courtesy of October 6 WRA Newsletter by Cori Lamont
Release of revised DWD workers’ compensation FAQ creates need for clarification
1. Historically, many real estate agents have been independent contractors rather than employees. Most individuals become real estate agents because they want to have freedom in their work and basically be their own small business owner. If they are designated as employees, this impacts tax withholdings as well as the benefits required to be offered by the firm.
The concept of independent contractor status has been recently challenged more aggressively nationwide than in years past. In both Massachusetts and California, real estate agents challenged their classification as independent contractors, arguing they were employees of the real estate firm. Based on the heightened scrutiny of this issue, the National Association of REALTORS® encouraged states to evaluate their laws relating to the independent contractor status of real estate agents.
2. As of July 1, 2016, the newly created Wis. Stat. § 452.38 provides a safe harbor for real estate independent contractors consistent with federal IRS regulations — see 26 U.S. Code § 3508 — if certain statutory tests are met:
- a. A written agreement has been entered into that provides the licensee shall not be treated as an employee for federal and state tax purposes.
- b. Seventy-five percent or more of compensation paid by the firm to the licensee during a calendar year is directly related to the brokerage services performed by the licensee on behalf of the firm.
If the licensee meets the above test, then the licensee for all intents and purposes is an independent contractor.
The law does not dictate whether a firm has employees or independent contractors. If the firm hires employees, then the firm will be required to treat the individuals as such for taxes and benefits. Agents and firms always have the opportunity to enter into an employer/employee relationship. This law retains this option and ensures, for the most part, that the decision about which relationship to adopt should be made by the firm and agent — not by the court.
3. The WRA pursued legislation touting three major changes to clarify and secure the status of agents who choose to be independent contractors:
- Change statutory labels by removing the reference to “employee” and “employer” and instead referring to “firms” and “agents.” Removing this antiquated terminology helps eliminate confusion as to the relationship between the firm and the agent.
- Create a safe harbor for those who wish to be deemed independent contractors. Basically, individuals who meet the safe harbor test are deemed independent contractors.
- Lastly, we tried to close any gaps where a court could look at the relationship in any manner other than as an independent contractor relationship. This discussion brought us to worker’s compensation. DWD interpreted the relationship between a firm and the agent to be an employer/employee relationship because of the supervisory responsibilities of the firm. Due to this DWD interpretation, the firm was required to carry worker’s compensation insurance for its agents.
4. DWD’s previous interpretation could have been looked upon by a court as indicating an employee/employer relationship even if the agent met the newly created independent contractor safe harbor. Moreover, DWD’s interpretation of an employee/employer relationship appears to be unique and inconsistent with other federal and state laws, such as the federal tax code and the Affordable Care Act, which treat agents the same as independent contractors.
If the agent meets the tests in Wis. Stat. § 452.38, then the agent is an independent contractor, and a firm is not required to carry worker’s compensation.
Finally, after review by the WRA’s public policy committee, board of directors and an internal member task force, it was determined the independent contractor status needed to be protected, and the requirement to carry worker’s compensation insurance for agents was counterintuitive to that premise. In July 2016, Wisconsin joined 29 other states in exempting real estate agents from worker’s compensation coverage.
5. While the law allows a firm to voluntarily offer worker’s compensation coverage to the agents associated with the firm per Wis. Stat. § 102.078, there has been discussion about the possible risks associated with not carrying worker’s compensation for independent contractor agents associated with the firm. The following provides an analysis relating to this discussion.
- If the agent does meet the independent contractor tests of Wis. Stat. § 452.38 and the firm chooses to carry worker’s compensation, the independent contractor status is not at risk of being forfeited.
- DWD FAQ suggests a negligence claim could be filed against the firm if the firm chooses not to carry worker’s compensation. It is true an agent could attempt to sue a real estate firm for negligence. However, it is unclear how a real estate firm would be responsible for negligence when the person is an independent contractor.
If a firm chooses not to carry worker’s compensation, and the agent fell down a flight of stairs, then the agent should be unsuccessful in a worker’s compensation claim because that agent is an independent contractor. However, the agent could attempt to make a claim against the seller’s homeowner’s insurance. If the seller didn’t have homeowner’s insurance, the agent could attempt to sue the seller for negligence.
For a negligence claim to be made when an agent is personally injured off-site, the agent would have to try and connect that the firm has some sort of supervision requirement over the agent. However, Wisconsin’s firm supervision responsibilities were substantially changed during the last legislative session. The firm is required to supervise the brokerage service activities of each agent, and the statute lists specific activities. See Wis. Stat. § 452.132(1)-(4). That list does not include confirming the safety or condition of the property. Arguably, it would be very difficult for an agent to try and connect negligence to a personal injury off-site with the real estate firm.
- Keep in mind that if the agent were at the firm’s office and were injured, then like any member of the public, the agent may be able to make a claim against the firm’s insurance or claim negligence, for example, if the sidewalk at the firm’s office was not properly shoveled or salted during winter.
However, like any business decision, there is a risk analysis that must be done. It is true that carrying worker’s compensation creates an exclusive remedy and reduces being sued related to an injury. However, if a person is an independent contractor, then they should not be able to hold a firm responsible for their independent actions even if a firm has some supervision responsibilities.
102.078 Election by real estate firm
(1) A firm, as defined in s. 452.01 (4w), may elect to name as its employee for purposes of this chapter a real estate broker or salesperson who is excluded under s. 452.38 by an endorsement on its policy of worker’s compensation insurance or, if the firm is self-insured under s. 102.28 (2) (b), by filing a declaration with the department in the manner provided in s. 102.31 (2) (a) naming the real estate broker or salesperson as an employee of the firm for purposes of this chapter. A declaration under this subsection shall state all of the following:
(a) The name of the real estate broker or salesperson to be covered under this chapter.
(b) That a written agreement has been entered into that provides that the real estate broker or salesperson shall not be treated as an employee for federal and state tax purposes.
(c) That 75 percent or more of the compensation related to sales or other output, as measured on a calendar year basis, paid to the real estate broker or salesperson under the written agreement specified in par. (b) is directly related to the brokerage services performed by the real estate broker or salesperson on behalf of the firm.
(2) A firm, as defined in s. 452.01 (4w), may revoke a declaration under sub. (1) by providing written notice to the department in the manner provided in s. 102.31 (2) (a) and to the real estate broker or salesperson named in the declaration. A revocation under this subsection is effective 30 days after the department receives notice of that revocation.
452.38 Independent contractor relationship
(1) Except as otherwise provided in s. 102.078, a licensee shall not, under ch. 102, 103, 104, or 109, under subch. X of ch. 71 or subch. II of ch. 111, under any other law or rule other than those specified under sub. (1m), or in any action or proceeding under the common law, be considered an employee of a firm if all of the following are satisfied:
(a) A written agreement has been entered into with the firm that provides that the licensee shall not be treated as an employee for federal and state tax purposes.
(b) Seventy-five percent or more of the compensation related to sales or other output, as measured on a calendar year basis, paid to the licensee pursuant to the written agreement referenced under par. (a) is directly related to the brokerage services performed by the licensee on behalf of the firm.
(1m) This section does not apply with respect to ch. 108 or any rules promulgated thereunder.
(2) (a) Subsection (1) applies notwithstanding the requirements and responsibilities of a firm under s. 452.132 and any rules promulgated by the board.
(b) Subsection (1) applies regardless of the licensee’s status as a supervising broker under s. 452.132 and any actions taken by the licensee as a supervising broker under s. 452.132.
(3) In the case of an individual who is engaged as both an independent contractor and an employee for the same firm, sub. (1) applies only with respect to activities covered under the written agreement referenced under sub. (1) (a).
Cori Lamont is Director of Corporate and Regulatory Affairs for the WRA.