Much has changed in the world of real estate over the last few decades, but one recent court decision is poised to make unprecedented alterations to not just real estate, but independent contractor work as a whole.
This spring, the California Supreme Court ruled in Dynamex Operations West, Inc. v. Superior Court that the previous distinctions for what constitutes an "independent contractor" were outdated. Its new litmus test could reclassify Uber drivers, gig economy workers, and even real estate agents as employees rather than contractors. Similar rulings in Ohio and elsewhere mean that this question could soon be making its way to the U.S. Supreme Court. In my opinion, however, forcing companies to pay salaries to agents as employees would be a mistake.
Shaking the Foundations
Generally speaking, a person on a set salary or hourly pay isn't as motivated to produce or provide the work required to be an effective real estate agent. The business of real estate happens all day, every day. One of our agents at Windermere Group One, for example, has spent the last four Christmas Eves selling homes. Other agents consistently work on days they hope to call "off days."
If agents were to become full-time employees, organizations would be focused to pay massive amounts of overtime — client work doesn't disappear just because the standard workday is over. In fact, our real estate contracts actually state that time is of the essence. It's hard for me to imagine how a traditional employee would last long in this all-hours job.
If all agents are treated as employees, organizations would likely be forced to downsize their staff in order to offset the additional expenses that accompany full-time employment. There are too many agents who work this business part time, and their production reflects it. So the company would have fewer agents — and would pay them less hourly — than they could pay them on a commission basis.
By extension, we'd likely see more industrywide adjustments. Hours of operations would undergo massive change. Companies could begin charging retainer fees to lock in clients. Transactions for smaller services would rack up: charging to show homes, to write up offers, to attend inspections, etc. Most buyers need this money for down payments and closing costs; few could afford to pay for the individual steps it takes to close a real estate transaction.
For agents, income would drastically decrease. It’s hard to stay motivated to work with multiple clients at once, and when commission stops being the primary mode of payment, the incentive to see a transaction through would all but disappear. We’d also likely see a reduction in the number of agents in the business, which would jeopardize the influence and size of the National Association of REALTORS®. Without this organization, there would be a huge void when it comes to protecting home ownership, as well as holding Congress accountable for its actions.
Batten Down the Hatches
All that said, I don't think we'll move into a full-scale employee model anytime in the next decade. As I already mentioned, doing so would eliminate NAR, but it would also get rid of the state associations and local multiple listing service associations. A lot of jobs would be lost as a result. It's unlikely that anyone — within both the courts and the industry — would allow this to happen without making some changes to keep real estate afloat.
Alternatively, I can see us shifting into a model in which new agents are brought in as employees and put on a probationary period to determine whether they have what it takes to be successful. Experienced agents become partners, much like a law firm. They’re responsible for bringing in their share of the business and moving up other employees to partnership status.
I believe the bigger problem is making sure our agents are productive upon transitioning from employee status. If agents were required to meet a production threshold to keep their license in good standing, this would change the industry. With every transaction, agents would become more experienced and qualified. They would provide better service and be up-to-date on local real estate trends, as well as the necessary forms and contracts.
We're standing on the precipice of change. Whether this ruling is upheld or not, it's clear that real estate will soon shift into a new era. It's high time that agents and managers adapt to what's ahead.
Jeff Thompson is managing partner at Windermere Group One. WGO is a member of Windermere Real Estate, a real estate network comprised of 300 offices and more than 6,000 agents throughout the western United States. Jeff is truly passionate about helping build companies by building their people. He leverages his 25-plus years of experience in real estate to coach other managers and brokers. Jeff credits much of his success to hard work and a willingness to partner with good people.