What is the Test to Determine if a Real Estate Salesperson is an “Employee” or an “Independent Contractor”?

During 2023, it is imperative that California real estate brokers understand and apply the applicable test or governing standard for determining whether a real estate salesperson is an “employee” or an “independent contractor” for purposes of California Labor Code’s wage and hour provisions.

In the recent decision in Whitlach v. Premier Valley, Inc., Plaintiff James Whitlach pursued a claim under the Labor Code Private Attorney General Act of 2004 (Labor Code, § 2698 et seq.) against Defendants Premier Valley, Inc. (doing business as Century 21 MM) and Century 21 Real Estate LLC, to enforce civil penalties for violations of the Labor Code.

The trial court sustained defendants’ demurrer to the operative complaint without leave to amend. Whitlach appealed.

The appeal involved issues of statutory interpretation with regard to the following question: What is the applicable test or governing standard for determining whether a real estate salesperson is an “employee” or an “independent contractor” for purposes of the Labor Code’s wage and hour provisions.

Resolution of this question turns on interpreting recently enacted Labor Code section 2778, subdivision (c)(1), and other provisions incorporated therein.

The appellate court concluded the applicable test is the test set forth in Unemployment Insurance Code sections 650 and 13004.1, as incorporated in Business and Professions Code section 10032, subdivision (b), which is itself incorporated in Labor Code section 2778, subdivision (c)(1).

The trial court reached the same conclusion and applied the correct test in ruling on defendants’ demurrer, and the appellate court affirmed the judgment.

Plaintiff James Whitlach is a former real estate agent who was affiliated with defendant Premier Valley, Inc., doing business as Century 21 MM (Premier Valley), a real estate brokerage firm located in Oakdale. Premier Valley is a franchisee of co- defendant Century 21 Real Estate LLC (Century 21), a Delaware Corporation with its principal place of business in Parsippany, New Jersey.

On December 20, 2018, Whitlach filed a class action complaint alleging multiple violations of the Labor Code, among other claims. The complaint alleged he was bringing the class action on behalf of similarly situated real estate agents who were misclassified as independent contractors when they should have been considered employees, and as a result were not properly paid all wages due and owing, were subjected to unlawful deductions, and were not reimbursed for reasonable and necessary business expenses.

Whitlach filed a first amended complaint (FAC) that added a representative claim under the Labor Code Private Attorney General Act of 2004 (PAGA), which allows an aggrieved employee to recover civil penalties for Labor Code violations committed by an employer. (Labor Code, §§ 2698, 2699, subd. (a).)

The FAC alleged Whitlach was an “aggrieved employee” for purposes of his PAGA claim. The FAC further alleged that Whitlach’s PAGA claim was brought on behalf of himself and other current and former real estate agents affiliated with Premier Valley, to seek civil penalties for Labor Code violations committed by Premier Valley and Century 21.

Whitlach’s class claims were dismissed upon the trial court’s adoption of a stipulated order to this effect, leaving at issue only the PAGA claim.

Premier Valley and Century 21 demurred to the FAC on the ground that Whitlach was precluded from asserting a PAGA claim (or any derivative Labor Code claim) because he was an independent contractor, not an employee.

The trial court heard the demurrer and concluded the applicable test for determining Whitlach’s employee or independent contractor status for purposes of his PAGA cause of action and derivative Labor Code claims was the Unemployment Insurance Code section 650 test.

Applying the Unemployment Insurance Code section 650 test, the trial court ruled that Whitlach was an independent contractor as a matter of law and dismissed the FAC with leave to amend.

Whitlach filed a second amended complaint (SAC), which is the operative complaint in this case. The SAC again asserted a single PAGA cause of action, premised on alleged misclassification of real estate agents as independent contractors rather than employees, and attendant Labor Code violations, by Premier Valley.

In addition, the SAC contained multiple new allegations directed to the trial court’s rationale for dismissing the FAC (i.e., that Whitlach was an independent contractor as a matter of law).

The test applied by the trial court in determining that Whitlach was an independent contractor as a matter of law turned, in part, on the existence of a written contract or independent contractor agreement between Whitlach and Premier Valley.

In the SAC, Whitlach alleged the independent contractor agreement he had signed was unconscionable and, therefore, unenforceable.

Whitlach alleged, alternatively, that should he be determined to be an independent contractor and not an employee, then Labor Code section 2778(c)(1) violated equal protection and was unconstitutional under the California Constitution.

Finally, Whitlach alleged he was an employee for purposes of PAGA and his derivative Labor Code claims because he had entered into a separate contract or management employment agreement with Premier Valley, in his capacity as a sales manager for the firm.

Premier Valley and Century 21 demurred to the SAC. Premier Valley and Century 21 again argued that Whitlach was an independent contractor as a matter of law; they further argued that Labor Code section 2778(c)(1) was not unconstitutional, the independent contractor agreement between Whitlach and Premier Valley was not unconscionable, and the separate contract Whitlach had with Premier Valley for his work as a sales manager was irrelevant for purposes of his representative claims.

The trial court sustained defendants’ demurrer and dismissed the SAC without leave to amend.

Whitlach appealed the trial court’s ruling sustaining the demurrer to the SAC and the subsequent judgment of dismissal.

The parties agreed that in order for Whitlach to proceed on his PAGA claim, he was required to be an employee of Premier Valley, because PAGA, as well as the Labor Code statutes Whitlach seeks to enforce through PAGA, apply only to employees, and not to independent contractors.

A PAGA action must be brought by an aggrieved employee on behalf of himself or herself and other current or former employees.

California’s labor laws protect only employees, not independent contractors.

The principal question on appeal is therefore whether Whitlach was an employee or independent contractor for purposes of his PAGA cause of action and/or derivative Labor Code claims.

“Real estate licensee” is one of the occupational classifications that was specifically exempted from the purview of Labor Code section 2775(b)(1), and in turn from the application of the Dynamex opinion and the ABC test for purposes of the Labor Code, Unemployment Insurance Code, and wage orders.

Labor Code section 2778(c) and (c)(1), collectively remove real estate licensees from the purview of Labor Code section 2775(b)(1) and application of Dynamex’s ABC test, as follows: “(c) Section 2775 and the holding in Dynamex do not apply to the following, which are subject to the Business and Professions Code: A real estate licensee licensed by the State of California pursuant to the Business and Professions Code, for whom the determination of employee or independent contractor status shall be governed by subdivision (b) of Section 10032 of the Business and Professions Code. If that section is not applicable, then this determination shall be governed as follows: For purposes of unemployment insurance by Section 650 of the Unemployment Insurance Code. For purposes of workers’ compensation by Section 3200 et seq. of the Labor Code.

Business and Professions Code section 10032 provides as follows: “(b) A real estate broker and a real estate salesperson licensed under that broker may contract between themselves as independent contractors or as employer and employee, for purposes of their legal relationship with and obligations to each other. Characterization of a relationship as either ‘employer and employee’ or ‘independent contractor’ for statutory purposes, including, but not limited to, withholding taxes on wages and for purposes of unemployment compensation, shall be governed by Section 650 and Sections 13000 to 13054, inclusive, of the Unemployment Insurance Code.

Defendants Premier Valley and Century 21 contended the Legislature added Business and Professions Code section 10032 in 1991, to, inter alia, identify the proper test for determination of employee or independent contractor status for real estate agents/salespersons, for purposes of the Labor Code, among other statutory schemes.

The appellate court concluded that defendants Premier Valley and Century 21 have the better argument, in that the Unemployment Insurance Code section 650 test, as incorporated in Business and Professions Code section 10032(b), has long provided, and continues to provide, the controlling test for resolving the employee or independent contractor question for real estate salespersons, for purposes of the wage and hour provisions of the Labor Code.

As noted, Business and Professions Code section 10032(b) incorporates the test for determining the employee or independent contractor status set forth in Unemployment Insurance Code sections 650 and 13004.1, respectively.

Unemployment Insurance Code section 650 provides: “ ‘Employment’ does not include services performed as a real estate ... broker or as a real estate ... salesperson, by an individual if all of the following conditions are met: The individual is licensed under the provisions of ... Part 1 (commencing with Section 10000) of Division 4 of, the Business and Professions Code.... Substantially all of the remuneration (whether or not paid in cash) for the services performed by that individual is directly related to sales or other output (including the performance of services) rather than to the number of hours worked by that individual [i.e., the remuneration is in the form of a commission].

The services performed by the individual are performed pursuant to a written contract between that individual and the person for whom the services are performed and the contract provides that the individual will not be treated as an employee with respect to those services for state tax purposes.” Section 13004.1 of the Unemployment Insurance Code perfectly mirrors section 650 of that code.

The unique relationship between real estate brokers and agents is both commonly recognized and has long been reflected in California law.

A web of statutes and regulations require brokers to exercise significant control over agents and to direct work performed by agents under their supervision.

Such a legal regime would normally complicate determining real estate agents’ employment status because a principal’s right to control his agent is usually the most important factor suggesting the agent is an employee rather than an independent contractor.

Yet the Legislature has signaled, at the same time, that real estate agents were free to structure independent contractor arrangements, and that, in many contexts, traditional or common law-based tests did not make sense for resolving the employee or independent contractor question for real estate agents.

There were no statutory tests to resolve the employee or independent contractor question for real estate agents in other contexts. California courts were thus left to evaluate whether real estate agents were employees or independent contractors by recourse to the general control-based test and/or the provisions of the Real Estate Law, and to tackle the question under what circumstances, if at all, real estate agents could enter into independent contractor relationships with brokers.

Business and Professions Code section 10032(b), creates an express exception for a subpart of the Labor Code, that is, workers compensation, in that it provides that determination of the employee or independent contractor status of real estate agents for purposes of workers compensation is to be made pursuant to the Borello test.

This carve out for workers compensation indicates that the Unemployment Insurance Code sections 650/13004.1 test is applicable to other parts of Labor Code, and specifically, as relevant here, the wage and hour provisions of the Labor Code.

The appellate court agreed with the trial court that the isolated reference to a management employment contract in the SAC does not support a separate PAGA claim. The sole allegation in the SAC relating to the management employment agreement was that, in light of the agreement, Whitlach and other managers did not meet the criteria set forth in Unemployment Ins. Code § 650.

In other words, the SAC alleged that the existence of the management employment agreement made Whitlach an employee for all purposes, not that his rights were violated in his work as a manager.

Nor did the SAC allege that the management employment agreement was a novation or modification of his independent contractor agreement.

Accordingly, the trial court properly sustained the demurrer to the SAC.

LESSONS:

1.         Brokers should have the appropriate written agreements or independent contractor agreement with each salesperson operating under the broker's license.

2.         A PAGA action must be brought by an aggrieved employee on behalf of himself or herself and other current or former employees.

3.         California’s labor laws protect only employees, not independent contractors.

4.         A web of statutes and regulations require brokers to exercise significant control over agents and to direct work performed by agents under their supervision.