Earlier today, the Massachusetts Supreme Court handed down its decision on Monell v. Boston Pads, one of two independent contractor status lawsuits that the real estate industry has been watching with baited breath. (The other one, still being litigated, is Bararsani v. Coldwell Banker in California.)
Bottomline: the brokerages and the REALTOR Associations that backed them won. I can almost hear the champagne corks popping from my house in Houston. Here’s the press release from MAR (Massachusetts Association of REALTORS):
This decision is a win for consumers and the entire real estate industry because real estate brokers and salespersons will still be able to work as independent contractors. Affiliating as an independent contractor has been the backbone of the profession for more than 100 years.
“We are pleased that the Massachusetts Supreme Judicial Court affirmed the pro-consumer choice by real estate professionals to affiliate as either independent contractors or employees.” said 2015 MAR President Corinne Fitzgerald, broker-owner of FITZGERALD Real Estate in Greenfield. “This relationship has worked for generations and it is what consumers have come to expect regarding agent entrepreneurship and availability. We’re glad the choice will continue.”
Inman News headline on the story looks like this:
And on Facebook and elsewhere, the celebrations continue.
First of all, I’m glad the case came out the way it did, and I can get behind the whole “this is a win for consumers” angle on the decision.
But might I suggest tapping the brakes on this joyride a touch? I’ve read the actual opinion itself, and while this is not legal advice, it is advice to consult your attorney when looking at how you’ve structured your brokerage operations.
This ruling is not an epic win. The ruling does not confirm that real estate agents are considered independent contractors. In fact, it is not a clear-cut victory for the brokerages at all. As Mos Def says, “Relax, pump the brakes. You’re speeding, money.”
The Case, And Some Thoughts
First of all, here’s the actual opinion from the SJC of Massachusetts:
Now, a few things jumped out at me while reading this. One was the degree to which the defendant brokerages controlled the agents in their companies. From the opinion:
The defendant entities required the plaintiffs to work sixty “front desk hours” during training and, thereafter, in some cases complete monthly “office hours” duty, which involved answering telephone calls from, and greeting, prospective clients. The salespersons were able to select the “office hours” that they wished to work. The business entities, however, allowed salespersons only one shift change every two months.
Then in the footnotes (#5 and #6) we get this:
5. During “front desk hours,” the business entities asked salespersons to perform “warm calling,” which included speaking with landlords, entering information into the business entities’ [the brokerage’s] database, and arranging times to meet with landlords to obtain keys and visit properties.
6. Specifically, the training guide provided that during office hours shifts the salespersons were to answer the telephone, greet clients and landlords, take out the trash, update facsimiles, telephone landlords, acquire new listings, and answer agent telephone calls. Under the guide, salespersons were prohibited during this time to schedule showings of available apartments for rent or property for sale. [Emphasis mine]
I know a lot of brokers and a lot of managers and managing brokers. The sorts of things that were required of the plaintiffs in this case are not things I’ve heard of often. Floor time is a time-honored practice, of course, but I haven’t heard of brokers or managers prohibiting their agents from setting appointments to show houses. Maybe that’s really commonplace; it just jumped out at me.
Something else that jumped out at me. The agents were told to get a cellphone with a “617” area code, and then the brokerages “instructed salespersons on what information they must enter into their cellular telephones and on how they were to answer their telephones.” (Footnote 8) That’s… wow. We’ll come back to this one later.
Nonetheless, bottomline is that the Court affirmed the lower Court’s ruling, but there’s some confusion about what that ruling was.
The Actual Holding of the Case
The press release version of the ruling is that the Court affirmed that real estate agents are not employees. That’s not the holding.
The actual holding of Monell v. Boston Pads is far more technical:
Thus, it is § 87RR that controls in this instance, not the more general independent contractor statute.
What the hell does that mean?
Massachusetts has a “general independent contractor statute” that applies to a whole bunch of industries and jobs. That would be Chapter 149 of the General Laws. The plaintiffs here sued under Ch. 149 alleging that they were employees under that law.
But Massachusetts also has laws that govern real estate licensing, registration, and practice. That would be Chapter 112 of the General Laws, specifically §§ 87PP through 87DDD½, and §§ 65A through 65E.
Section 87RR mentioned above reads in relevant part:
No salesman may conduct or operate his own real estate business nor act except as the representative of a real estate broker who shall be responsible for the salesman and who must approve the negotiation and completion by the salesman of any transaction or agreement which results or is intended to result in the sale, exchange, purchase, renting or leasing of any real estate or in a loan secured or to be secured by mortgage or other encumbrance upon real estate. No salesman shall be affiliated with more than one broker at the same time nor shall any salesman be entitled to any fee, commission or other valuable consideration or solicit or accept the same from any person except his licensed broker in connection with any such agreement or transaction. A salesman may be affiliated with a broker either as an employee or as an independent contractor and may, by agreement, be paid as an outside salesperson on a commission-only basis but shall be under such supervision of said broker as to ensure compliance with this section and said broker shall be responsible with the salesman for any violation of section eighty-seven AAA committed by said salesman. [Emphasis mine]
The Court held that the general labor laws do not apply to real estate agents; the industry specific real estate licensing laws do. Critically, since the plaintiffs sued under the general labor laws, which do not apply, the Court has to rule for the defendant. Victory for the brokerages, and victory for the industry.
But Some Dicta…
Thing is, check out these words:
That being said, we underscore the limited nature of our holding.
Because we agree with the Superior Court judge that the independent contractor statute does not apply to real estate salespersons, we conclude that the judge properly granted summary judgment on the first count: the plaintiffs cannot prevail on a claim based on a statute that does not apply to them. In reaching that conclusion, however, we take no position on whether the plaintiffs in fact are employees or independent contractors, or on how, in the absence of the framework established by the independent contractor statute, it may be determined whether a real estate salesperson is properly classified as an independent contractor or employee.
Limited nature, eh? Not the stuff that “epic wins” are made of. The Court then talks about some legislative history, and then more or less invites new litigation:
Because the plaintiffs based their argument on appeal on the contention that they are employees under the framework set forth in the independent contractor statute, they did not address how the court should determine the nature of their relationship if the court determines, as we have, that the framework does not apply. In light of the potential impact of that issue on the real estate industry as a whole and its significant ramifications for real estate salespersons’ access to the rights and benefits of employment, we think it prudent to leave that issue’s resolution to another day, when it has been fully briefed and argued. Should the Legislature be so inclined, it may wish to clarify how a real estate salesperson may gain employee status under the real estate licensing statute.
Other lawyers might disagree, but when I read language like that in an opinion, it’s like the Court is begging for some new plaintiffs to bring that lawsuit so that the Court can rule on that issue. Basically, the Court is saying:
“Just because the general independent contractor law does not apply to real estate agents, that doesn’t mean that the real estate agent isn’t an employee. In fact, we sure would love to determine how a real estate agent could be an employee, so could someone please sue a brokerage and then bring us briefs arguing the case without relying on Section 149?”
The last sentence could be read as a rebuke to the legislature, which is common in judicial opinions. Translated into English from Legalese, that sentence reads: “You numbskulls in the Legislature screwed the pooch with these contradictory laws. You guys wanna clean that up please?”
So, Where Does That Leave Us?
Basically, it leaves Massachusetts brokerages in a slightly better place than before. The general independent contractor law does not apply to real estate agents. So that’s good if you want to keep the 1099 thing in place.
But the Court never actually decided whether the plaintiffs here were employees or independent contractors. That wasn’t an issue that was raised before them. So the Court is begging for a new case, or in the alternative, asking the Legislature to clarify the law.
Now, I don’t know the specifics of the Bararsani v. Coldwell Banker case. I’m not about to pay $1 per page to download the various briefs in that case. But anecdotally, I have heard that the judge in the Bararsani case refused to throw the case out, refused summary judgment, and that things are headed to trial. Specifically, I heard that the judge wants to apply the 11-factor test for independent contractor status under California law.
So one of a few things could happen here.
1. Something about California law makes that case different, so the case is adjudicated under general independent contractor law. That pretty much means every real estate agent in CA is an employee, as the MA Court pretty much points out how labor law conflicts with real estate licensing law.
2. CA Court looks at the MA ruling and adopts the same logic; real estate agents are governed under real estate licensing law. Given that CA has laws that appear to be a bit stronger and more specific than the MA laws, this may be the likely outcome.
3. CA Court applies those laws but still finds that the agent is an employee. Critically, s.650 and s.13000-13019 talk about brokerages not having to pay Unemployment Insurance for a real estate agent. The plaintiffs in Bararsani are wanting reimbursement for expenses, among other things. It’s not clear that laws governing Unemployment Insurance are on point for a judge trying to figure out whether a real estate agent spent a bunch of money because his brokerage required him to do so.
4. CA Court does something completely off the wall wacky. Can’t rule it out. It’s California, after all.
Let’s see what happens in that case.
Ask Your Lawyer, But… What I’d Be Thinking HARD About
As I say, I’m a consultant, not a practicing attorney. So talk to your lawyer. But some of the things I would take a really hard look at are….
The level of control and management would be number one with a bullet on my list. The Court in Monell spent quite a few words on some of the things that the plaintiff agents were required to do by the brokerages. Even though the “facts” were not ultimately relevant to the disposition of the case, the Court took pains to point out stuff like dress codes, cell phones with “617” area codes, and being required to take out the trash. It’s just me, but I think the fact that the agents were not allowed to make appointments to show houses during their “floor time” shifts left a huge impression on the Court.
You see, the amicus brief filed by MAR and the position of the defendants says that real estate agents are unique in the realm of labor, that they are”independent and self-made… responsible for their own success and their own failure.” It’s really hard to justify that with the brokerage prohibiting appointments with clients because of “floor time”.
Management vs. Oversight
The other thing I would look at hard is whether the requirements are in the nature of “oversight” that the real estate license laws clearly contemplate, or in the nature of “management” for improved business success.
The defendants made the argument that the real estate license laws require the salesperson to be affiliated with a single brokerage, and that the brokerage exercises oversight and control over the salesperson. The reasoning of the real estate license law — and therefore, the defense used here — is that the real estate license laws prohibit “a range of conduct, the prohibition of which is intended to promote fairness and integrity in real estate transactions.” (Monell, p. 13)
The amicus brief from MAR makes the same argument: that brokerages needs to exercise control over the agent in order to ensure compliance with the real estate license laws, especially since the brokerage is legally responsible for actions of its affiliated agents.
But the things prohibited listed by MAR and by the Court all go towards that “fairness and integrity in real estate transactions”. There’s a very strong element of public protection in those. For example, the prohibitions are for things like:
- knowingly making substantial misrepresentations;
- improperly acting for more than one party to the same transaction;
- failing to properly remit any escrow funds;
- accepting any rebate or profit on expenditures made for the client;
- failing to give both the buyer and the seller copies of a purchase and sale agreement;
- soliciting listings on the basis of ethnic changes in a particular neighborhood (commonly known as “blockbusting”);
All of those are on Page 7 of the MAR Amicus Brief. The law is correct to be concerned with those kinds of behavior.
But you know what’s not on any list of prohibited conduct? What doesn’t go to fairness and integrity of the real estate transaction? Anything to do with marketing, listing acquisition, answering telephones, etc.
The Court calls out the brokerages telling its agents what information to put into their personal cell phones, and instructing them on how they were to answer the phone. Things like dress codes and floor time have nothing whatsoever to do with fairness and integrity. Requiring (as plaintiffs here claimed) that agents participate in a farming program has zilch to do with consumer protection. Being required to make phone calls to landlords and homeowners to drum up business is not within the purview of a broker’s “oversight” to ensure compliance with real estate licensing laws.
Meaning… if a brokerage mandates that the agent take certain types of training, or requires that the agent do certain actions, I would want to make sure all of those are connected to ethical, legal, consumer-protection type of issues and not about lead generation and doing more business. So mandatory classes on Fair Housing Act? Absolutely fine. Required attendance to the “10 Mobile Apps for Real Estate” class? Not a chance.
Not an Epic Win, More Like Dodging a Bullet
So bottomline… this ruling isn’t an epic win for the brokerages and the real estate industry. It’s more like dodging a bullet, because the shooter had poor aim.
In Monell, if the plaintiffs had alleged that they were in fact employees even if S. 149 (general independent contractor law) didn’t apply, then argued it and backed it up by pointing to all of those required actions that had nothing to do with the prohibitions in real estate licensing law, the Court just might have found for them. The next litigant, especially since the Court pretty much begged for someone to step up and bring that lawsuit, will have better aim.
Sorry to be a party pooper, because I am happy that Monell didn’t come out the other way. But I wouldn’t be relaxing if I were a broker. If anything, given the seeming eagerness of the MA court to rule on whether a real estate agent is an employee without reference to the general labor law, I’d be even more nervous and more careful.