The Protecting the Right to Organize (PRO) Act was recently approved by the U.S. House of Representatives and will move to the Senate for a vote. If passed, it could represent a massive change to labor laws in the United States and could have a major impact on the real estate market.
For real estate, the Act might mean that the existing system of real estate agents as independent contractors in real estate brokerage would no longer be legal. Most large national brokerages, excluding those like Redfin (NASDAQ: RDFN) that hire agents as employees, have an independent contractor relationship with agents that allows agents to perform duties for the brokerage without receiving the benefits an employee receives.
The ABC test
Many states use what is called the ABC test to determine if a contractor is actually acting as an employee. The test stems from a legal case that was decided by the California Supreme Court, Dynamex Operations West vs. The Superior Court of Los Angeles. From this case, a simple test emerged.
A worker is considered a contractor if:
- They are free from the control or direction in how the work is performed.
- The work performed is outside of the usual scope of business.
- The worker is engaged in an independently established trade in the same business as the work performed.
Real estate agents operate under what is called a carve-out from this rule. When California passed AB 5, its legislation on worker status, it specifically excluded real estate licensees. If the PRO Act passes, it's unclear if Realtors will be carved out of the legislation. If not, this could represent a massive sea change in real estate as brokerages would have to bring on agents as full-time employees and offer benefits.
Joanne Cleaver, President at Wilson-Taylor Associates and author of The Career Lattice, is closely monitoring the PRO Act partly because of the ABC test. "One key aspect of the ABC test is that the self-employed cannot perform work essential to a client's operation," says Cleaver. "This is a critical understanding because it not only could (if lobbying fails) completely wipe out the ability of agents to be self-employed but it also would prevent agents from applying career skills in other ways within the real estate industry as a self-employed professional."
What that means is that if someone who was licensed as an agent but wanted to work in other aspects of the industry as an assistant or marketing professional might not be able to do so. This is important because many agents and teams inside brokerages hire a variety of other professionals as part of their work. The legislation could mean that brokerages would need to bring on these workers as part-time employees perhaps on a listing-by-listing basis.
"Obviously this is unsustainable," adds Cleaver. "Because I run training sessions for people who want to transition from employee to entrepreneur, I know how much hope people put in their ability to apply their experience to new opportunities."
It may not necessarily be all or nothing. An article in HousingWire proposed one way forward, which is that an agent could form an LLC or other corporation and then enter into a relationship with the brokerage through that corporation. However, at this point, it's not clear if that would work in all states. While the PRO Act would be national, laws determining the status and behavior of agents happen at the state level.
The lobbying power of the National Association of Realtors
The news comes as there are more than 1.45 million licensed Realtors in the United States. That is a record number, however, most of them are not likely to stay in the business. In 2014, the National Association of Realtors reported that 87% of agents failed within five years. However, what that statistic doesn't take into account is all of the agents who remain in the business in some capacity as an assistant.
The N.A.R. and other real estate associations throughout the U.S. have long been engaged in lobbying efforts to protect the status of Realtors as independent contractors. In briefing documents, the N.A.R. has described independent contractor status as "essential to the real estate industry, homeowners across the country, and to boosting the economy."
Given the current makeup of the Senate, it's not expected that the PRO Act will pass in its current form. However, the ongoing debate over the status of real estate agents is one that is N.A.R. and other organizations are prepared to use their lobbying muscle to fight whatever comes next.