Chapter 3 - Independent Contractor

I. The Nature of the Relationship

In New York, the distinction between being an Employee and an Independent Contractor is critical for tax purposes and legal liability. While a broker must supervise your real estate activities, they generally do not control how you do your work if you are an independent contractor.

• Common Law "Control Test": This is the historical standard used by courts and the IRS. If a broker directs not just the result of your work but also the means and methods (e.g., specific hours, mandatory meetings, step-by-step instructions), you are likely an employee.

• IRS Section 3508: The federal tax code specifically identifies "Qualified Real Estate Agents" as statutory non-employees if they meet three criteria:

1. They are a licensed real estate agent.

2. Substantially all payment is directly related to sales/output (commission), not hours worked.

3. There is a written contract stating they will not be treated as an employee for federal tax purposes.

II. New York State 1986 Laws

In 1986, New York added specific language to the Labor Law and Worker’s Compensation Law to protect the independent contractor status of real estate licensees. To maintain this status, the following conditions must be met:

• The Written Contract: There must be a written agreement between the broker and the salesperson executed within the past 12–15 months. It cannot be signed under duress.

• Commission-Based Pay: Compensation must be paid without deduction for taxes and must be based on output (sales) rather than hours.

• Freedom of Schedule: Salespersons must be permitted to work whatever hours they choose.

• Location Flexibility: Salespersons can work from home or the broker's office.

• Expenses: While a broker may provide office space and supplies, the salesperson is generally responsible for their own expenses (e.g., auto, travel, entertainment, and cell phone).

• Outside Employment: The salesperson must be free to engage in other employment outside of the brokerage.

III. Supervision vs. Control

A common point of confusion is how a broker can "supervise" without "controlling."

• DOS Regulation 175.21: This law mandates that a broker provide "regular, frequent and consistent personal guidance, instruction, and oversight." This is legal supervision to protect the public.

• DOS Regulation 175.23: Brokers are required to maintain transaction records (listings, contracts, disclosure forms) for 3 years.

• The Line: Supervision is about ensuring legal compliance; control is about managing the daily routine. If a broker requires you to sit "floor time" at a desk for no pay, they are exercising "control," which could jeopardize your status.

IV. Consequences of Non-Compliance

If the DOS or IRS determines a salesperson is actually an employee (due to "Substance Over Form"), the consequences are severe:

For the Broker:

• Liable for back payment of unemployment insurance premiums.

• Responsible for unpaid Worker’s Compensation and disability insurance.

• Liable for all Federal and State withholding taxes, including the employer's share of Social Security (FICA).

For the Salesperson:

• Loss of the ability to file Schedule C (Form 1040).

• Inability to deduct business expenses (mileage, marketing, dues) directly against income.

• All compensation becomes subject to immediate tax withholding.

⚠️ EXAM ALERT: QUICK FACTS

• The 12-15 Month Rule: NY law effectively requires that independent contractor agreements be re-signed every 12 to 15 months to ensure they remain current and valid.

• $1,000 Fine: The Department of State can fine a broker up to $1,000 for failing to properly supervise their salespersons under Regulation 175.21.

• The "Output" Rule: To be a "Qualified Real Estate Agent" under the IRS, at least 90% of your income must be from commissions, not an hourly wage.

• Termination: Under an independent contractor relationship, either party may terminate the association at any time.

KEY TERMS:
Independent Contractor: A person who is retained to perform a certain act but who is not subject to the control of the hiring person as to the physical details of the work.

Employee: An individual who performs services for another (the employer) where the employer has the right to control not only the result of the work but also the means and methods used to achieve that result.