estate agents join the industry because they see TV shows where
agents are earnings up to 6% and commission on multi-million-dollar listings.
They join for that not to earn a boring salary working as a real estate agent.
As a result, the best talent and the best salespeople as in any industry or naturally
migrate to positions where they can have the highest amount of upside and that with commission.
So as you can imagine a company that tries to offer salaried agents perhaps as some sort
of a gimmick will suffer poor results over the long run because of a poor batch of agents
servicing customers which leads to poor customer service and less productive results.
So, there you have it, these are all the reasons why real estate agents are traditionally and
generally are independent contractors versus employees at real estate brokerages.
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