AB5 Update: Real Estate Licensees Can Remain Independent Contractors

From the California Association of REALTORS®

Real Estate Licensees can continue their half century practice as independent contractors. AB 5 clarifies that existing law is not displaced by the Dynamex decision, a case that changed the way independent contractor status is analyzed in California. Although media coverage of AB 5 has focused attention on the sweeping changes to employment law generally, contained within AB 5 is a clear reconfirmation of the right of real estate agents to be treated as independent contractors.

The new law recognizes and reinforces Business and Professions Code § 10032 which allows real estate licensees to be independent contractors for “statutory purposes” as long as they meet three conditions:

1) They hold a real estate license;

2) Substantially all of their remuneration is directly related to sales or other output rather than to the number of hours worked; and

3) The parties have a written contract stating that the individual will not be treated as an employee with respect to those services for state tax purposes.

This three-part test follows the federal tax code as well.

AB 5 also indicates that if the classification in the B&P Code is not applicable then question of independent contractor status would be governed by “the Borello test,” which is based on factors of control, instead of those established by Dynamex.   However, even if the Borello test does apply, the duties of broker supervision and control under the real estate licensing law cannot be considered as factors.

This puts to rest some plaintiffs’ assertions that obeying the real estate law of broker supervision and the requirement that a salesperson must work under only one broker results in an employee status, which was never the case. In this regard, as part of C.A.R.’s real estate clean-up legislation, which was signed into law last year, all references to “employing broker” and “employee” were removed from the B&P Code.

Finally, AB 5 states definitively that the Dynamex decision does not apply to real estate licensees and adds that the law relating to real estate licensees applies retroactively to existing claims and actions to the maximum extent permitted by law.