SJC Issues Narrow Ruling Allowing Classification of Real Estate Agents as Contractors

On June 3rd, 2015 the SJC ruled in Monell, et al. v. Boston Pads, LLC, et al., that the Real Estate Licensing StatuteEmployer failed to pay overtime G.L.c. 112 §87RR (“Real Estate Licensing Statute”) trumps the Massachusetts Independent Contractor Law (G.L.c. 149, §148B) for purposes of determining whether real estate salespersons must be classified as employees or independent contractors. Applying traditional rules of statutory construction, the Court reasoned that due to the specificity of the Real Estate Licensing Statute, which expressly permits real estate brokers to engage real estate agents as independent contractors, the statute controls over the provisions of a general statute such as the Independent Contractor Law.

Nonpayment of OvertimeDon’t Throw a (Mis)Classification Party Yet, Massachusetts Business Owners

Real Estate Brokers, therefore, became one of the very few industries in Massachusetts that have been saved from the harsh penalties of worker misclassification and corresponding unlawful wage deductions and non-payment of wages and overtime. However, business owners generally should not rejoice, because the SJC’s ruling is so narrowly applicable it is unlikely to have any broader impact.

The real takeaway here is that if a Massachusetts statute exists that is specifically applicable to a particular industry or type of worker and it expressly allows workers in that industry to be classified as independent contractors, then classification of those workers as independent contractors is permitted despite the more generally applicable Independent Contractor Law which imposes strict criteria for classification as an independent contractor.

If that sounds like it would be a rare set of circumstances, that’s because it is. And that is why Monell, et al. v. Boston Pads, LLC, et al. was the first case of its kind to address this legal issue.

If the SJC had ruled otherwise, it would have subjected real estate brokerage firms to potential criminal penalties for misclassifying its real estate salespersons in a manner that is otherwise expressly authorized under the Real Estate Licensing Statute. Automatic re-classification of real estate salespersons as employees would have forced real estate brokers to cease certain deductions from pay and provide benefits, calculate tax withholdings and pay overtime wages. Although the real estate industry argued the burden would have been devastating to the industry, thousands of other businesses in numerous other industries have suffered the burden of taking such ‘corrective’ action.

The Massachusetts Independent Contractor Statute

The Independent Contractor Law establishes a presumption that Massachusetts workers are properly categorized as employees unless they pass a 3-pong test outlined in the statute. However, it would be utterly impossible, and contrary to the supervisory requirements imposed on real estate brokers, for real estate agents to ever pass the second prong of the independent contractor test: In Prong 2, an employer must prove that the service of the worker is performed outside the usual course of business of the employer.

This prong directly contradicts with the Real Estate Licensing Statute (§87RR). Under the Real Estate Licensing Statute, real estate salespersons are prohibited from conducting or operating a real estate business, and cannot act or perform the duties of a real estate salesperson except as a representative of a real estate broker and/or broker business. Therefore, if real estate brokers act in compliance with the Real Estate Licensing Statute, their real estate agents could never be considered independent contractors.

As a result of the SJC ruling, real estate agents are essentially exempt from the Independent Contractor Law, real estate brokers can breathe a sign of relief, and the Real Estate Licensing Statute controls. Therefore, real estate agents may either be considered an employee or an independent contractor.

What the SJC failed to resolve, however, was a method, test or factors to be used to determine whether and when a real estate agent should be classified as an employee or independent contractor.

Some have argued that the classification status of real estate agents should be determined by the common law “facts and circumstances” analysis of the control brokers exert over agents. Others propose a legislative solution that takes facade of a building with columns guidance from the Federal Internal Revenue Code which provides that if compensation is in the form of commissions and a written agreement with the worker makes clear the worker is responsible for paying their own taxes, the employer is entitled to a ‘safe harbor’ for classifying the worker as an independent contractor.

If you’re an employer and you engage workers as Independent Contractors, you need an attorney to review the facts and circumstances to determine if your classification is not a MISclassification. A dollar spent today, can you save you hundreds of thousands, if not millions, of dollars in civil litigation costs, treble damages, attorney’s fees and costs. Contact an experienced business attorney at The Jacobs Law LLC today by calling 1-800-652-4783 or at Business@TheJacobsLaw.com. An ounce of prevention is worth a pound of cure.

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Your Attorneys for Legal Review of Independent Contractor Classification