Employee or Independent Contractor?

For many years, it has not been clear if salespeople working in real estate offices are employees or independent contractors. The distinction has considerable implications for all concerned. An employer is required to withhold money from paychecks for such things as federal income taxes and Social Security on behalf of employees. Naturally, more than a fair amount of paperwork is connected with this obligation.

Independent contractors, on the other hand, have nothing withheld by their offices. They receive the gross amount of commissions earned and are responsible for paying their own tax obligations. As far as the principal of the office is concerned, considerably less paperwork is required.

Owners of real estate agencies have historically opted to treat most salespeople as independent contractors. It is much easier for them, but is it really proper? A recent Connecticut Supreme Court case, Tianti v. William Raveis Real Estate, Inc., (231 Conn. 690 [1995]), directly addressed this issue.

The case concerned two people who worked for one of Connecticut's largest real estate firms, William Raveis Real Estate, Inc. Gluck was a real estate salesperson for the defendant from January 1982 until March 1988. From 1986 to 1988, Lyren was the sales manager for the defendant's Greenwich office and later for the defendant's Trumbull office. Because the claims of both were similar, they were tried together.

After a full trial on the merits, the trial court found that both claimants were employees; the defendant then appealed. Although the court decided several matters, the only relevant issue here was whether the trial court was correct in finding that the claimants were employees. The Connecticut Supreme Court concluded that the trial court correctly determined the claimants' employment status.

Let us examine the reasoning used by the court. In determining whether an employment relationship exists, the court looked to the actual status in which the parties were placed. In other words, it looked to substance, not form. The court stated that the determination of the status of a worker is often difficult. From a purely legal point of view, it was well established that the fundamental distinction between an employee and an independent contractor depended upon the existence of the right to control the means and methods of work.

The test is not whether actual interference with the control occurs, but whether the owner of the agency has the right to interfere. This is the difference between an independent contractor and a servant or agent. The court went on to point out that an independent contractor has been defined as "one who, exercising an independent employment, contracts to do a piece of work according to his own methods and without being subject to the control of his employer, except as to the result of his work."

Furthermore, when examining the working relationship, the paramount factor is the right to control not only the results of work but also the methods of work. This control test is by nature a balancing test. The court did realize that the determination of general control is not always a simple problem; many factors are ordinarily present for consideration, not one of which is by itself necessarily conclusive.

As far as the defendant's real estate company was concerned, the trial court found that Raveis retained the right to control-and actually exerted a great deal of control over-the real estate salespersons and sales managers affiliated with it. Salespeople and managers were required to attend mandatory office meetings; both did business under the Raveis name; both used the company letterhead, business cards, and supplies; both were required to attend training sessions; and both were threatened with discharge if they did not comply with these requirements.

The court noted that "the right to terminate [an employment] relationship without liability is not consistent with the concept of an independent contract." Additionally, the managers were assigned specific reading material, and in particular, Gluck was required to put in specified hours of floor time while Lyren was required to work 40 hours per week plus put in an office appearance on weekends.

The defendant had countered that both claimants were independent contractors because they received 1099 forms rather than W-2 forms for income tax purposes and they did not receive medical benefits. Though these factors did weigh in the defendant's favor, they were insufficient to persuade the Connecticut Supreme Court that the claimants were not employees.

Clearly the court felt that the right of the defendant to control its employees far outweighed the factors that indicated an independent-contractor relationship. It is not obvious that the Raveis offices were operated that much differently from the way that most real estate offices across the country run. What does this mean for the real estate industry?

The first issue an owner of an agency must consider is whether or not the office is able to run adequately without the typical controls. Will an agency be run effectively and profitably without meetings for salespeople? How many agencies could be run professionally without the salespeople using company stationary, business cards, and other industry accessories?

Whatever this decision may mean to the day-to-day operations of a real estate office, consider that it may have even more unavoidable implications for real estate agencies that are franchisees. This is because a franchiser typically creates a relationship with a franchisee based upon structures and controls that mandate conducting business in a certain way. It is hard to imagine the control factor disappearing as the franchisee in turn deals with his or her salespeople. One may be able to reach the unpleasant conclusion that a franchisee that is in turn subject to controls by a controlling franchiser may be per se operating a business in an employer-employee relationship.

While some real estate offices are able to run well without mandatory meetings, floor time, and the like, they are exceptions. The office with no structure, requirements, direction, or regulation is not usually an office that is able to compete well in the open market that is the lifeblood of the real estate industry. That may lead to the inevitable conclusion that the industry just may have to get used to treating salespeople as employees.

Hanon W. Russell, CCIM, JD

Hanon W. Russell, CCIM, JD, is a partner in the firm of Cantor, Floman, Russell, Gross, Kelly, & Amendola, P.C., located in Orange, Connecticut. Russell can be reached by phone at (203) 795-1211 or by e-mail at hwr@chesscafe.com. The discussion of legal issues involved in this column is for informational purposes only. Results may vary depending on state laws and particular facts.