The Best of the Legal Hotline: New Year, New Firm?


 Tracy Rucka  |    November 08, 2021
Legal Hotline

The WRA Legal Hotline fields calls about agents transferring firms and brokers opening new firms throughout the year. There is, however, an increase in these inquiries around the new year. In anticipation, the hotline article this month offers discussions related to this topic to help facilitate smooth transitions. 

Interim time between firms

The agent plans to leave the firm at the end of the month. What is the process, and can the agent who has a salesperson license continue to show properties and draft offers while between firms?

When leaving a firm, the agent should start by reading and following the terms and conditions of the independent contractor agreement and office policy regarding moving on from the current broker. The process will differ from firm to firm, and it is important to comply with the policies of the specific firm. As a salesperson, the individual cannot provide brokerage services unless the license is associated with a firm. No showings, no negotiations, no drafting. The salesperson, between firms, can negotiate a referral fee, which is best documented in writing. Remember to follow any company policy regarding how or if your departure is communicated to current customers and clients.

Agency agreements 

The agent plans to change firms. The agent has several listings with friends and family as well as buyer agency agreements. Can the agent terminate these agency agreements? 

No. The listings and buyer agency agreements are entered into between the sellers and buyers and the firm ‚ÄĒ not the agent individually. See lines 81-94 of the WB-1 Residential Listing Contract and lines 86-98 of the WB-36 Buyer Agency/Tenant Representation Agreement. In addition to the contracts, Standard of Practice 16-20 of the REALTOR¬ģ Code of Ethics prohibits agents from inducing clients of the current firm to cancel agency agreements between the client and the firm. An agent who attempts to terminate an agency agreement will be at risk of interference with contract.¬†

Pending transactions  

The agent has a seller with an accepted offer, and the transaction is scheduled to close after the new year. If the agent leaves the firm before the closing, can the agent still help the seller with the transaction and the closing? 

No. Once the licensee leaves the firm, the licensee can no longer provide brokerage services on behalf of the former firm. The broker or another agent assigned by the broker will service the transaction to closing. It would also be possible for the seller to have private legal counsel oversee the transaction to closing. The departing agent should refer to the office policies and procedures about what, if any, communication the agent has with existing clients and customers before leaving the firm. After termination, any contact by the clients should be referred to the former broker or legal counsel to avoid engaging in the unlicensed practice of law or violating the REALTOR¬ģ Code of Ethics.¬†

Commissions  

An agent is planning a move to a new firm. How will commission for pending transactions be paid?

The entitlement to a commission in this situation depends on the contract between the firm and the agent, which can be the independent contractor agreement or company policy and procedures manual, for example. If the contract does not cover the situation, prior actions of the broker in this regard and the prevailing practice in the industry would be factors to be considered if the matter went to court.

Wisconsin real estate statutes and administrative rules do not address commission policies between an agent and the agent‚Äôs associated firm. This is an issue of contract law. After the agent moves to a new firm, if the former firm does not pay commission according to the terms of the agreement, the agent can attempt to have the dispute arbitrated at the local REALTOR¬ģ association, provided the previous broker agrees to arbitrate. This would be considered a voluntary arbitration under Article 17 of the Code. If the former broker refuses to arbitrate, the salesperson can bring separate actions in small claims court for each commission claimed.¬†

A closing occurred after an agent left the firm. Should the former broker pay the agent directly? Or are the funds sent to the new broker, and the new broker pays the agent?

Wisconsin real estate statutes and administrative rules do not address commission policies between a brokerage firm and a real estate agent. Rather, the broker’s commission payment obligation after agent termination will usually depend on the terms and conditions of the independent contractor agreement and/or office policy. For instance, the Compensation Following Termination provision of the WRA Real Estate Independent Contractor Agreement explains how to determine commission upon termination. That provision indicates what step must have been reached and the portion of the commission that would then be payable on a case-by-case basis. The timeline must be reviewed to determine if commission is earned. If earned, the commission will be paid directly to the agent because the commission is the fulfillment of the obligations in the independent contractor agreement. It is not routed to the new broker/firm. 

Independent contractor agreements   

An agent is contemplating moving to a new firm. The new broker stated there is no need for a written independent contractor agreement. Isn’t a written agreement required? 

The relationship between the broker and the company’s sales associates can be either an independent contractor relationship or an employer/employee relationship. Classification of that relationship is critical for state and federal tax purposes and workers’ compensation. To take advantage of the Wis. Stat. § 453.38 independent contractor safe harbor provisions, a firm and the licensee associated with the firm need to have a written agreement stating the licensee shall not be treated as an employee for federal and state tax purposes. In addition, 75% or more of the compensation related to sales paid to the licensee must be directly related to the brokerage services performed by the licensee on behalf of the firm. The written independent contractor agreement (ICA) is a statement that documents the agent will be treated as an independent contractor under Sec. 3508(B) of the Internal Revenue Code as well as for purposes of Wisconsin law. Moreover, a comprehensive commission agreement, which may be a part of the ICA or an addendum thereto, will address commission for listings, sales and referrals, as well as what to do in the event of termination.

A broker is planning on leaving the firm and practicing real estate independently. The broker has an LLC, a trust account, and has errors and omissions insurance lined up. The paperwork for the Department of Safety and Professional Services (DSPS) Business Entity license has not yet been returned. The DSPS told the broker he can continue to sell real estate. Is this correct? 

An individual with a broker’s license can continue to provide brokerage services after officially leaving their current firm. Until the real estate business entity license is obtained from the DSPS, the broker will be providing brokerage services under the individual broker’s license. Although the LLC is formed with the Department of Financial Institutions, until the DSPS issues a license to the business entity, the broker can only conduct business as a broker licensee. 

Resources 

Licensee lookup

Whenever changes are made, it is prudent to check the DSPS licensee lookup online to confirm the changes. 

Visit licensesearch.wi.gov.

DSPS forms

Licensee Termination of Association with Firm

Wis. Admin. Code § REEB 17.06 requires the submission of a Notice of Termination of Licensee Association with Firm Form #766 within 10 days of a licensee leaving a firm. No fee is required to file the Notice of Termination. It is available online at dsps.wi.gov/Credentialing/Business/fm766.pdf. 

Licensee Termination as Business Representative of Firm

A licensee, who is a business representative of a firm, must notify the DSPS within 30 days after the effective date of the change using the Application for Real Estate Broker Business Entity License Form #815. Yes, you read that correctly; the form to change a business representative is the application for entity license, available online at dsps.wi.gov/Credentialing/Business/fm815.pdf.

Licensee Application for New Broker Business Entity License

An individual with a broker’s license may conduct real estate brokerage as a sole proprietor or may choose to create a business entity such as an LLC. After consulting with legal counsel about the best choice, if an LLC is the chosen path, anyone can create an LLC with the Wisconsin Department of Financial Institutions at www.wdfi.org/corporations/forms. Whether or not the LLC is then licensed as a Wisconsin Real Estate Business Entity is the next decision. To provide brokerage services out of the entity, the broker must obtain a real estate business entity license. The licensed entity must have a business representative with a broker’s license per Wis. Stat. § 452.12 (see docs.legis.wisconsin.gov/statutes/statutes/452). The business entity application is available at dsps.wi.gov/Credentialing/Business/fm815.pdf.

Tracy Rucka is Director of Professional Standards and Practices for the WRA.

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