Overview of Real Estate Contractor Agreements
A real estate independent contractor agreement is a key contract that brokers enter in to with their agents, especially in instances where the broker enters an independent contractor agreement with all or most of its agents. As the title suggests, the agreement generally establishes the relationship between the broker and the agent as independent contractors. The agreement is separate and distinct from an actual "employment" contract with the agent.
As with all agreements, understanding the meaning behind the language contained in a real estate independent contractor agreement is important so as to clearly understand the intentions of the contracting parties. A traditional employee-employer or employment contract generally contemplates that the employer has more rights and control over the employee than an independent contractor or independent contractor agreement. In an employee-employer situation , for example, an employer often directs the employee on the manner in which work must be performed. In addition, the employer has the right to terminate the employee. Often, when it comes to the payment of wages, the wages an employer pays an employee are substantially set forth through a compensation schedule established by the employer.
In an independent contractor situation, the independent contractor generally controls the manner in which work must be performed. It is the independent contractor who determines the means and methods of performing his/her work. Generally speaking, the independent contractor earns income from the sale of services or goods that he or she provides. In comparison to an employee, an independent contractor usually bears more risk of loss in the sense that the contractor is paid only if the contractor produces sufficient income from his or her work.
Core Components of a Real Estate Contractor Agreement
The foundation of real estate independent contractor agreements is an introduction that lays out the parties involved, identifies the purpose of the agreement, and specifies the effective date. From there, there are several key elements that should be included. While these provisions can be further tailored to your specific needs or situation, following is a basic outline of what to cover.
- The Parties. The agreement should clearly identify the relationship between the parties by naming the company (or broker) and the individual independent contractor by name and address. If the company has a fictitious business name registered, it should be incorporated in the agreement.
- Relationship. It is essential to clearly define the nature of the relationship between the company and the individual. This section should be clear that the contractor is an independent contractor and NOT an employee. Specifically, most independent contractor agreements contain boilerplate language such as: "Nothing in this Agreement is intended nor shall be construed to create the relationship of employer/employee between the Company and the Licensee nor shall it give rise to any rights to compensation or damages to the Licensee." These provisions are important to demonstrate the nature of the relationship between a contractor and company should issues arise over wages or employment rights.
- Duties. What is expected or required of the independent contractor? There are multiple elements to consider when defining the duties and responsibilities of an independent contractor. These include:
- Compensation. Some form of compensation is a strict requirement of a valid independent contractor agreement. Compensation can take many forms, including commission, hourly pay, or a flat fee. Calculate the amount of compensation and how it is paid to the contractor. For example, commissions are commonly paid weekly or bi-weekly, while hourly compensation may be paid hourly, weekly, bi-weekly or per project. Identify any specific bonuses or awards outside of the stated compensation, including bonus commissions for obtaining new clients or recognition awards for exemplary service. Also, specify when any expenses are reimbursable, such as for travel or clothes.
- Duration. State the duration of the agreement, including the start and end date. Breach of the agreement can be a reason for either party to terminate the contract. Some agreements also offer the option to suspend the relationship during times that the company is experiencing financial difficulties through no fault of the independent contractor.
Legal Requirements and Compliance Issues
In your real estate independent contractor agreement, you must be vigilant about state and federal employment laws. You risk liability if you misclassify workers as independent contractors or handle their accounts improperly. Qualifications for independent contractor status vary by state, so you must check the rules of your state(s) and comply. If you violate laws of your state, you could end up facing litigation (and losses!) for minimum wage, overtime, sexual harassment related claims, and illegal withholdings.
The U.S. Department of Labor has a strict test for determining whether workers are independent contractors. "Independent contractor"—not "employees"—may earn commissions based on sales and real estate brokerages may legally pay them commissions instead of salaries, but stringent test requirements apply that you must follow. If you fail to determine whether your sales agents are employees vs. independent contractors correctly, the brokers could face imposition of penalties and liability for state and federal employment taxes (including FICA, Medicare, unemployment insurance, and workers’ compensation coverage), minimum wage and overtime, nondiscrimination and labor laws, and other statutory and contractual rights associated with employees.
For example, federal law dictates that workers classified as independent contractors must be free from your control in how they work and are not subject to company policies and procedures for work behavior and performance. State laws may have additional requirements. You’ll need to consider many other factors to determine whether your sales agents are truly independent contractors or if you erroneously paid them as such: This is a general guide only. You should consult an attorney to make sure you are in full compliance with the law in your state(s) when it comes to payments to real estate agents, independent contractors, and employees.
Pros and Cons for Contractors and Brokers
For realtors, an independent contractor agreement offers several benefits. One of the most attractive is the flexibility that comes with the status. As a 1099 contractor, a realtor typically has the freedom to set their own hours and choose their business strategy. In the hierarchical structure found in a traditional employment model, the employee has little control over their daily responsibilities. An employee often completes tasks in response to directions, while an independent contractor creates solutions for the customer’s problems and decides how to accomplish goals. While this autonomy is appealing to many, it comes with a risk. A real estate agent has full control over their activities and vision but also assumes the risk associated with trying to make that vision come to fruition. The individual must stay competitive in the marketplace and be wary of the threat of other agents carving out the same clientele. Flexibility has a cost, and that includes a lack of security. Job security is not an option for the independent contractor.
Brokers benefit from the flexibility of being able to establish a recruiting schedule that works for their needs. While efforts must be made to acquire quality agents to build a strong brokerage, the broker has more control over the pace of recruiting than a manager of employees. Brokers are also free from some of the restrictions of the employee-employer law and may choose how they want to operate their brokerage. Standards for hiring agents and how the commission split is established can be configured to suit the needs of the business.
The most significant drawback for brokers is the risk of employees versus contractors. Employees can be considered "free labor" and won’t walk away without notice, which means the broker has time to replace employees who leave the company. Independent contractors operate on a project basis and may jump from brokerage to brokerage when their needs are not met. Brokers can also run into problems if the IRS or state officials challenge the classification of agents as contractors rather than employees. Assuming that the IRS wins the challenge, the broker would face back taxes owed, as well as interest on the overdue amounts and penalties going back several years.
Tools for Creating a Successful Agreement
As is the case with nearly any legal document, the drafting of an independent real estate contractor agreement usually will involve several steps. While each document will be unique and will vary based on the parties involved, some basic principles can help in drafting an effective one.
Consult with an Attorney
For most people who are not skilled drafters of legal documents, it may be advisable to consult an attorney. It may not be necessary for you to have an attorney draft your agreement for you, but depending on the complexity of the relationship, an attorney can advise you as to specific languages that will be necessary while also ensuring that the agreement is legal in your state.
If you decide to work with an attorney, you should gather information before your meeting. Review what others have done and if possible determine what the other party might want. Although the attorney will help you draft the agreement and may have experience with drafting them, it is still important for you to understand the general outline so you know what to expect. An attorney should also explain various clauses, such as indemnification clauses, and their purpose so that you fully understand the potential effect it might have on you.
Drafting the Agreement
Before you put pen to paper, be sure that you know what the deal is between you and the contractor. Otherwise , you may have a difficult time transforming what you think is the deal—or what you would like the deal to be—into legal language. The entire purpose of the agreement is to fully and clearly communicate what is expected from each party. Vague or incomplete terms will lead to misunderstandings and disagreements and may even cause both parties to be in breach of the agreement.
Start with the basic information, including the names of both parties, the purpose of the contract and the subject matter of the contract. Next, list the responsibilities of both the employer and the employee so there is little chance of confusion or misunderstandings. Other things to include are payment details, which include any bonuses, commission structure and when and how payments will be issued. Next, you may wish to include clauses for termination, non-disclosure and non-competition agreements. Finally, be sure to include a severability or savings clause, a clause stating that independent contractors are exempt from Title VII of the Civil Rights Act of 1964, liability disclaimer language, solid language agreeing that the independent contractor is not an employee for federal tax purposes and a disclaimer that nothing in the contract should be construed as infringing on the rights of either party.
Sample Agreement Summary
To fully understand the scope and purpose of real estate independent contractor agreements, a review of a sample agreement terms is instructive. Such agreements are usually comprised of numerous clauses and sections that describe the relationship and expectations between brokers/employers and agents/independent contractors.
For example, the "Employment" section of such an agreement often begins with language such as, "Employer hereby hires and retains the Agent as an independent contractor and not as an employee…" Further to explain the nature of the relationship: The parties acknowledge that the Agent and its employees (if any) will be self-motivated, will provide their own office space, equipment, materials, supplies, clerical help and assistance without claim for compensation by the Employer; will be responsible for all income, payroll, FICA, Self-Employment or other taxes and assessments arising out of this relationship; payments or contributions for FICA, Social Security, and unemployment compensation insurance, insurance protection programs, bond premiums, retirement/annuity plans, medical/hospitalization insurance and disability income coverage, other benefits of any kind, and all other obligations of this agreement. It is understood that the Agent and Employer are not engaged in an employment relationship and shall not be so construed or treated by any party.
On matters relating to compensation, the following is representative of a sample commission plan section: A. The commission plan below is subject to a 10% administrative fee, deducted from each commission payment. B. The Agent shall be paid commission on any transaction where the Agent has a direct involvement (i.e., the Agent is the listing or selling agent), regardless of the source of the listing, as long as it meets the definition of net commission. C. The commission rate shall be one hundred percent (100%) minus any administrative, franchise (if any) and/or Association of Realtors dues to be assessed depending on the city/state in which the property is located. At the time of publication this rate is 0%, however this will lower your split. D. Under no circumstances shall the Company be liable for payment of a commission to anyone with whom the Agent reasonably believed to be a cooperating Broker, or anyone with whom the Seller/Buyer entered into a contract to pay a commission.
Conclusion and Considerations
In reviewing the above components of a real estate independent contractor agreement, there are some standard tips that will be helpful in drafting this kind of agreement. First and foremost, be sure to avoid any controlling language within an employment classification provision. The IRS has stricter standards for interpreting employment status than state law in most jurisdictions, and in order to ensure your agreement is consistent with IRS standards for independent contractor relationships, controlling terms should be avoided. Second, ensure at least one mutually agreed upon term for the agreement. A simple contract provision such as "this Agreement will commence on January 1, 2015 and will renew annually" is helpful to avoid the risk of a court overturning the agreement as unenforceable or vague under common law . Third, consider including a broad integration clause. As with an employment contract, the broader the integration clause, the harder it is for the employee to argue that a prior oral agreement controls. Fourth, consider using a severability clause to ensure that only part of an agreement is invalidated if a court finds other portions of the agreement to be unlawful.
In the dynamic context of a real estate business, be sure to review your independent contractor agreements. Getting the agreements in place is an important first step, but reviewing your agreements regularly will help to ensure compliance with evolving real estate law.