Ch. 23 - Broker-Sales Associate Relationship

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.

A broker can hire a sales associate as:

An employee An independent contractor The main difference between the two is an issue of control, as established by income tax laws.

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.

When paying employees, the broker must withhold the following from the sales associate'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 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.

IRS Code Section 3508

Federal tax laws allow real estate licensees 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.

Balance

However, both licensees and brokers must realize that different sales associates 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.

What is the compensation for a licensee who sells one of his or her own listings?

If a licensee lists and sells a property, he or she will receive a share of both the listing and selling side commissions.

Consequences of Non-Compliance

If as a result of an IRS audit a sales associate 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 Oklahoma 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 Oklahoma 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.

Broker Supervision

Oklahoma requires that brokers supervise all their salespeople, regardless of their income tax classification. Even though a sales associate may be classified as an independent contractor, the broker is still responsible for the licensee's professional actions.

This time Jim listed a home for $160,000 and it was sold for $150,000 by another licensee in the same agency. Sarah has a 75% commission split with broker John and Jim has a 60% commission split with John. The commission is 6% on this listing. Commission for each "side" is 50%. How much will Broker John Make on this sale?

Sale Price: $150,000 Commission at 6%: $9,000 ($150,000 x .06) Brokerage share: $9,000 Listing side: $4,500 (50%) Selling side: $4,500 (50%) Listing side: Jim's share: $2,700 ($4,500 x .60) John's share: $1,800 ($4,500 - $2,700) Selling side: Sarah's share: $3,375 ($4,500 x .75) John's share: $1,125 ($4,500 - $3,375) John's total on the transaction: $2,925 ($1,800 + $1,125)

The three conditions of the safe harbor test are:

The person must be a properly licensed real estate licensee. 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.

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.

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.

Policy and Procedures Manual: 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?

Negotiating a Contract: When deciding what firm would work best, licenses should ask these types of questions:

**What are the start-up costs? Some brokers charge a monthly fee for a desk and a fee to have a telephone line. **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 sales associate 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.

Other questions to ask include:

**What training and support is provided? Some companies start their licensees of 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 sales associates by answering their questions and accompanying them on appointments. **What is the commission schedule? As we will discuss later in this chapter, 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 licenses 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.

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 licensees. *The licensees have a long history with the firm. *The firm feels like a "good fit."

Independent Contractor Status

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 sales associate to have office duty at specific times or attend meetings. Sales associates 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 sales associate 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 sales associate 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.

sales associate may engage in only those activities assigned by the broker

And the sales associate may receive compensation for performed activities ONLY from the employing broker.

Recommended Forms

As we mentioned on a previous page, 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 repots 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.

Broker Responsibilities to Licensees

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.

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.

Because brokers could be held responsible for any wrongful acts performed by a sales associate 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 sales associates 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.

Common Law Rules Facts that provide verification of the level of control and independence (employee or independent contractor) 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?

Policy and Procedures Manual: 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?

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.

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 Oklahoma licensing laws, agency duties, discrimination laws and antitrust laws in the training provided.

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 a licensee from another firm.

Sale Price: $125,000 Commission at 6%: ($125,000 x .06) = $7,500 Brokerage share:($7,500 ÷ 2) = $3,750 Jim's share: ($3,750 x .60) = $2,250 John's share: ($3,750 - $2,250) = $1,500

Jim sells one of his own listings. Jim listed a home for $250,000 and it sold for $240,000. The owner negotiated a 5% commission on this listing. What is Jim's Commission? What is John's?

Sale Price: $240,000 Commission at 5%: ($240,000 x .05) = $12,000 Brokerage share: $12,000 Jim's share: ($12,000 x .60) = $7,200 John's share: ($12,000 - $7,200) = $4,800

Remember there's a 50% co-brokerage split. Gaslight Realty - Broker John and licensee Jim (60% commission split) Hamilton Real Estate - Broker Anita and licensee Tanya (50% commission split) This one is licensee Tanya's listing of a $200,000 home Jim sold for $195,000. The commission on this listing is 6%.

Sales Price: $195,000Commission: $11,700 ($195,000 x .06) Listing side commission: $5,850 ($11,700 ÷ 2) Tanya's share: $2,925 ($5,850 ÷ 2)*Anita's share: $2,925 ($5,850 ÷ 2)* * Remember this broker has a 50% split with her licensee Selling side commission: $5,850 ($11,700 ÷ 2) Jim's share: $3,510 ($5,850 x .60)John's share: $2,340 ($5,850 - $3,510)

a licensee should keep two types of records:

Tax records and expense records As 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 records - According 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.

What is a 100 percent commission plan?

The licensee pays a monthly fee to the company to cover the costs of things like office space, telephones, office equipment and supervision. In return, the licensee receives 100% of the commission from any sales he or she negotiates.

Policy and Procedures Manual: 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?

Policy and Procedures Manual: 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?

If a broker hires a sales associate as an employee, he or she can require the sales associate 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. Sales associates 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.

Policy and Procedures Manual

a document that explains proper business practices, describes needed knowledge and experience, explains document procedures, explains how to handle transactions, and lists the resources provided to carry out specific duties

The broker can choose to pay the sales associate in what ways?

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, a licensee 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 licensee pays a monthly fee to the company to cover the costs of things like office space, telephones, office equipment and supervision. In return, the licensee receives 100% of the commission from any sales he or she negotiates. Most often in these programs, the licensee is responsible for the costs of advertising and promotion.

A sales associate 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/sales associates must perform all activities in the name of the broker.