Ch 5, Unit 5

Training

All new salespersons need training in the management systems and philosophy of the brokerage company. Each brokerage company has certain philosophies of sales, listing appointments, listing agreements, contracts and closings that each new salesperson has to know. The broker should not assume that any other brokerage company has trained the licensee in dealing with the seller, the buyer, the tenant, or the landlord. Even though all renewing sales associates must take post-license training, each broker can and should give additional instruction. A well-trained salesperson requires less attention during early transactions and is usually eager to try out the new techniques he or she has learned. Also, a well-trained salesperson is an asset to the firm and is more likely to succeed and decide to remain with the company. Depending on the size of the office, training can take various forms: -One-on-one, on-the-job training - best for small firms -Training sessions periodically integrated into sales meetings - often used in medium-sized offices -Organized classroom training - typically done by multiple office companies, franchises or small independent firms combining to offer training It is important for a broker to include information about licensing laws, agency duties, discrimination laws and antitrust laws in the training provided.

Staff meetings

All staff benefit from attending sales meetings and company meetings that are informative and educational. It is the job of management to present learning opportunities as often as is practical to help the licensees be informed and educated in modern real estate practices and associated knowledge such as termite inspections, radon gas problems, layoffs at manufacturing plants in the area, etc.

Recommended forms

As we mentioned on a previous screen, the broker must file yearly the IRS Form 1099-MISC for any independent contractor licensee who earns more than $600. The broker should provide a copy of this form, which reports the licensee's total earnings for the year, to the licensee for his or her records. The licensee should track his or her earnings carefully and make sure that his or her record of earnings matches what the broker has submitted to the IRS. The licensee should also be vigilant in keeping records of expenses, so that he or she will have complete and accurate information when it comes time to file the federal and state income tax returns.

Licensee responsibilities to broker

As we said earlier, the broker employs some number of affiliated licensees for assistance in handling real estate transactions. Because of this relationship, each of the parties has certain obligations to the other. Responsibilities of affiliated licensees to their broker may include the following: -Assure that all real estate brokerage services in which the licensee participates are in accordance with the license law and rules. -Remain knowledgeable about the license laws and rules. -Follow the written policies outlined in the policy and procedures manual. -Seek advice regarding any aspects of the firm's polices that are not clear to the licensee. -Work to promote and sell the broker's listings. -Work to procure new listings for the firm. -Assure that all fiduciary duties owed to the broker's clients are fulfilled. -Seek advice and counsel from the broker when questions arise that the licensee cannot answer. -Be appropriately licensed. -Follow licensing laws and rules regarding the handling of client's funds and property. -Deliver all transaction documents to the broker in a timely manner. -Assure that all advertising written by the licensee is proper and legal. -Maintain all insurance policies required by the broker. -Act in an ethical manner as required by the broker and the real estate trade organizations.

Salesperson compensation

As we said, it's important for the broker to have a written agreement with each affiliated licensee that outlines the specifics of his or her compensation. The broker can choose to pay the salesperson a salary or a percentage share of the commission from the transaction. Many companies have a payment plan that is "graduated." In this type of program, an agent may start out at a lower percentage payment, but then graduate to higher percentage rates as his or her production increases. Other companies have a 100% commission plan. In this situation, the agent pays a monthly fee to the company to cover the costs of things like office space, telephones, office equipment and supervision. In return, the agent receives 100% of the commission from any sales he or she negotiates. Most often in these programs, the agent is responsible for the costs of advertising and promotion.

Substance over form

Even with a written independent contractor agreement in place, both parties must recognize that the broker still has a duty to supervise his or her licensees. This duty is first and foremost in their agreement.

IRS common law rules

Facts that provide verification of the level of control and independence fall into three categories: -Behavioral - Does the company control or have the right to control what the worker does and how the worker does his or her job? -Financial - Are the business aspects of the worker's job controlled by the employer? (These include things like how a worker is paid, whether or not the employer reimburses expenses, or who provides tools/supplies.) -Type of Relationship - Are there written contracts or employee-type benefits, such as a pension plan, health insurance, or sick pay? Will the relationship continue and is the work performed a key aspect of the business? Businesses must consider all these factors when determining whether a worker is an employee or an independent contractor. Some factors may indicate that the worker is an employee. Other factors may signify that the worker is an independent contractor. There is no set number of factors that designates a worker as an employee or an independent contractor, and no single factor stands alone determining this status. Also, factors which are relevant in one situation may not be relevant in another.

IRS code section 3508

Federal tax laws allow real estate agents to be classified as independent contractors. In order to qualify, the IRS requires what's called the safe harbor test to establish that a person is indeed an independent contractor. The three conditions of the safe harbor test are: -The person must be a properly licensed real estate agent. -Gross income, including that which results from sales and all other output (including the performance of services), must be based on production and not on hours worked. -A written agreement must exist between the independent contractor and the broker which outlines the services to be performed by the contractor and states that the contractor will not be treated as an employee for income tax purposes.

Balance

However, both licensees and brokers must realize that different salespersons will require different levels of supervision. In most cases, a licensee with experience will not need the level of supervision that a new licensee will need. So the broker will have to exercise some degree of judgment when deciding how much supervision to provide to a particular licensee.

Employee status

If a broker hires a salesperson as an employee, he or she can require the salesperson to follow rules regarding such things as: -Working hours -Office duty -Meetings -Dress code The broker can require an employee to perform his or her work in a certain order or work at a specified location. Salespersons who are employees usually have their expenses paid by their broker and the broker usually supplies whatever tools the employee needs to conduct business. Employees could also receive health insurance or profit-sharing benefits from the broker. When paying employees, the broker must withhold the following from the salesperson's wages: -Federal income tax -State income tax -Social Security tax -Medicare tax The broker would also be responsible for paying federal and state unemployment taxes, workers' compensation and, possibly, disability insurance. And there are also quarterly and annual government reports to file. Most real estate assistants, both licensed and unlicensed, are considered employees for income tax purposes.

Consequences of non-compliance

If, as a result of an IRS audit, a salesperson is concluded to be an employee, the broker will be liable for state and federal unemployment insurance premiums, worker's compensation and disability insurance. The broker will also have to withhold federal and state taxes, including Social Security taxes. In addition, the broker could incur stiff tax penalties as a result of the incorrect classification. For the licensee, employee status means that he or she cannot claim the self-employment deductions that would otherwise be allowed on his or her income taxes. In addition, the licensee will lose that part of the commission that the broker will have to withhold to cover the state and federal income taxes. Maintaining independent contractor status can create a predicament for some brokers. It limits the control they have over their licensees. As we said, if the broker exercises too much control, it can look more like employee status for the licensee.

Commission splits

In most cases a real estate transaction is completed by cooperating brokers. Each broker will receive an agreed upon share (percentage) of the compensation. These shares can be referred to as the listing side commission and the selling side commission. A licensee who lists a home for sale will receive a share of the employing broker's commission on the listing side. This share will be based on the compensation agreement this agent has with the employing broker. A licensee who sells a listing will receive a share of the employing broker's commission on the selling side. This share will also be based on the compensation agreement this agent has with the employing broker. If a licensee lists and sells a property, he or she will receive a share of both the listing and selling side commissions. Example: Jim works for Gaslight Realty. His compensation agreement with his broker John states that he will receive 60% of the commission on any transaction he negotiates. Broker John has a co-brokerage split of 50% with the other agencies in town. Jim lists a home that sells for $125,000. The commission rate is set at 6%. Let's calculate what John and Jim will receive from this transaction if the home was sold by an agent from another firm. Sale Price: $125,000Commission at 6%:$7,500 ($125,000 x .06) Brokerage share: $3,750 ($7,500 ÷ 2) Jim's share: $2,250 ($3,750 x .60) John's share: $1,500 ($3,750 - $2,250)

Broker-salesperson relationship

In today's real estate industry, most brokers are not in business alone. They transact their business with the assistance of a staff of one or more salespersons. A salesperson is licensed to perform transactions on behalf of his or her licensed broker. The broker is ultimately responsible for the actions of his or her affiliated licensees. Therefore, the salespersons must perform all activities in the name of the broker. A salesperson may engage in only those activities assigned by the broker. And the salesperson may receive compensation for performed activities ONLY from the employing broker. Since the salesperson is acting as the agent of the broker, he or she has no authority to make contracts with or accept compensation from any other party - including another broker, the buyer, the seller or a referral agency. A broker can hire a salesperson as: -An employee -An independent contractor The main difference between the two is an issue of control, as established by income tax laws. An employee works under the supervision and control of the broker. An independent contractor is hired to perform certain acts, but the broker cannot control how the salesperson performs those acts. First let's take a step back and look at IRS common law. Then we'll look at how employee versus independent contractor status works in the real estate world.

Future implications

Is it possible that licensees working under independent contractor arrangements will become employees? Several factors must be taken into consideration before that judgment could be made. On the one hand, the broker saves both time and money by having independent contractors. He or she doesn't have to withhold taxes or file the quarterly and annual reports required of employees. The broker doesn't have to provide paid sick days, vacation leave, and health care or pension benefits. On the other hand, the broker is still faced with the laws that require him or her to supervise the actions of all the firm's licensees. And the broker must do this, since he or she could be held accountable for any of those actions. And we know that supervision of licensees can cross over the line and look like an employer-employee relationship. However, as we have discussed, the IRS code permits real estate licensees to be independent contractors, even when the broker's supervision borders on employer-employee status. So it would seem that licensees will continue to operate as independent contractors, unless at some future time the laws or regulations governing this relationship changes.

Maintaining business records

It's important for every licensee to maintain his or her own business records. Some of the records are required by license law; others just make sense to keep. Basically a licensee should keep two types of records: -Tax records and expense recordsAs independent contractors, these records are particularly important as documentation for the licensee's tax return. Also, depending on the written agreement the licensee has with the broker, he or she may need specific expense records and receipts for reimbursement of some of those expenses. -Transaction recordsAccording to the real estate license law in many states, the brokerage firm is responsible for keeping a file on every real estate transaction. The file must contain all agreements, contracts, documents, leases, closing statements and correspondence for each real estate or business opportunity transaction. For sales transactions, the file must also contain a copy of the earnest money agreement, a copy of the final settlement statement, and any addenda related to the accounting or disposition of client funds. Note: According to the license law of many states, all listings, transactions, management agreements, and other contracts relating to providing brokerage services are the property of the real estate firm. Therefore, all affiliated licensees must submit complete copies of their transactions to their firm. The records must include, but are not limited to, a copy of the purchase and sale agreement, earnest money receipt, and an itemization of the receipts and disbursements with each transaction.

Independent contractor status

On the other hand, if a salesperson is hired as an independent contractor, it is quite a different story. A broker can tell the independent contractor what to do, but not how to do it. In this case, the broker cannot dictate working hours or require the salesperson to have office duty at specific times or attend meetings. Salespersons working as independent contractors are paid by the job (commission rather than an hourly or weekly salary), they must usually pay their own expenses and they must provide their own tools. The broker does not withhold anything from the commission he or she pays the independent contractor. If the licensee makes more than $600, the broker must file an IRS Form 1099-MISC for that licensee to report how much he or she earned for the year. A salesperson operating as an independent contractor must pay his or her own income tax, self-employment taxes, Social Security tax and Medicare tax. In addition, the salesperson cannot receive anything from the broker that would make it look like he or she is an employee, such as health insurance, paid sick days or a pension plan. Note: A broker may carry errors and omissions insurance on all of his or her licensees, regardless of their status as employees or independent contractors. The broker may pay the cost or require the licensees to pay it. In today's real estate world, most licensees are independent contractors.

Written employment agreements

Regardless of a licensee's status as employee or independent contractor, the broker must enter into a written agreement with each affiliated licensee. This agreement must be dated and signed by the parties. It must include, at the minimum, the employment or independent contractor relationship terms, including but not limited to: -Supervision -Duties -Compensation -Duration (this term, as used here, is not meant to indicate a specific termination date, but to allow the parties to negotiate the term of the agreement, whether "at will" or a specific length of time) -Termination (how the agreement is renewed or terminated, and that these provisions be included in the agreement) The employing broker must give a copy of the employment agreement, including any modifications, to every employee and independent contractor. Note: It would be wise for a broker to have a standardized contract that has been reviewed by an attorney to be sure it is in compliance with federal law.

Negotiating a contract

Since most licensees are hired as independent contractors, it's important for the licensee to ask the right questions and get the right information when deciding what kind of firm to join. There are large firms and small, firms that specialize in sales and those that specialize in property management or leasing, firms that are located in big cities and those that are located in less populated areas. As mentioned before, many licensees fail in their first year due to lack of preparation. Part of the preparation for licensing is creating a budget for the first year. This budget should consider the "Start-up" costs or fees, which would include the first year costs of doing business in a brokerage. Start Up costs include: Franchise fees, Association Membership (local, state, national), MLS Fees, insurance, desk fees, phone fees, technology fees, and any other expenses to be considered for the year. Start up costs may also be referred to as "monthly fees"and/or "expenses". When deciding what firm would work best, licenses should ask these types of questions: What are the start-up costs or monthly fees? Ask for a breakdown of what each fee is and if the broker will pay or if the associate pays straightout and how often these payments are collected. Who pays the expenses? Some expenses will probably be paid by the broker with the rest falling to the licensee. The licensee needs to know who will pay for which. These expenses include "For Sale" and "Open House" signs and flags, business cards, stationery, literature, brochures, newspaper ads, telephone charges, forms, trade magazines, membership in the local Chamber of Commerce yellow page ads, Internet websites and e-mail addresses. What are the salesperson requirements? Most brokers expect their licensees to have a good car with adequate insurance that would cover any liability that could happen when showing property. Errors and omission insurance is also important and is usually paid by the licensee through the broker, but the broker could choose to provide it. What training and support is provided? Some companies start their licensees off with a week or so of training. Others have in-house training staff to teach licensees how to use their forms and/or provide training in closing techniques. Other firms have experienced licensees who mentor the new salespersons by answering their questions and accompanying them on appointments. What is the commission schedule? As we will discuss later in this unit, firms have different methods of splitting the commissions. The licensee needs to know when and how the broker will pay commissions. Some brokers offer a bonus incentive that kicks in after a licensee earns a certain amount in commission. This greatly encourages higher productivity. Who answers the phone? This is an important issue in determining how to set priorities and budget time. If a licensee can answer the phone, he or she is receiving leads to potential clients. What are miscellaneous benefits? Some brokers provide incentives to successful licensees that allow them to attend educational seminars that are provided by various real estate boards. A broker may allow a licensee to purchase a personal residence without having to pay a listing or selling commission or at a significantly reduced commission. Whatever the details that the licensee and broker agree upon, they should all be carefully spelled out in the independent contractor agreement.

Broker responsibilities to licensees

Some of the responsibilities that brokers have to their affiliated licensees may include the following: -Assure that all real estate brokerage services in which the broker participates are in accordance with the license law and rules. -Maintain, implement, and follow a written policy that addresses the levels of supervision of all members of the firm. -Assure that the licensee has a copy of the firm's policy and procedures manual. -Provide access to all the firm's listings and marketing data. -Review all brokerage agreements, both listing agreements and purchase offers, which involve any newly-licensed affiliated licensee. (It's probably a good idea for the broker to conduct these reviews for at least a year.) -Ensure that all persons performing real estate brokerage services on behalf of the firm are appropriately licensed. -Provide the level of office support that was agreed upon and written into the employment contract. -Ensure that affiliated licensees submit their transaction documents to the broker in a timely manner. -Provide all training that was agreed upon when the licensee was hired.

Factors in selecting a brokerage affiliation

Statistics show that several new licensees no longer practice real estate after the first year. And some of those who are still practicing are not making a good income after their first year. For this reason, it's important that a licensee spend time and effort in choosing a broker/employer. It's just as important for a licensee to find the right broker as it is for the broker to find the right licensee for his or her firm. Here is a list of important things to look for when choosing a broker/firm. -Quality training programs are available in-house and locally. -The broker encourages and supports training. -The broker provides a mentor program and/or office assistance for the licensees. -The firm has a large selection of books, audios, videos and CDs on hand for licensee use. -The office is dedicated to the licensee's desired specialty area. -The firm employs a number of successful agents. -The agents have a long history with the firm. -The firm feels like a "good fit."

Policy and procedures manual

The purpose of a policy and procedures manual is to make sure that all members of the brokerage company understand the broker's philosophy. All company policies must comply with all laws, including license law. The law does not prescribe manual contents but does suggest several topics. On the next few screens we'll list some of the items you may likely see in your company's policy and procedures manual and what kinds of information about those topics you will find. -ADVERTISING - Who writes the ads? Who places ads? Who pays for ads? What media is authorized for use in the brokerage? Is there training on telemarketing solicitation? -BROKER RESPONSIBILITIES - What are the broker's obligations to the staff and licensees? If the managing broker's license becomes inactive, what are his or her obligations to the licensees? What are the procedures for ending the sponsorship of a licensee? -CODE OF ETHICS - What are the ethical standards recognized in the brokerage? How are staff and brokers expected to adhere to these standards? If the licensees are REALTOR® members, must they have had the NAR Code of Ethics training? -COMMISSION POLICY ON ASSOCIATE'S PERSONAL PURCHASES/SALES - Can the sales associate buy and sell properties for his or her own investment portfolio? Will such transactions need to be run through the brokerage? What is the responsibility of the broker in this situation and what is the liability of the broker? Are personal investment opportunities allowed or not? -CO-OPERATIVE SALES WITH OTHER REAL ESTATE COMPANIES - If the brokerages are members of a Multiple Listing Service, usually cooperating brokerage fees are spelled out in the MLS rules. But if not, those policies will be addressed here. Also the policy in dealing with out-of-state brokerages should be defined. -DESK SPACE - Are desks and/or cubicles to be shared? Are computers to be shared? What are the procedures to be followed in creating a compatible sharing situation? -DISCRIMINATORY PRACTICES - Licensees and staff should understand that they must not inquire about, respond to or facilitate inquiries about, or make any disclosures which indicate any preference, limitation or discrimination based on race, color, religion, sex, national origin, ancestry, familial status, or handicap. Handicap includes a person who has, had, or may have, AIDS, or an HIV infection or illness. -DRESS AND ATTIRE - Is attire in the office to be professional at all times or is casual attire permitted? What constitutes professional attire? Is professional attire required at all times when brokers are with clients? -ENTERTAINING CUSTOMERS AND CLIENTS - Are there specific policies regarding how customers and/or clients should be entertained? Even if the licensee is paying, are there limitations on where a customer/client can be taken; i.e., a nightclub, a sports bar, etc. -ESCROW MONIES - What are the requirements for getting escrow monies to either the brokerage or the approved escrow depository (Title Company)? What forms of escrow monies does the brokerage allow; i.e., personal check, cashier's check, money market order, promissory note, etc.? -FLOOR TIME - What is the purpose of floor time, how is it to be scheduled, how long is it for? Can the independent contractor request floor time? What are the other specific rules expected of the salesperson during floor time? Does each brokerage listing require special informational training? -INTER-OFFICE RESPONSIBILITIES AND COOPERATION - What responsibilities does each person in the office have to the other? What are the telephone procedures? When there are inter-office disputes, what is the procedure? Who makes the final decision on inter-office disputes? If someone feels there has been sexual harassment, to whom is that reported? What are the consequences for continued violations of the office rules? -KEYS - What procedures are in place for keeping keys safe in the office? What steps must staff and brokers follow in the distribution of keys and in getting them back? -LISTINGS - WHAT IS EXPECTED - What are the types of listings taken within the brokerage (exclusive-right-to-sell, exclusive, open, other)? Does the firm accept third-party corporate relocation listings? How should listings be priced and what is the policy for how long a listing should be taken? -LISTING POLICIES AND PROCEDURES - What is the procedure for bringing the listing into the office? How is a listing entered into the MLS? What contracts or forms are to be used, how is the listing information to be verified, and what are the processing procedures? Is a home protection plan offered? How will the listing be serviced by the listing agent and the brokerage? What is the brokerage responsibility to the listing licensee regarding advertising, other marketing, etc.? -OFFERS AND COUNTEROFFERS - Is it the policy within this brokerage for the agents to present their own offers directly to the sellers, or is it standard to fax or email the offer to the other listing brokerage and let the listing agent present the offer? -OPEN HOUSES - What are the procedures for licensees holding open houses? What are the rules regarding open house signs and directional signs? What are the safety policies regarding how to keep the licensees safe and how to protect the homeowners' possessions during an open house? -PROSPECTING POLICIES AND PROCEDURES - What types of prospecting for clients are encouraged within the brokerage and what types are discouraged? What are the policies regarding general advertising; direct-mail, fliers; signs, flags and billboards; individual advertising programs; telephone solicitation and prospecting programs; expired listing prospecting; door-to-door neighborhood canvassing (farming), long distance telephone calls. -REFERRAL FEES -How are referrals dealt with? -SAFETY POLICY - What is the established procedure for maintaining safety in the office place? What are the codes and procedures for keeping agents safe who are in the field? -SALES CONTRACTS - WHAT IS EXPECTED - What are the procedures in place when a sale is made? How is the sale to be brought into the office? What are the procedures for: acceptance and ratification of offers, the deposit of earnest monies, holding of the documents, occupancy agreements, non-realty items, contingencies, alterations and changes, inspection of the property, procedures on forfeitures and returned deposits? Who maintains the transaction folders and the trust account? -SALES MEETINGS AND INSPECTION TOURS - What is the policy on sales meetings? When, where and how often are they to be held? Is attendance mandatory? -SALESPERSON COMMISSION POLICY - Even though the specific commission split with each individual agent is outlined in his or her Business Agreement, the office policy manual will explain the commission procedure for the brokerage. -SALESPERSON EXPENSES - What is the salesperson expected to pay for (signs, business cards, entertaining, and advertising)? -SALESPERSON DISPUTES - When two licensees get in a dispute over clients, commissions or general problems, what are the rules for mediation or binding arbitration (within the company)? Will there be money considerations (fines, etc.?) What could be the potential disciplinary actions? -SETTLEMENT AND SETTLEMENT COSTS - Are there brokerage-directed forms to use with the sellers and buyers to ease them through the escrow process? Does the broker use the lender's Loan Estimate form or does the broker determine the figures? -SHOWING PROPERTY - Are there specific procedures for the brokers to use when showing property? What is the policy for making appointments, keeping appointments, and breaking appointments (if necessary)? How can the broker be safe, and how can the broker protect the homeowner's possessions while showing the property? -TELEPHONE/TELEGRAM/FAX /EMAIL ACCEPTANCE OF A CONTRACT - What is the policy for accepting a contract via phone, telegram, fax or email? -TERMINATION - What are the actions that will precipitate termination with the company? What will happen to transactions that are in escrow? -USE OF COMPANY RESOURCES - Besides using office space, desks, computers, telephones, office supplies, use of a receptionist and/or secretary, what other office resources are included? Does the broker pay for copies? What costs can a licensee or staff employee expect to pay? Note: It is important for the policies and Procedures Manual to have all the answers to every brokerage procedure question.

Broker supervision

The way the IRS treats a salesperson - as either an employee or an independent contractor - applies to the issues of income tax and withholding obligations. It has nothing to do with the broker's liability for any wrongful acts performed by the licensee. Most states require that brokers supervise all their salespeople, regardless of their income tax classification. Even though a salesperson may be classified as an independent contractor, the broker is still responsible for the licensee's professional actions. Because brokers could be held responsible for any wrongful acts performed by a salesperson they employ, many brokers require that licensees carry -Automobile liability insurance in high amounts, naming the broker as an insured on the policy -Errors and omissions insurance, covering the broker and salespersons for negligent acts (but not intentional acts) If a licensee working for a broker is a property manager having access to the money of others, the broker may get a fidelity bond to protect himself or herself from any embezzlement by such a licensee. It also seems that brokers are not protected from any injury claims that may be made by any of their independent contractors, so it would be wise for brokers to carry workers' compensation coverage for everyone who works for them.