On March 9, 2021, the House of Representatives passed HR 842 (PRO Act) amending the National Labor Relations Act (NLRA) of 1935, and President Joe Biden urged the Senate to pass the measure as well.
If passed, the PRO law would make the “ABC” test of Independent Contractor (IC) status the law of the country, classifying real estate professionals and almost all other gig workers as white-collar workers. The new law would come into force on January 1, 2023.
The IC status in real estate has been attacked in court for years. The main reason lies in the numerous conflicting laws about what constitutes IC status. For example, at the federal level, the definition of IC status for tax purposes differs from the definition in the National Labor Relations Act (NLRA).
To make matters worse, states also have contradicting laws. In California, this led to the California Supreme Court’s Dynamex ruling confirming the Congregation Bill that replaced the Borello test that most California companies used to classify ICs through what is known as the “ABC” test. (California currently operates under Borello.)
Lobbying by the California Association of Realtors resulted in a spin-off of the brokerage legislature. In November 2020, California voters passed Proposition 22, which allowed Lyft and Uber drivers to stay as ICs as well.
Provisions of the PRO Act that suspend IC status for brokers and gig workers
The PRO law wants to expand “various health and safety measures related to workers’ right to organize and bargain collectively ”and weaken the“ right to work ”laws in force in 27 countries.
The language (i.e. the “ABC” test) that specifically affects the IC status of real estate professionals and other gig workers is:
A person providing a service is considered an employee (except as specified in the previous sentence) and not an independent contractor unless:
“(A) the person is free of control and instruction in connection with the provision of the service, both under the contract for the provision of the service and in fact;
(B) the service is provided outside of the employer’s normal course of business; and
(C) The person is usually employed in an independently established trade, profession, occupation or business that corresponds to the type of service being provided. “
According to an analysis by Littler, a law firm specializing in labor law:
Through the PRO Act, Congress seeks to rule “once and for all” at the federal level on the question of the classification of the independent contractor versus the classification of workers. The implementation of the ABC test by PRO Law would force employers to end independent contractor relationships or to submit to the added burden of converting independent contractors into regular employees, although many contractors prefer to remain independent.
The biggest problem for real estate is “B.” According to the National Law Review in their analysis of the California Dynamex decision and the implementation of the “ABC” test in California:
Note that each of these requirements must be met in order for the presumption that an employee is an employee to be rebutted and for a court to recognize that an employee has been properly classified as an independent contractor. Prong B of the ABC test is particularly noteworthy as it appears to prevent companies from using independent contractors to deliver or provide their core product or service.
In other words, “B” says that if you are a real estate agent working for a broker whose primary business is selling real estate, you must be an employee. (For a more in-depth analysis of the other provisions of the PRO Act, visit JD Supra.)
Where the real fight will be
Michael Lissack, the executive broker for the Virtual Realty Group in Oregon and Washington, has been involved in a number of filings and litigation relating to violations of existing IC laws in several states. Lissack believes the odds that the bill will pass the Senate are 60-40:
“The PRO bill will pass if the Democrats can convince 10 Republican senators to override a filibuster of the bill. The ABC test doesn’t even get put on the Senate’s list of priorities. Instead, Republicans are likely to make changes to the right to work provisions that would be eliminated in 27 states.
“The PRO Act is very likely to pass if it is bound by the revision of the provisions of Section 230 that limit the civil liability of large tech companies for external content posted on their servers. The most notable examples are Facebook and Twitter. “
While Republicans are eager to make changes in Section 230, that too pales in comparison to the upcoming struggles over immigration and tax hikes. Lissack is right: the ABC test isn’t even on the radar, which is most important.
Contrary to Lissack’s opinion, an analysis by JD Supra, a law firm that provides information to the legal community, legal consumers, the media and the general public, read: “As suggested, the PRO bill is unlikely to get Senate approval this year. “
The operational words are “as suggested,” hence Lissack’s comments on the potential of the Democrats and Republicans to negotiate a compromise.
What is around the corner when the PRO Act becomes law?
According to the NAR, 87 percent of all brokers are independent contractors and only 5 percent are employees. When real estate agents need to switch to employee, they are entitled to a minimum wage, reimbursement of expenses, employee benefits, rest breaks, vacation, and other benefits granted to employees under federal / state law.
This also means that they are subject to new standards of how, when and where they do their work.
10 changes to be expected when the PRO Act becomes law
1. The industry will have a unified federal standard regarding the application of labor laws to brokers and agents. State legislators will no longer be able to work out exceptions to IC laws as they have in the past.
2. PRO Act only applies to agents who are not brokers and / or who are not registered (i.e., acting as an LLC or S company). Trapped agents work in a business-to-business (B2B) relationship. If you have a broker license and your license is hanging with a broker who is going out of business, you always have the option to continue your business as an independent broker.
3. To become full-time workers, agents who are not brokers or unregistered agents must generate enough income to pay them the minimum wage in their state plus benefits and a profit for their broker.
For example, assuming a minimum wage of $ 15 an hour, that would be $ 30,000 per year plus vacation time, sick leave, and 6.2 percent employers who have to pay social security benefits. Coverage for all of these costs could easily be in the range of $ 45,000 to $ 50,000 with no profit to the broker.
According to NAR, the median income of brokers in 2019 was $ 49,700. As a result, at least half of the current realtor population would fail to make the cut for full-time employment.
4th Agents who become employees can expect big changes in their requirements. These can be:
- Required training, mandatory meetings and increased supervision.
- Tighter control over the customer experience with incentives tied to customer reviews.
- Odds and bonuses based on production and ratings.
- More part-time workers are paid hourly who do certain tasks like open house, conducting buyer demonstrations, prospecting, etc.
5. The PRO Act will disrupt brokerage revenue models, especially those that rely primarily on desk fees or high agent numbers. These companies must fundamentally change their current revenue models in order to survive.
6th Individual practitioner brokers and team models will explode as agents try to maintain their independence and control their own businesses.
7th The trend towards outsourcing work to virtual assistants will also explode, especially for companies that already provide these services to the real estate industry and for freelance firms like Odesk who can hire brokers on a B2B basis.
8th. Due to the smaller number of members, the NAR, state and local associations will have less political clout. The decline in sales can also lead to higher fees, with fewer resources for consumers and brokerage members.
9. Due to the decline in the number of agents, many multiple listing services are being phased out or merged. This will accelerate the transition to larger regional MLS so that they can survive.
10. The portals and providers that have signed contracts with large corporations or broker associations will see their income decline in line with the decline in the number of agents. This creates additional disruption as the agents and brokers of systems and products they rely on may no longer be available.
Will real estate avoid losing IC status again?
So far, the industry has evaded the loss of IC status. If the PRO law is passed, the months leading up to January 1st, 2023 will be extremely disruptive. Still, as one of my high-tech friends once remarked, “America is the great workaround society.”
We figured out how to deal with COVID-19. The entrepreneurship and determination of the industry will find out how things can work regardless of what politicians ultimately do.
Bernice Ross, President and CEO of BrokerageUP and RealEstateCoach.com, is a national speaker, author and trainer with over 1,000 articles published. Find out more about their broker / manager training programs developed by women for women at BrokerageUp.com and about their new agent sales training at RealEstateCoach.com/newagent.