Becoming the boss

What real estate professionals need to know about employment law.

by Tom Morgan   REALTORS® have historically worked as independent contractors dependent on sales commissions for income. While some large brokerages now have many employees, the typical office today features a broker with salespersons acting as independent contractors.

However, NAR’s annual income survey consistently shows that real estate professionals who hire sales assistants produce more commission income than those working without employees. It stands to reason that using employees to take care of routine clerical matters that do not require a real estate license, such as phone answering and data processing, should increase the productivity of an agent with a busy practice.

If you decide to hire employees, take the time to understand basic employment law to avoid making simple mistakes that could result in legal liability. This article provides a broad overview of issues you may encounter. But as always is true with legal matters, there are numerous exceptions, and sanctions for violating any employment law can be quite severe.

Before entering into an employment relationship with a worker, sit down with an attorney to discuss the legal ramifications of hiring employees and to review any office policies (including employee manuals) directed at employees.

Discrimination

Virtually everyone in the United States today understands it is against federal and many state laws to discriminate on the basis of race, color, national origin, sex or religion. In addition, most employers are not allowed to discriminate on the basis of age or disability.

When beginning to interview potential employees, be careful to avoid using any screening techniques that could be considered discriminatory. For example, employment applications should not ask an applicant’s race, color, national origin, sex, religion, age, or handicap. During the interview process, avoid questions concerning religion, ethnic background, national origin, or age.

The Americans with Disabilities Act can require employers to make reasonable accommodation of individuals with handicaps who are otherwise capable of performing a job. Consult with an attorney if you have concerns regarding this specialized area of employment law.

Employee vs. independent contractor

You probably know that real estate salespersons are considered, by statute, independent contractors for federal tax law purposes. Brokers should ensure that they have a written independent-contractor agreement and a memorandum of understanding with every broker and salesperson associated with the firm. An annual memorandum of understanding should be renewed, and TAR has promulgated forms 2301 and 2302 for this purpose.

Failure to obtain a written independent-contractor agreement could result in the broker being held liable for withholding of FICA and income taxes on commissions paid to salespersons. The annual memorandum of understanding solidifies any changes on the agreement and helps avoid the argument that the independent-contractor agreement was waived.

For other workers and other statutes, the definition of employee vs. independent contractor is not as clear. The IRS uses a 20-part test to determine whether a worker is an employee or independent contractor. The typical non-salesperson worker in a real estate office is likely to be considered an employee by the IRS, and the employing entity is likely to be liable for paying the employer’s portion of the FICA and income-tax withholding (as well as withholding the employee’s portion) for that worker.

If a broker wishes to treat a worker other than a salesperson as an independent contractor, it would be advisable to consult an attorney regarding the structure of the arrangement to avoid liability for failure to withhold taxes.

For salespersons, the broker should try to adhere to the 20-point test to avoid allegations by a disgruntled salesperson that, for the purposes of state unemployment laws, the salesperson was an employee.

Wages and hours of work

The current federal minimum wage is $5.15 an hour. This wage applies to any employer engaged in interstate commerce, and virtually all real estate brokerages are considered to be engaged in interstate commerce.

Employers must pay at least the minimum wage to all employees who are non-exempt from the law. Exempt employees include managerial employees who work on a salaried basis. In addition, employers must pay time-and-a-half ($7.725 for minimum-wage employees) for all hours worked in excess of 40 hours in a week.

Wage garnishment

In Texas, a court may garnish up to 50% of an employee’s after-tax earnings for child support. An employer may not fire an employee simply because wages have been garnished.

Safety and health standards

The primary occupational safety-and-health standards are set by the federal Office of Safety and Health Administration (OSHA). While real estate offices are covered by OSHA regulations, they are exempt from the OSHA record-keeping requirements regarding workplace injuries, because real estate offices are defined as low hazard.

Due to many unfavorable comments from REALTORS® regarding ergonomic regulations that OSHA had proposed in the last decade for office workers, those regulations have been withdrawn and are not likely to be reproposed soon.

Child labor

Many property managers use teenagers to mow grass and perform other routine maintenance. Employing anyone under the age of 18 comes under separate rules regarding the type and hours of work that may be performed.

Sixteen- and 17-year-olds may perform any job not declared hazardous by the secretary of labor. Tasks like mowing the grass, painting, and house cleaning are not considered hazardous.

Fourteen- and 15-year-olds may work outside school hours in nonhazardous jobs for three hours per school day (eight hours on a non-school day), 18 hours a week. Youths age 14 and 15 cannot begin work before 7 a.m. nor work after 7 p.m., except for June 1 through Labor Day when they can work until 9 p.m.

Health benefits and retirement standards

There are no federal or state laws that require employers to offer health or retirement benefits to any employees. However, if benefits are offered, most employers must make sure that the plans comply with the Employee Retirement Income Security Act. These laws essentially require non-discrimination in how the plans are set up.

Before setting up any health or retirement plans for employees, use a consultant to ensure compliance with the numerous complex laws and regulations affecting such plans. In addition, a REALTOR® offering health insurance to employees may be required to ensure that the employee can continue health insurance coverage after separation by complying with COBRA requirements.

Family and Medical Leave Act

The federal Family and Medical Leave Act entitles a covered employee to take up to 12 weeks of unpaid, job-protected leave during any 12-month period for the birth of a child, to care for an immediate family member who has a serious health condition, or if the employee has a serious health condition.

To be eligible, an individual must be employed by a covered employer and work at a worksite within 75 miles where that employer employs at least 50 people, have worked at least 12 months, and have worked at least 1,250 hours during the prior 12 months.

Employee Polygraph Protection Act

This act prohibits most private employers from using lie-detector tests, either for pre-employment screening or during the course of employment.

Tom Morgan is associate counsel for TAR.

Photo © PictureQuest.

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