Dynamex and Real Estate: Apocalypse Starts with ABC

I seriously thought about not writing this post.

For one thing, this is complicated stuff, and I thought maybe it deserves to be a Red Dot Report in the near future. That might still happen, depending on how things play out over the next few months.

This is also one of my Black Swans coming home to roost, and I felt like maybe it’s a bit too much for me to be the one talking about it.

But ultimately, I decided to write it because no one else appears to be talking about this in the real estate industry. I just looked all over Inman, all over Housingwire, all over Realtor.org — and no one is talking about the Dynamex decision. Hell, I can’t find any mention of Dynamex even on the California Association of REALTORS website.

That’s just odd, since Dynamex just might be a neutron bomb on the real estate industry, at least within California, which has 185,000 of the roughly 1.3 million REALTORS in the United States. Plus, what the California Supreme Court just decided was in line with the rules of a number of other states (such as Massachusetts), one can easily see the reasoning of Dynamex spreading across the land, at least among ‘worker-friendly’ states, which also happen to be the most populous.

Then it’s zombie apocalypse time in the real estate industry.

So let’s talk about it. Briefly. Well, as briefly as possible.

The Dynamex Opinion

What we’re talking about is the recent (filed 4/30/18) decision by the California Supreme Court in the case called Dynamex Operations West v. Superior Court of Los Angeles County. I’ve embedded the full opinion if you’re a masochist like me and want to read the damn thing.

It goes without saying, I am not your attorney. Please consult your lawyer for actual legal advice and what you should or should not do.

Now, this is honestly one of the most complex and confusing opinions I have ever had the displeasure of reading. Part of the reason is the underlying facts that brought this up to the California Supreme Court — has to do with certifying a class for a class action lawsuit. Part of the reason is that the law is all kinds of jacked up in this area, as the court sort of acknowledges. And part of the reason is that (in my humble opinion) the court bends over backwards to reach the result that it wants to reach.

To summarize as briefly as I possibly can without making major errors (which are still possible, I suppose), what the court held in Dynamex is that most people classified as independent contractors are actually employees under California law.

Basically, the Court adopts the “ABC Test” instead of a complicated multi-factor test (known as the Borello test in California). The ABC Test begins by assuming that everyone is an employee of the company that “employs” them. To make someone an independent contractor, the employer has to prove:

(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and

(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and

(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Those “and” in between each element means exactly that: you have to prove all three in order to classify someone as an independent contractor.

All Real Estate Agents in California Are Likely Employees

The killer is (B) of the ABC Test: that the worker performs work that is outside the usual course of the hiring entity’s business.

The Court is trying to say that a traditional independent contractor is not an employee, but everyone else is. The actual example the Court uses is a plumber:

Thus, on the one hand, when a retail store hires an outside plumber to repair a leak in a bathroom on its premises or hires an outside electrician to install a new electrical line, the services of the plumber or electrician are not part of the store’s usual course of business and the store would not reasonably be seen as having suffered or permitted the plumber or electrician to provide services to it as an employee. (opinion page 70)

Obviously, if the plumber works for a plumbing company, then he would be an employee, no matter what kind of “independent contractor agreement” he might have signed.

Since every real estate agent works for a real estate brokerage, there is no way to say that their work is outside the usual course of the brokerage’s business. Ergo, every salesperson in California is likely an employee.

Limited (For Now) to Wage Orders

Thing is, the Dynamex opinion is limited to “wage orders” — which are features of California’s particular legal and regulatory regime. At least for now. Until someone brings a lawsuit outside of a wage order, and that court adopts the Dynamex ABC Test as the rule.

And real estate brokerages in California are subject to either Wage Order #4 or Wage Order #5, depending on whether they do or do not have property management as part of the business. I know, I know. And frankly, I don’t have the patience or the mental fortitude to read those wage orders in detail. You can, if you’d like, here and here.

What I can say after even a brief read, however, is that every real estate agent is likely owed a minimum wage:

Every employer shall pay to each employee wages not less than the following:

(1) Any employer who employs 26 or more employees shall pay to each employee wages not less than the following:

(a) Ten dollars and fifty cents ($10.50) per hour for all hours worked, effective January 1, 2017; and (b) Eleven dollars ($11.00) per hour for all hours worked, effective January 1, 2018;

(2) Any employer who employs 25 or fewer employees shall pay to each employee wages not less than the following:

(a) Ten dollars ($10.00) per hour for all hours worked, effective January 1, 2016 through December 31, 2017; and (b) Ten dollars and fifty cents ($10.50) per hour for all hours worked, effective January 1, 2018.

Employees treated as employed by a single qualified taxpayer pursuant to Revenue and Taxation Code section 23626 are treated as employees of that single taxpayer.

LEARNERS. Employees during their first 160 hours of employment in occupations in which they have no previous similar or related experience, may be paid not less than 85 percent of the minimum wage rounded to the nearest nickel.

(B) Every employer shall pay to each employee, on the established payday for the period involved, not less than the applicable minimum wage for all hours worked in the payroll period, whether the remuneration is measured by time, piece, commission, or otherwise.

(C) When an employee works a split shift, one (1) hour’s pay at the minimum wage shall be paid in addition to the minimum wage for that workday, except when the employee resides at the place of employment.

In addition, brokerages are going to have to pay overtime, under another complicated formula, but basically 150% of the base hourly wage.

So, take a brokerage with 200 agents. The least productive agent, who does two deals a year, is now going to have to get paid at least $11.00/hour to meet minimum wage requirements, and $16.50/hour if she worked more than 40 hours in a given week.

Say it with me, gang: mass layoffs in California real estate coming soon! I would estimate that CAR membership would go from 185,000 today to somewhere around 35,000. Maybe that’s a good thing, but I suspect most brokerages in California today would disagree.

The upside, I suppose, is that the Dynamex ruling is limited to wage orders… for now. It specifically does not address related items, like reimbursement for expenses, unemployment insurance, Obamacare, etc. etc.

But I can’t imagine those things are not coming soon, one way or another.

Limited (For Now) to California

The other thing to point out is that this is a California Supreme Court decision, and has no legal effect outside of California.

Having said that… the Dynamex court cites Massachusetts, Delaware and New Jersey as “sister states” they followed in making the decision. Furthermore, it cited a law review article from UPenn Journal of Law and Social Change called “ABC ON THE BOOKS AND IN THE COURTS: AN ANALYSIS OF RECENT INDEPENDENT CONTRACTOR AND MISCLASSIFICATION STATUTES.” And that article talks about sixteen different states who have made it harder to classify someone as an independent contractor instead of an employee.

More importantly, the ABC On the Books article points out why the states are so eager and interested:

Thus, by misclassifying workers as independent contractors, employers avoid these obligations. The stakes are clear and high. Whether at the local or federal level, reformers have consistently identified three harms that result from misclassification. First, misclassified workers are deprived of workplace protections and remedies to workplace harms like discrimination and wage theft. Second, businesses that play by the rules compete with businesses taking unfair advantages to their bottom line by skirting taxes. And finally, state and local governments and their constituents are divested of millions of dollars in lost payments to unemployment insurance funds, payroll taxes, and workers’ compensation funds.

The scale of these shortfalls varied by state and was inevitably shaped by each state’s size, industries, prior legal standards, and enforcement practices, but the issue has not discriminated by region. Around the country, academic and government reports have measured the impact of misclassification on state tax revenues or unemployment insurance funds and found sizable deficits. For example, Colorado’s labor and employment agency assessed that an imposing $167 million in income tax revenue had gone unpaid annually between 2009 and 2010. A policy center focused on Maine’s construction industry estimated its state income tax shortfall for the construction industry alone could be as high as $4.3 million per year. An analysis of 2002 to 2005 audits of the New York Department of Labor’s Unemployment Insurance Division revealed an annual average of more than $175 million in underreported taxes to the state’s unemployment insurance fund. Additionally, a state-funded task force in Maryland estimated that the state had lost as much as $20 million in contributions to its trust fund annually.

States have since set out to collect these lost dollars. Unlike other budget balancing tactics, such as tax increases or service reduction, enforcing and strengthening misclassification laws appear to have garnered broad political support. [Emphasis added]

California isn’t exactly the only state to be wanting more tax revenues. According to at least one scholar, 25 states are facing budget shortfalls in 2018. (Although, interestingly, California is not one of them.)

So think about your state. Think they’re not interested in collecting millions of dollars in “lost dollars” due to misclassification? Then read the last line of the long quote above: enforcing misclassification laws is politically popular.

Will Real Estate Get An Exemption?

I think that the way the industry will seek to handle the Dynamex ruling is to argue that real estate is different. That’s kind of what they did successfully in Monell v. Boston Pads, which I wrote about extensively in this blog.

NAR’s white paper on independent contractor status from 2015 (updated in 2016) is directly on point here:

In a positive win for the real estate industry, the Massachusetts Supreme Court affirmed the lower court’s ruling, holding that the Massachusetts independent contractor statute does not apply to real estate salespersons.  Instead, the Massachusetts Supreme Court held that, as the more specific statute, the real estate license law controls.

In reaching its decision, the court noted that despite the level of supervision and control brokers are required to exercise over their salespeople under the real estate license laws, the real estate statute expressly permits a broker to classify their salespeople as employees or independent contractors.  The court observed that compliance with the various controls set forth in the real estate licensing statute makes it difficult for a real estate salesperson to meet the “ABC Test” in the independent contractor statute, but that it could not have been the legislature’s intent to exclude real estate salespersons from independent contractor status.  In construing both the independent contractor statute and the real estate licensing laws together, and taking into consideration the legislative purpose behind these laws, the court determined that the real state licensing laws control.  This decision preserves Massachusetts brokers’ longstanding practice and ability to continue to choose to classify their salespeople as independent contractors.

I happen to think that’s a bit too optimistic, since I believe that the Monell court was practically begging for someone to bring a lawsuit under licensing law, but that’s a different issue for a different day.

I imagine that the industry’s response will be twofold.

First, CAR/NAR will argue that real estate license law exempts real estate agents from being classified as employees because of the broker’s supervisory requirements. It worked in Massachusetts, which also uses the “ABC Test” so why wouldn’t it work in California?

Second, CAR will lobby like hell in Sacramento to have clear exemptions written into statutory language.

We’ll see if either effort works. It’s impossible to guess which way the first argument will go, until we see an actual lawsuit by a real estate agent using the new Dynamex ruling. And it’s impossible to guess how successful or unsuccessful CAR’s lobbying efforts will be… except that the last time they went to the California legislature, the very powerful unions stood against them. As of this writing, Realtors don’t beat unions, not in California. Maybe it’ll be different this time.

Now Then, An Observation

On the issue itself, I think that just about covers it. Sure, there are hundreds of details in the opinion itself, and dozens of cool (if you’re a lawyer) things to think about, and there are hundreds of questions as a result of the decision. But the decision is made, the opinion was handed down, and there will be time for all of that in the future.

What’s interesting about Dynamex to me is the timing of it, in relation to other issues roiling the real estate industry right now.

In particular, I can’t help but think about the kerfuffle over the $30 NAR dues increase. My old hometown association, the Houston Association of REALTORS, is now on record as opposing the dues increase, and suggesting that NAR stop wasting money on useless things. In the open letter penned by Kenya Burrell-VanWormer, Chair of HAR’s Board of Directors, it reads:

HAR recommends the following amendments:

  • Waive the NAR reserves requirement for 2019 to allow leadership time to conduct a comprehensive line-by-line review and analysis of the budget to eliminate low usage and ineffective products and services, for example, HouseLogic, Realtor University, “dot-Realtor” domain and the Consumer Awareness Program.
  • Reallocate $30 of the $35 currently paid by members for the Consumer Awareness Campaign to fund the required 2019 budget needs and future budgets.
  • Charge the 150,000 RPR “power users” $11 per month to cover RPR’s operating expenses.
  • Accept a dividend from SCV in the amount of $39 million (of the roughly $43.8 million received) from the DocuSign IPO to fund the required 2019 budget needs.

I will fully admit to my biases here both for HAR and for Kenya Burrell-VanWormer, who is one of my favorite human beings, but they do have a point, don’t they?

At the same time, HAR is clear that they support REALTOR Party political advocacy.

Might I suggest that Dynamex is the best example of why political advocacy is the single most important benefit of the REALTOR Association?

Ask any California real estate broker whether NAR should spend (round numbers here) $45 million on Consumer Awareness Program, $20 million on RPR, $7.5 million on zipLogix, or $72.5 million (more) on lobbying state legislatures to prevent the “ABC Test” from applying to real estate brokerages. For that matter, ask any California broker how they’d feel about a $30 annual dues increase, all of which will go towards lobbying on top of all that to fight Dynamex.

I think the answer would be clear, don’t you?

Conclusion?

I don’t know that there is one to be drawn here, except that you need to be paying attention to Dynamex and what follows. Because I fully expect the industry to fight this, to seek an exemption for real estate based on licensing laws, I don’t know that it will have an impact. But the general trend is clear as day, and the motivations of the state governments are obvious.

If California REALTORS can’t defeat the unions on this issue legislatively, that says something about organized real estate, which in turn says something about the future of the industry.

One last thing. I expect that many of you will be heading to DC next week to attend Midyear. I cannot imagine that the REALTOR Party people have not already formulated talking points on this issue; make sure you talk to whoever you need to talk to in order to get educated on this issue. In some respects, all of the various MLS policy changes you’ll get in the weeds about, the $30 dues increase kerfuffle, and REALTOR prom and all of the committee meetings — all of that pale in importance compared to what Dynamex means for the industry.

Unless an exemption for real estate can be found either through the courts or through the legislatures, let’s just say that the word apocalypse starts with A… just like ABC Test. So get ready, and get busy.

-rsh

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11 Comments

Join the discussion and state your opinion. Some comments may be held in moderation. I try to get to them as soon as possible, but may be traveling or unable to approve comments immediately. I do not censor comments, but reserve the right to remove anything that looks like spam, trolling, or just outright inappropriate.

  1. I’m going with “the law is all kinds of jacked up in this area”.

  2. A reader, Eric Farrar, posted this on Facebook. I believe it’s an email newsletter from CAR Legal:

    REALEGAL®
    May 2018

    Dynamex Operations West, Inc. v. Superior Court, Charles Lee, et al. Real Parties in Interest
    During the last five years, the challenges to the real estate salesperson independent contractor status have increased. In a case unrelated to real estate, the California Supreme Court has issued a landmark ruling changing the common law factors test for employees for over 28 years to a new “ABC” test. This test is in conflict with California real estate license law. However, this potential conflict (under the factors test) was anticipated years ago and the legislature specifically stated in Business & Professions Code Section 10032 that real estate licensed salespersons and brokers may elect an independent contractor relationship even though they are subject to real estate laws including broker supervision and the law requiring salespersons to only be under one broker’s license. Since specific targeted laws typically take priority over generalized pronouncements under rules of legal analysis, this specific law relating to the ability to have an independent contractor relationship as between brokers and salespersons should still apply to modify, or create an exception to, the non-real estate employment law case.

    The case, Dynamex Operations West, Inc. v. Superior Court, Charles Lee, et al. Real Parties in Interest, was decided by the California Supreme Court on April 30, 2018. It involved a trucking company which hired drivers who alleged misclassification of the drivers as independent contractors instead of as employees. Prior to 2004 the drivers were employees but in 2005, the company changed them to independent contractors. The drivers brought a class action. The decision states the issue is of employee classification in one specific context: “…for purposes of California wage orders, which impose obligations relating to the minimum wages, maximum hours, and a limited number of very basic working conditions (such as minimally required meal and rest breaks) of California employees.” (Emphasis in original court decision.)

    The Court applied a new “ABC” test that requires an independent contractor to pass ALL three tests:

    That the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact.
    That the worker performs work that is outside the usual course of the hiring entity’s business.
    That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

    As to A, the real estate law requires a broker to supervise the licensed activity of the broker’s salespersons. B&P Code § 10032 addresses that head on and indicates that if the broker and salesperson select an independent contractor relationship by following the three-prong/factors test in the US Tax Code, and also articulated in the California Unemployment Insurance Code ((i) the individual is duly licensed under the B&P Code, (ii) substantially all remuneration is directly related to sales or other output, (iii) the services are performed pursuant to a written contract providing the individual will not be treated as an employee for state tax purposes), then the independent contractor status is recognized but does not remove the supervision or other regulatory requirements. The same analysis applies for the requirement that a salesperson only be licensed to one broker.

    The bottom line is, although this is a landmark case in changing the test, it will likely have little or no impact on those that strictly follow the three-prong test. Both brokers and salespersons should be careful, particularly with transaction coordinators and administrative staff, and even unique team arrangements, that they still have their practices examined to make sure they are squarely under the three-prong test in California’s Code and do not create an issue by blurring the lines under the ABC test. It is possible this will be challenged in the future, but to date, of the several cases filed, none have been decided on the merits and none have been able to certify a class action, the later of which is the honey attracting plaintiff’s lawyers. All are advised to examine whether they have the most current Independent Contractor Agreement and should consider the one with the more robust arbitration clause that provides for individual arbitration with an outside vendor.

    1. A few thoughts here.

      1. As expected, CAR will try to have real estate exempt via the licensing law (B&P Code § 10032) and that SHOULD work.

      2. I say it SHOULD work because it didn’t work in Bararsani v. Coldwell Banker. The judge in that case more or less simply ignored B&P Code § 10032.

      3. Furthermore, there are a number of other places where the state of CA considers real estate agents employees despite B&P Code § 10032. See, e.g., this: https://www.dir.ca.gov/RealEstateNotice.htm

      So like CAR advises, be careful, and while the above SHOULD exempt real estate, there just ain’t no guarantees.

  3. Very nice job Rob. As I read your article all I could think was the following. Imagine the extent of the “payroll” at Compass should ICs be deemed to be employees. The future cash calls to investors would literally need to be scheduled. But I am certain that the investors in Compass were made fully aware of this impending risk. On a more positive note, the consumer experience might finally have a chance of being improved in real estate if the brokerage and marketing services were delivered in a formatted offering made by employees. There certainly would not be the demand for 2.0 million or so licensees or 1.2 million Realtors, but would that really be all that bad?

  4. Increasingly, companies use independent contractors as a way to save money. A recent NPR/Marist poll concluded, “1 in 5 jobs in America is held by a worker under contract. Within a decade, contractors and freelancers could make up half of the American workforce.”

    If the courts try to change the nature of the employer/IC relationship the NAR PAC will be standing in line with dozens of other industry lobbies (truckers, beauty shops & security just to name a few) fighting any effort to stop it. Beyond the shrinking unions, there won’t be as many campaign contributions on the other side.

    While access to “free” tax revenue will be tempting, follow the money. The “gig economy” is here to stay. Beyond spending some PAC money, I don’t think Realtors have anything to worry about.

  5. Small token salary plus bonus (% of sale)?
    Not sure straight salary works for the big producers, and commission only has that darn conflict of interest feature.

    I believe the financial industry compensates its salespeople as employees.

    It seems to work for them.

    Thanks

    1. Or how commercial RE compensates employees. Instead of taking the “we don’t think there’s anything to worry about” approach, I would hope NAR and the State Associations will, at the very least, being to have “what if” discussions.

  6. I think the efforts of future Governor Gavin Newsom to have universal healthcare in California will decimate the industry far before a class action lawsuit brought by agents that changes IC…I suspect he will require all employers to offer healthcare for all employees (or show evidence they have it elsewhere) and he will consider agents to be employees and not independent contractors…let’s say basic insurance is $500 a month…you would need to know, without any doubt, your agent was going to close at least 1 deal a year….at least 50% of agents in this state find a new job…we can solve the professionalism/too many agents internally (increase the dues $1,000/year and use those funds to fight worthy political fights (rent control, just cause eviction, etc) or externally (state mandated insurance, elimination of the IC status by the courts and/or legislature)…I would opt to control my destiny and increase the dues.

    1. Increasing dues is simply doubling down on the status quo. That isnt a strategy, thats just a bet.

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