There are looming threats on the horizon that may dramatically transform how the industry conducts business in the future. These threats include increased regulatory enforcement plus two major threats that could eliminate or greatly reduce the ability for real estate agents to function as independent contractors.  

First, increased regulation and enforcement are on the rise. Examples include the on-going dispute between the Department of Justice and National Association of Realtors, the Biden administration’s decision to increase the IRS budget for enforcement by 67 percent, as well as President Joe Biden’s July 9, executive order bringing the FTC into the mix in order to examine “areas such as [the] unfair occupational licensing restrictions; unfair tying practices or exclusionary practices in the brokerage or listing of real estate; and any other unfair industry-specific practices that substantially inhibit competition.” 

Additional enforcement is also coming in fair housing as well. At the recent Awesome Females in Real Estate Conference, Laurie Benner, the associate vice president of programs at the National Fair Housing Alliance, explained how the Biden administration stepped-up Fair Housing regulatory enforcement immediately upon taking office.  

For the real estate industry, this means increased use of testers (the people who pose as clients to see if Realtors exhibit discriminatory behavior) and increased budget for prosecuting violators. This why having a systematized approach where every client is treated exactly the same with the highest level of professional service is imperative.  

The PRO Act and Independent Contractors 

Biden’s $3.5 trillion spending package now includes the PRO Act, which is aimed at companies like Uber and Doordash that have come under scrutiny for their use of independent contractors to avoid paying drivers minimum wage or benefits. However, the bill would end independent contractor (IC) status for most professions as well as “right to work” laws in 27 states.  

There is a silver lining, however. In order for the Biden $3.5 trillion spending bill to become law, not only would all 50 Democratic senators have to vote for it, the Senate parliamentarian would have to agree that it is budget-related enough for it to qualify for “reconciliation” rules in the Senate. If this tactic works, Republicans will be unable to use the filibuster to prevent passage of the bill.   

The effects of reclassifying agents as employees rather than independent contractors are profound. One hundred percent-commission models, virtual brokerages and firms that support high numbers of agents who close no deals will be hit especially hard as would membership in most Realtor associations.  

Even if this bill doesn’t pass Congress, there’s a much larger looming threat that could force the industry to move to an employee model – increased enforcement by both state and federal departments of labor.  

Increased Enforcement a Concern 

In a recent column, Kimberly Stassel of the Wall Street Journal raised significant concerns about the confirmation of David Weil to run the Wage and Hour division of the Labor Department, a position he held from 2014-2017 during the Obama administration. Even if the PRO-Act doesn’t pass, Stassel warned that Weil’s history raises concerns he could challenge independent contractor rules “by fiat.”  

“Dr. Weil issued rules stripping most contractors of their independence, forcibly reclassifying them as employees (the better to unionize them). He more recently worked with the Massachusetts attorney general to sue Uber and Lyft, part of that blue state’s effort to kill its own gig economy,” Stassel wrote. 

Two significant cases in California illustrate how costly these actions can be for brokerages dealing with a case under the purview of their state’s Department of Labor.  

In the Bararsani v. Coldwell Banker class action lawsuit alleged that Coldwell Banker had misclassified current and former affiliated sales associates as independent contractors when they should have been classified as employees. On behalf of the purported class, the plaintiffs sought “the benefit of the California labor laws for expenses, wages and other sums, plus asserted penalties, attorneys’ fees and interest.”  

Coldwell Banker settled the lawsuit for $5 million. Several experts speculated that if this litigation had been successful, it would have forced the entire industry into an employee model. The fear was that up to 50 percent of the brokerages and an even higher percentage of agents would be put out of business on day one if the Bararsani litigation hadn’t settled.  

The California Department of Labor continues to actively pursue companies that violate the state’s existing independent contractor laws. The cost of these violations can be huge.  

To illustrate this point, four Zip Realty IC agents filed a lawsuit alleging they were employees rather than independent contractors. Zip Realty settled the suit for $586,000.  

After the suit settled, the California Labor Commissioner sought an additional $17 million in unpaid wages, damages, and penalties for all California Zip Realty agents. The case settled for $5 million.  

Unlike the change in the law the PRO Act seeks to make, the massive settlements described above resulted from the California Department of Labor’s enforcement of current employment laws. Regardless of what happens with the PRO Act, very few companies have the financial capacity to stay in business when facing judgments and fines like those paid by Coldwell Banker and Zip Realty.  

Increased regulation and enforcement have arrived. More than ever, real estate professionals must be hypervigilant about following the fair housing laws as well as avoiding any practices that could result in them being sued for misclassification of employees as independent contractors.  

Bernice Ross is a nationally syndicated columnist, author, trainer and speaker on real estate topics. She can be reached at bernice@realestatecoach.com