The Best of the Legal Hotline: Written Independent Contractor Agreements Matter. Really!


 Tracy Rucka, WRA director of professional standards and practices  |    August 01, 2022
Legal Hotline

When it comes to broker and agent relationships, one of the most frequent calls to the WRA Legal Hotline relates to licensees claiming the firm is not paying commission as negotiated. Claims arise while the licensee is with the firm and/or after the licensee’s departure from the firm. For context, over 5,000 Wisconsin licensees changed firms in 2021. Therefore, the written agreement is essential to document commission in these situations. 

Wis. Stat. § 452.38 provides a licensee will be considered an employee of the firm if the licensee and firm enter into a written independent contractor agreement (ICA) related to sales or other output and 75% or more of the licensee’s compensation is directly related to brokerage services performed on behalf of the firm. Therefore, the written ICA is essential to document independent contractor status. Although the hotline inquiries are generally about the money, independent contractor status has implications reaching well beyond commission with issues like workman’s compensation, Wisconsin Department of Labor rules and the Wisconsin Department of Revenue rules, to name a few. Read on. 

Independent contractor vs. employee

Are all broker and agent relationships that of independent contractors? Is a written agreement really necessary? 

The law does not dictate whether licensees associated with a firm are employees or independent contractors. If the firm hires employees, then the firm will be required to treat the individuals as such for taxes and benefits. Alternately, if the relationship is one of independent contractor, a written agreement documenting the relationship is required. 

As of July 1, 2016, Wis. Stat. § 452.38 created an independent contractor safe harbor for real estate licensees. The Wis. Stat. § 452.38 safe harbor for real estate independent contractors, consistent with federal IRS regulations in 26 U.S. Code § 3508, applies if certain statutory tests are met:

  1. A written agreement has been entered into that provides the licensee shall not be treated as an employee for federal and state tax purposes.
  2. 75% or more of compensation related to sales or other output, and paid by the firm to the licensee during a calendar year, is directly related to the brokerage services performed by the licensee on behalf of the firm.

If the licensee meets the above test, then the licensee, for all intents and purposes, is an independent contractor. The written agreement will address the independent contractor nature of the relationship.

The relationship between a firm and an agent is governed by the ICA between the two and any company policies. The WRA’s sample Independent Contractor Agreement form may be used as a template to meet the Wis. Stat. § 452.38 written agreement requirement. The WRA form addresses many areas of the broker/agent relationship, including compensation due while the agent is with the firm, the process and procedures for termination, and what compensation is due post-termination. It is important for both the agent and firm to maintain copies of the ICA in the event a dispute arises.

Compensation 

An agent has his first listing. He showed the property to a buyer, drafted the offer, and went to closing on the transaction. The broker has not paid the agent. What are the next steps in this scenario?    

Wisconsin real estate statutes and administrative rules do not directly address compensation issues or commission policies between a firm and the licensee associated with the firm. In this situation, the entitlement to a commission depends on the contract between the firm/broker and the licensee; that contract may be an ICA, company policy, or a policy and procedures manual, for example. If the contract does not cover this type of situation, prior actions of the broker in this regard as well as the prevailing practice in the industry could be factors a court would consider if the agent went to court to recover his commission. 

Commission claim options  

Is the initiation of litigation the agent’s only option to pursue commission? Can the agent go to small claims court for pursuing commission? Can REALTOR® arbitration be used?    

The agent has multiple options to pursue commission, and litigation is not the only option. The agent can first attempt to reach out directly to the broker stating the basis for their claim. Alternately, the agent may have legal counsel make the request for compensation. An additional option available to the agent is the alternative dispute resolution services of the REALTOR® association. Both REALTOR® ombudsman and mediation services are free, voluntary member benefits. The agent may also attempt to have the dispute arbitrated at the local REALTOR® association. Each of these alternatives is subject to the broker agreement to arbitrate because an agent vs. broker request would be considered voluntary arbitration under Article 17 of the REALTOR® Code of Ethics. If the broker elects not to arbitrate, the agent can bring separate actions in small claims court: one action for each commission due. The limit on the amount that may be recovered in small claims court for civil actions and money judgments, other than evictions and earnest money cases, is $10,000. An agent may still sue in small claims court if the commission claimed exceeds $10,000 as long as the agent understands that recovery will be limited to $10,000. 

Why might a broker choose to use REALTOR® professional standards services to resolve a commission dispute with an agent? Why might the broker choose to agree to voluntary arbitration?    

REALTOR® ombudsman and mediation services are free. The process of these services is confidential in nature, and there is no public record of the parties participating in the process. Also, the ombuds or mediator is bound to keep the meetings, negotiations or any offers of compromise confidential. The services are also timely: the association can set up ombudsman or mediation as soon as the parties and ombuds or mediator are available to meet. In addition, alternative dispute resolution services allow the parties to reach their own resolution, and the parties control the outcome by mutual agreement. There is freedom and creativity allowed in negotiated resolutions. 

If the alternative dispute resolution services are not successful to reach resolution and the broker agrees to arbitration services, there are benefits in comparison to litigation. The fees, which are set by the local association, will be $500 or less per party — and in some associations, the prevailing parties’ fees are refunded. The arbitration process is quasi-judicial, therefore the parties have an expectation of due process and a fundamentally fair hearing. In addition, the hearing panel is comprised of trained REALTORS®. The participants are familiar with the real estate business, allowing the parties to focus on the underlying claims. 

Commissions after termination 

The agent has left her former firm. The agent was the listing agent on a property, and the pending transaction has not yet closed. What should the agent expect for commission from the former broker? 

This question brings to light one of the most contentious areas regarding what, if any, compensation is due when the agent leaves a firm and there are transactions midstream. These midstream transactions happen when the agent has done work, leaves the firm, but there has been no closing or payment of commission. 

Without a written agreement, the claim for compensation may be more difficult to determine, and the prior firm may take the position that no compensation is due after the agent’s termination. Bottom line: the entitlement to a commission depends on the contract between the firm/broker and the licensee. That contract may be an ICA, company policy, or a policy and procedures manual, for example. It is imperative to negotiate and document the terms and conditions of the agreement when the agent associates with the firm.

The agent and broker may review the ICA. The Compensation Following Termination section in the WRA’s Independent Contractor Agreement form identifies when the agent’s right to commission is triggered or accrues, and what amount of the commission is payable, depending on how far the transaction has progressed when the agent departs the firm and the firm assigns someone else to continue and finish the transaction. This may also be addressed in the compensation exhibit or another addendum to the ICA.

The agent will have an independent claim based on each transaction. The agent may begin with a direct request to the former broker. If the compensation issues are not thus resolved, the agent may try the alternative dispute services offered by the REALTOR® association, including ombudsman or mediation. These services are free, voluntary member benefits and attempt to reach resolution between the agent and former broker. REALTOR® arbitration is also available as a voluntary alternative to litigation. The agent may contact the local REALTOR® association for more information about these services.   

The agent may wish to confer with legal counsel regarding this issue. The agent can visit the Wisconsin Bar Association’s Lawyer Information and Referral Service (LRIS) online at www.wisbar.org/LRIS if the agent does not have a real estate attorney they work with or do not know of any good attorneys to contact.

Unilateral modification  

The agent just closed on a transaction, and the broker paid the agent. However, the payment is much less than the previously agreed-upon split. Can the broker unilaterally change the ICA?

The written ICA is evidence of the agreement between the broker and agent and will determine the broker’s obligation to pay commission and the agent’s rights or expectations thereto. Generally speaking, a contract is a bilateral agreement and cannot be unilaterally modified. The agent may request a meeting with the broker to identify the agent’s claims for compensation. In anticipation of the meeting, it may be helpful to review the current ICA and the office policies and procedures. It is important to look for any amendments to these documents. If the agent and broker are unable to reach resolution, legal counsel will be required to give specific advice about the rights, duties and obligations between the firm and agent. 

The agent listed a property while with firm A. The agent has since moved his license to firm B, and the seller’s sale with firm A has closed. The agent and former broker are in agreement on compensation. Who does the broker with firm A pay: the agent or the agent’s new broker?

The entitlement to a commission between the brokerage firm and the agent is determined by the ICA. If a commission that is due becomes payable after an agent leaves a company, it may be paid directly to the agent. The commission is for the activity the agent conducted on behalf of the former brokerage firm.  

What if there is no ICA, the agent leaves the firm, and a commission dispute arises?

If the contract does not address commission after termination or there is no written contract, prior actions of the firm in similar situations and the prevailing practice in the industry would be factors a court may consider if the agent pursued the commission in court. If the previous firm had no written agreements or policies, then the agent may need to prove the past practices of the firm or the prevailing industry practice in court. Alternately, if there is no ICA, the agent can attempt to collect earned commissions after termination under the Wisconsin Minimum Wage Law. This requires the Equal Rights Division of the Department of Workforce Development (DWD) to first find that the agent was an employee and not an independent contractor of the previous firm. If the DWD determines that the agent was an employee and not an independent contractor, it may investigate and collect any commissions or wages due to the agent. For more information, see the following resources from the DWD:

Bottom line: The entitlement to a commission depends on the contract between the firm/broker and the licensee.

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