The Effect of Dynamex Operations West, Inc. v. Superior Court on Worker Classification for Real Estate Brokers and Salespersons
| Publication year | 2018 |
| Author | Jason S. Murai |
Jason S. Murai
Jason S. Murai is an associate with Hoge Fenton in the firm's Real Estate practice group. Mr. Murai has extensive experience with residential and commercial real estate transactions, including purchase and sale agreements, leases, and easements. He also handles real estate litigation such as nondisclosure, fraud, breach of fiduciary duty, breach of contract, and lease disputes. Before joining Hoge Fenton, Mr. Murai was in-house counsel for a prominent real estate brokerage. He is admitted to practice law in California, Washington, and Hawaii.
A new ruling from the California Supreme Court has the potential to ignite a new wave of litigation involving the independent contractor vs. employee issue in the real estate brokerage industry. In Dynamex Operations West, Inc. v. Superior Court ("Dynamex"), the court established a new test that, if applicable to the real estate industry, will make it more difficult for real estate brokers to classify salespersons as independent contractors under certain wage and hours laws.1
Real estate salespersons have traditionally been classified as commissioned independent contractors of the supervising real estate broker, rather than salaried employees of the broker. One exception is Redfin, a real estate brokerage operating in several states, including California, that bills itself as a non-traditional broker because it treats its real estate salespersons as employees who earn a salary, rather than independent contractors who get paid on commission.2 As a result of Dynamex, the Redfin model of treating salespersons as employees may end up being the new normal for real estate brokers in California.
There are advantages to both the broker and the salesperson if the salesperson is a de facto independent contractor. For example, the broker enjoys tremendous cost savings from the lack of a minimum wage, overtime, benefits, unemployment insurance, and expense reimbursements, while the salesperson enjoys independence and the absence of control by the broker.
This practice of classifying real estate salespersons as independent contractors has been increasingly challenged, as demonstrated by several recent California cases. For example, Bararsani v. Coldwell Banker involved a class action lawsuit alleging that Coldwell Banker improperly classified its salespersons as independent contractors rather than employees.3 As discussed in Section II, the plaintiff's complaint withstood Coldwell Banker's demurrer, and the case settled without a determination of the salespersons' employment status.
Similarly, a pair of cases involving Redfin alleged that Redfin's "field agents" were misclassified as independent contractors.4 Redfin has a two-tiered system where some licensed salespersons are labeled as "Redfin agents" and are employees who get paid a salary.5 These salaried Redfin agents are supported by "field" or "associate" agents, licensed salespersons who assist the Redfin agents' clients with home tours, inspections, and open houses.6 Redfin field agents are treated as independent contractors.7 The claims by the two Redfin field agents were found to be subject to mandatory arbitration.8
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To date, brokers in the real estate industry have been able to fend off such worker misclassification lawsuits, either procedurally or by settlement, and no California court has yet fully addressed the issue. This article will examine some of the questions and issues that may arise in a future lawsuit challenging real estate salespersons' classification as independent contractors for purposes of specific wage and hour laws.
On April 30, 2018, the California Supreme Court issued its ruling in Dynamex, which did not involve real estate salespersons but could provide precedential value in a future dispute.9 Dynamex involved delivery drivers who alleged they were misclassified as independent contractors of Dynamex rather than as employees.10 The supreme court's review was limited to whether the workers were properly classified as independent contractors under the applicable Industrial Welfare Commission ("IWC") wage order.11
The IWC is a five-member appointed board that was created by the California Legislature in 1913 to regulate the hours, wages, and labor conditions of women and minors.12 The IWC's jurisdiction was later expanded to include all employees, male and female, after passage of Title VII of the Civil Rights Act of 1964.13 Today, the IWC's duty is "to ascertain the wages paid to all employees in this state, to ascertain the hours and conditions of labor and employment in the various occupations, trades, and industries in which employees are employed in this state, and to investigate the health, safety, and welfare of those employees."14 Based on its findings, the IWC is vested with authority to issue "wage orders" that mandate various minimum requirements with respect to wages, hours, and working conditions to protect the health and welfare of employees.15 There are currently 18 wage orders that relate to specific industries and occupations.16
The California Supreme Court has sanctioned the use of wage orders. "The IWC's wage orders are to be accorded the same dignity as statutes. They are 'presumptively valid' legislative regulations of the employment relationship, regulations that must be given 'independent effect' separate and apart from any statutory enactments."17 Thus, in California, "wage and hour claims are today governed by two complementary and occasionally overlapping sources of authority: the provisions of the Labor Code, enacted by the Legislature, and a series of 18 wage orders, adopted by the IWC."18
Traditionally, the test for classifying a worker as an independent contractor or an employee was "whether the person to whom the service is rendered has the right to control the manner and means of accomplishing the result desired."19 In S. G. Borello & Sons, Inc. v. Department of Industrial Relations, the California Supreme Court set forth a multi-factored test for determining an employment relationship, with the right to control being the most significant consideration.20
Prior to 2010, the standard for determining employment status under both the Labor Code and wage orders was the Borello test.21 In 2010, the California Supreme Court held in Martinez v. Combs that employment status for purposes of a wage order should be based on the definitional language of the wage order rather than the common law Borello test.22
In Dynamex, the court simplified the independent contractor inquiry with respect to wage orders by adopting the ABC test.23 As discussed in more detail in Section IV, Dynamex delineated two different standards for determining worker classification, with the multi-factor Borello standard used for Labor Code claims and the ABC test used for wage order claims.24 Thus, due to the differing standards, it is theoretically possible, for example, for workers to be deemed employees entitled to a minimum wage per a wage order, but independent contractors who are not entitled to reimbursement for expenses under the Labor Code.25
In the real estate context, Business and Professions Code section 10032(b) provides that the employment relationship between a broker and salesperson may be contractually agreed upon as independent contractors or as employer and employee.26 Section 10032(b) also provides that "[c]haracterization 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."27
The referenced sections of the Unemployment Insurance Code set forth a three-factor test, where a salesperson may be classified as an independent contractor if: (a) the salesperson is licensed; (b) compensation is directly related to sales rather than number of hours worked; and (c) there is a written agreement providing that the salesperson will not be treated as an employee for state tax purposes.28
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In Bararsani, the plaintiff alleged that he and other class members were entitled to certain protections under the Labor Code because they qualified as employees under the Borello test, and that Coldwell Banker willfully misclassified them as independent contractors.29 In its demurrer, Coldwell Banker asserted that the three-factor test referenced in Business and Professions Code section 10032(b) controlled, rather than the multi-factored Borello test.30 The trial court overruled Coldwell Banker's demurrer, finding that the three-factor test was inapplicable for determination of employment status under the Labor Code, and that a more detailed factual inquiry under the Borello test was necessary.31
Coldwell Banker presumably chose to settle the case rather than risk a published appellate court opinion establishing a more onerous legal standard for classifying real estate salespersons as independent contractors. Unfortunately for the brokers, Dynamex set forth just such an onerous new legal standard that may find application in the real estate industry.
Dynamex is a same-day courier and delivery service operating in California.32 Since 2004, Dynamex classified its drivers as independent contractors and required them to provide their own vehicles and pay for all of their transportation expenses, as well as taxes and workers' compensation insurance.33
The Dynamex case involved IWC wage order No. 9, the applicable wage order governing the transportation industry.34 Wage order No. 9 imposes obligations on employers relating to minimum wages, maximum hours, and a limited number of...
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