The U.S. Department of Labor’s new rules on determining whether a worker is an independent contractor or an employee went into effect March 11, 2024. The changes reflect the current political climate strongly favoring employee-employer relationships over independent contractors. The shifting landscape is a great opportunity for industries that commonly use independent contractors—like real estate brokers—to revisit those relationships and their practices moving forward.

Real estate agents have long been viewed as independent contractors, which allows broker firms more flexibility in contracting. But as the guideposts for who can properly be an independent contractor continue to move, it is crucial that broker firms review such relationships with care.

Engaging an independent contractor is not as simple as a title. Instead, broker firms should have clear, written agreements with their agents that comply with state and federal rules. After the agreement is signed, broker firms must continue to be mindful of how they treat an agent – if the relationship functions more like an employer-employee relationship, a reviewing court or agency is likely to determine the worker was misclassified.

What Rules Apply?

The Federal government uses an “economic realities” test to analyze the relationship between a worker and potential employer that considers the following six factors:

1. The worker’s opportunity for profit or loss
2. The financial stake and nature of any resources a worker has invested in the work
3. The degree of permanence of the work relationship
4. The degree of control an employer has over the person’s work
5. Whether the work the person does is essential to the employer’s business
6. Consideration of the worker’s skill and initiative

The new DOL rule further allows considering additional factors relevant to the overall question of economic dependence; for example, will the worker lose money if the job is done poorly, or is the worker’s immediate compensation unrelated to performance? If the latter, there is an assumption of economic dependency, or an employment relationship.

At the state level, every state has their own standards for how to define an independent contractor relationship. In Oregon, there are three different tests, depending on which agency you ask. Washington applies a “personal labor test” before applying an additional six-part test. In California, the situation is even more complex and the tests assume that the worker is an employee.

What’s the Risk of Getting this Wrong?

Misclassifying a worker as an independent contractor carries steep liabilities, as laws like the Fair Labor Standards Act, which governs minimum wage, apply only to employees and not independent contractors. Broker firms on the receiving end of such claims may find themselves paying significant penalties and opening themselves up to suits from the agent, liability to government agencies, and potential class actions – it’s not a cheap mistake to make.