FACT #1: NOT all real estate agents are REALTORS® and NOT all REALTORS® are real estate agents. The REALTOR® term doesn't mean "residential real estate agent" or "real estate agent."

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The REALTOR® term is a trademark owned by the National Association of REALTORS® (NAR) and protected by federal law. The REALTOR® designation represents a real estate professional who is a member of NAR and subscribes to its strict Code of Ethics and Standards of Practice. ​

 

Out of the more than 2 million actively licensed real estate practitioners in the U.S., only about half are REALTORS® or members of the National Association of REALTORS® (NAR). The NAR is the world's largest business trade association.

 

Its membership is composed of residential and commercial brokers, salespeople, property managers, appraisers, counselors (i.e., consultants and advisors), international real estate professionals, and others ​​​​engaged in all aspects of the real estate industry​​ in the United States and throughout the world​. 

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Commercial specialists make up about 10% of all NAR members.

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FACT #2: Only REALTORS® subscribe and are obligated to abide by a strict national and global Code of Ethics and Standards of Practice​.  

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The REALTORS® Code of Ethics and Standards of Practice is revised annually to reflect the latest issues in real estate law and professional practice. The REALTORS® Code of Ethics was the precursor to U.S. state licensing laws which govern the entire real estate brokerage industry.

 

Additionally, because the REALTORS® Code of Ethics and Standards of Practice goes above the fiduciary standards required by law (similar to attorneys, CPAs, physicians, and other professional practitioners), the REALTOR® designation represents a competent real estate agent or business professional who aspires to a higher moral standard of professional real estate and business conduct; driven by uprightness, honesty, sincerity, and integrity. 

 

REALTORS® can be sanctioned for violation of the Code of Ethics. ​(Watch this video to learn more about the REALTORS® Code of Ethics).

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FACT #3: Most REALTORS® are (academic) college educated.* 

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Academic education of REALTORS®:

• Some undergraduate school: 30%

• Bachelor's degree: 30%

• Graduate degree and above: 13%

• Associate degree: 13%

• Some graduate school: 6%

• High school diploma: 8%

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*In addition to their academic education, most REALTORS® have completed some form of specialized professional or vocational education or training at a career college. 

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FACT #4: Though affiliated with a brokerage firm, 86​% of REALTORS® are Self-Employed "1099" Independent Contractors (ICs)​ or private practice sales professionals with a majority operating ​their professional business practice as a proprietorship​ (a one-owner or spousal shop) while a few other REALTOR® professionals run their small business as partnerships, limited liability companies, or corporations.  

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Only 5% of REALTORS® are actually direct employees of the brokerage or corporate firm while 9% of REALTORS® have other types of work relationships with the brokerage or corporate firm. 

 

When REALTORS® are real estate agents, state licensing laws, in addition to federal laws and the broker's business model, ultimately determine the broker and salesperson work relationship.

 

In the industry, there are one of three possible types of relationships which can exist: employee (common-law employee), common-law independent contractor, or statutory independent contractor.

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Source: 2018 NATIONAL ASSOCIATION OF REALTORS®' Member Profile, NAR Media Resources

 

Note: Direct sellers (e.g., independent direct salespeople or business owners, selling consultants, sales representatives, distributors, and network marketers) are also considered to be statutory independent contractors. There are many similarities between the direct sales business model and real estate brokerage business model. The Direct Selling Association (DSA) defines direct selling as "a business model that provides entrepreneurial opportunities to individuals as independent contractors to market and/or sell products and services, typically outside of a fixed retail establishment, through one-to-one selling, in-home product demonstrations or online. Compensation is ultimately based on sales and may be earned based on personal sales and/or the sales of others in their sales team."  

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BROKER-AGENT RELATIONSHIP

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Regardless of the type of independent contracting relationship established between the broker and salesperson, there is no such thing as a "1099 Employee." It is a mythological creature. Statutory and common-law independent contractors are self-employed workers who are not classified as employees for tax and other legal purposes.

 

However, there is a "W-2 independent contractor" hybrid classification called statutory employee. Statutory employees (e.g., traveling or city salespeople, life insurance salespeople, certain agent or commission drivers, and certain home workers) are independent contractors that are treated as direct employees by their employers.

 

Statutory employees are not self-employed. They are "self-employed" only for tax reporting purposes. Please visit Wikipedia or the IRS website on this topic by going here. 

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In contrast, service providers who are 1099 ICs are self-employed. They are either a sole proprietor or co-owner of a business.

 

Sole proprietors and other self-employed individuals (such as partners and some limited liability company members) are not employees of their own business, the client's business, or the hiring firm's business. They are simply small business owners and operators of a commercial enterprise (i.e., principals or "their own boss").

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Therefore, unincorporated independent contractor (IC) real estate salespeople are also bona fide owners of a proprietorship or partnership within their affiliated brokerage firms. Under this arrangement, the brokerage house is the IC salesperson's strategic business partner, peer, internal client, and sponsor rather than their direct employer.

 

Inversely, IC real estate salespeople or associates are also internal clients of the brokerage firm. This unique business relationship is in contrast to the historical and traditional management perspective involving a boss and subordinate or employer (master) and employee (servant).

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WHAT IS (COMMON-LAW) INDEPENDENT CONTRACTING?

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Independent contracting is a business venture and way of doing business. It is a personal or business service to an individual or firm provided by another individual or firm for pay under contract.

 

The services provided may be legal, medical, architectural, in real estate, design, construction, accounting/auditing, engineering, advertising, public relations, writing/editing, sales, or any other area.

 

The independent contractor must be free to offer services on the open market, not just to one person or firm. And the independent contractor must not be controlled in the manner in which the work is accomplished.

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If an independent contractor fails to be differentiated from an employee, irrespective of the contractual relationship, the IC will lose his/her status and benefits as an independent contractor. In such a case, the client or prime contracting firm may well be described as the ICs employer and subjected to the employment labor and tax laws - including federal and state financial penalties for worker misclassification.

 

However, in the real estate brokerage industry, the statutory independent contractor (non-employee) classification does provide brokerage firms with some degree of control over how the work is accomplished without the elimination of the independent contractor's self-employment status and without imposed penalties (see Real Estate Worker's Classification Chart below).

 

The statutory non-employee classification only applies to real estate agents and direct sellers. 

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LEGAL BUSINESS OWNERSHIP STRUCTURE OPTIONS

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It is important to note that self-employed individuals (i.e., 1099 ICs) can own and legally structure a single-person business (solo practice) or group (team) practice either as a sole proprietorship, partnership, limited liability company, or corporation. The default legal business structure for an unincorporated (single- or multi-person) business enterprise is sole proprietorship. 

 

The sole proprietorship structure is the easiest business organization to establish and refers to the number of owners in the enterprise and not to the size or scale of the business. A sole proprietorship is simply one of the four legal forms of business organization with it being no less significant than the other business structures.

 

Each type of business organization offers unique benefits and is usually chosen based on the goals and objectives of the business owner(s). It is often presumed that a sole proprietorship is always a one-person operation (i.e., individual or sole practitioner firm). But this is not always the case.

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For example, a one-ownership business can have one employee, a few employees, several hundred, or thousands of employees qualifying it to be considered a multi-person firm.  Therefore, the one-owner business can be a small-size, mid-size, or large-size venture.

 

There are no legal restrictions on the number of employees and/or non-employees that a sole proprietor (owner) can either employ or contract with, respectively. Of all the business forms, the sole proprietorship gives the owner the strongest control over their business since they have no partners to consult with on decisions or board of directors to satisfy.

 

The sole proprietor may have employees with varying degrees of accountability, but the ultimate decision-making responsibility rests with the owner. When a business is organized as a sole proprietorship, which by the way is the oldest form of business organization, the nonemployee-owner of the business is operating as a "natural and mortal person" having complete decision making authority and total (unshared) ownership of the business' assets and liabilities. 

 

If the business is organized as a corporation, the incorporated business becomes an "artificial legal and immortal person" having decision making authority, ownership of the firm's assets, and responsibility over the firm's liabilities. As an artificial person, a corporation can sue, be sued, hold title to, lease, and sell property.

 

It can enter into contract agreements with individuals, other corporations, partnerships, government bodies, and perform many of the same activities as a natural person. So essentially, the corporation becomes the proprietor's stand-in ("corporate shield") and the proprietor becomes an employee-owner of the corporation or "corporate citizen."

 

When a proprietor becomes an employee-owner of the corporation, the proprietor is "corporate-employed" and no longer considered to be self-employed nor required to comply with the Self-Employment Laws and Tax Regulations.

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Conversely, corporate-employed owners are subject and required to comply with the Labor and Employment Laws and Tax Regulations. The Labor and Employment Laws only become applicable to self-employed business owners when they choose to hire direct employees or become an employee of their own corporation.

 

Partnerships (general and limited) are formed when two or more sole proprietors decide to work together as a team or group. Limited liability companies can be either single-member, partnership member, or incorporated enterprises. For further information on this topic, please consult appropriate business advisors and additional resources.  

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BROKERAGE FIRM BUSINESS MODELS

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IC real estate agents purchase (via revenue sharing arrangements or fee splits, and payment of other broker assessed fees) the right to come under the brand logo of the company they affiliate with (i.e., hang their license) and to use the brokerage or hiring firm's resources.

 

Consequently, the broker-salesperson IC relationship is more analogous to the prime contractor-subcontractor or franchisor-franchisee (entrepreneurial) model than to the traditional, hierarchical employer-employee (command-and-control) model. In other words, the broker-salesperson IC relationship is a strategic business alliance interdependent on one another's success.  

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The prime contractor-subcontractor/franchisor-franchisee model is used throughout the business world and across various industries including, but not limited to, personal grooming, construction and development, sales and direct selling, entertainment, and financial services. The real estate services industry is no exception.

 

In real estate brokerage, there are two popularly used contracting business models that tend to run parallel to the statutory and common-law independent contractor work arrangements: Agent-Centric Model and Broker-Centric Model. Agent-centric firms promote an entrepreneurial business culture and operate according to the common-law independent contractor practice standards. (See Real Estate Worker's Classification Chart below). 

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Broker-centric firms, on the other hand, promote a traditional (command-and-control) work culture and operate according to the employee or statutory independent contractor practice standards. Direct sellers and real estate agents are classified as statutory independent contractors at the federal level.

 

It is important to note, however, that state laws ultimately determine the broker-salesperson relationship and can supersede the federal laws. If a salesperson is a statutory independent contractor for federal tax purposes but a common-law independent contractor for state tax purposes, the broker must adhere to the standards applicable to the most restrictive of the two types of relationships.

 

In most instances, the most restrictive are those standards applicable to the common-law independent contractor. (Here is a Worker Classification Chart comparing the different work relationships and practice standards existent in the real estate brokerage industry).

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​Because the broker and IC salesperson are forming a strategic relationship based on a business-within-a-business concept, the work arrangement does not strictly adhere to the traditional corporate employment hierarchy model.

 

Although brokerage firms play a supervisory or sponsorial role, real estate agents are starting a small independent personal/professional services business (typically a solo or partnership sales practice in their legal name(s) or personal brand) when they affiliate with a brokerage firm as a standard 1099 independent contractor sales professional or entrepreneur.

 

Another name for the type of business being started by an IC agent is small office/home office (SOHO) or home-based business (HBB). Therefore, IC sales agents are in business for themselves, but not by themselves. This is true regardless of the type of IC relationship the salesperson has with the brokerage firm since there is no such thing as a "1099 Employee."

 

However, as previously mentioned, there are significant operational differences between the agent-centric and broker-centric business models, and 1099 IC versus W-2 IC classifications. IC sales agents operating under the agent-centric model are typically private practitioners where there are no corporate job titles, seniority system, and bureaucratization. There is also not a "bottom," corporate ladder to climb, or corporate interference. 

 

Many REALTOR® sales professionals (especially residential practitioners) are affiliated with agent-centric firms and operate autonomously. In contrast, IC sales agents operating under the broker-centric model are typically corporate practitioners having traditional job titles and whose work environment involves a company seniority system, and bureaucratic company structure.

 

In some cases, corporate practitioners are direct employees of the firm instead of standard independent contractors. Corporate practitioners may or may not be REALTORS® or members of the National Association of REALTORS®, or any of NAR's affiliated organizations (e.g., CCIM, SIOR, CRE, and CPM).

 

Brokerage firms are not obligated to join the NAR or its affiliates. Many commercial firms and practitioners operate on the broker-centric platform.   

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THE BUSINESS/ENTREPRENEURIAL MINDSET AND WORKER MISCLASSIFICATION

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Top level salespeople in all industries, whether company-employed or self-employed, REALTOR® or non-REALTOR®, statutory or common-law IC, think and act like the owners of their careers or a business.

 

It is more than just a technical orientation. Psychologically, they have adopted a Serious Business Attitude (SBA) rather than a Marginal Business Attitude (MBA); developed a "business owner" mentality versus an "employee" mentality; they have moved from paycheck to profit thinking.

 

Unfortunately, there are some real estate agents, teams, and real estate offices that have not made the mental shift and overlook the "business-within-a-business" and entrepreneurial framework of real estate brokerage as well as the unique work relationships used in the real estate and professional sales industries.

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And instead, encourage the misconception that 1099 independent contractor salespeople or independent sales associates (ISAs) are ​direct employees or sales personnel of the house or team. These misconceptions have led to a recent wave of litigation (​see NAR's white paper) within the real estate industry regarding the Independent Contractor versus Direct Employee worker classifications. 

 

It is possible that some brokerage firms may mistakenly confuse the idea of 1099 independent contractors with the "W-2 independent contractor" (statutory employee) classification since there are allied industries (e.g., corporate sales and insurance) that use independent contractors that are also treated as employees. 

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Nevertheless, there are people and organizations such as ClassAction.com who continuously challenge companies that are negligent in the use of independent contractors in the business and real estate arenas. With many calling for a crackdown on improper worker classification because they believe that employers classify workers as independent contractors simply to avoid existing requirements of state and federal labor law and employment benefits (i.e. overtime pay, vacation and sick leave, employer Social Security contributions, workers compensation requirements, health insurance employer mandate, etc.).

 

Additionally, there are several federal and state agencies that audit businesses for misclassifying employees. There are also employment attorneys who specialize in real estate agent misclassification.

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The NAR strongly supports the continued right of brokers to choose whether to classify agents as employees or independent contractors. NAR also supports actions at the state level to strengthen the rights of brokers to make these determinations and will resist any efforts at the federal level to weaken those rights.

 

The links above and following links have been provided for further study on this subject. Click here for more information or please visit NAR's website on this topic by going here. Also see NAR's Independent Contractor FAQ. Also see NASE's Difference between Independent Contractor and Employee video.

 

INMAN News has also published the following article on this topic as well: "Real Estate Independent Contractor Lawsuits Explained." 

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LAST WORDS

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In summary, the real estate services industry is fascinating and offers several unique career opportunities to work either in corporate or private practice. Real estate offices, teams, and principal brokers have three basic choices when building their field sales force: 100% company-employed (direct) salespeople, an independent (outsourced) affiliated sales force, or a combination of these two.

 

IC real estate sales agents or ISAs are not traditional in-house employees of the company or real estate team regardless of the type of contracting relationship - i.e, statutory or common-law.

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Real estate ISAs are self-employed service professionals and business owners (entrepreneurs) who should be treated as peers strategically partnered with the real estate office or team to achieve a mutually desired objective: distribute new product and service solutions, provide customer service, and generate revenue and profit in order to satisfy individual goals, and meet the company's or team's sales channel needs. 

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Industry practitioners are strongly encouraged to ​​read the book developed by NAR's Legal Team, Real Estate Brokerage Essentials®: ​​Navigating Legal Risks and Managing a Successful Brokerage, Fourth Edition for more clarification on the different worker classifications within the real estate brokerage profession. The manual is regarded to be the most comprehensive tool ​to run a brokerage business​ efficiently and minimize ​risk for legal liability. Highly recommended.    ​

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