Last week, the U.S. House of Representatives passed what is known as the PRO Act, a bill which aims to empower unions in the 27 “right to work” states and impose the Dynamex ABC test regarding independent contractor status on the country as a whole.
Realtors be forewarned. If the PRO Act can attract 10 US Senators (and thus survive an expected filibuster), Realtors who fail to self-incorporate will automatically become employees of their brokerage firm. Unlike with California and AB5, there is little opportunity for NAR, or Realtors in general, to enter into the legislative deliberations and obtain a carve-out.
The fight for the PRO Act is a fight to see if trade-offs and compromise can bring about bipartisanship. Ten U.S. Senators is the final goal. The bill has passed the House, and President Biden has already committed to signing it.
Getting those 10 Senators will not be easy, but take little solace from that fact. There is at least one path forward, and if it works, independent contractor status for Realtors will be a relic of history. That path involves what is known as Section 230 — the law which exempts internet platforms from having legal responsibility for content posted thereon by external parties.
Think of Facebook and Twitter. A major Republican goal for the past few years is to revoke or revise the liability waivers offered by Section 230. If the Democrats go there, the effort to compromise has reasonable odds of success. The bill would still need to be amended to remove provisions that impose unions on unwilling members to reach for the sky provisions that the Democrats are likely to jettison if a compromise is possible.
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If the PRO Act passes, what happens to Realtors?
In essence, this is Dynamex imposed nationwide. No real estate firm can argue that their brokers and salespeople meet the ABC independent contractor test. Thus, by definition, we all become employees. But there is an escape hatch.
Most states allow Realtors to self-incorporate and have their real estate license held in the name of an LLC, PLLC, PA, or S Corp. Realtors making this change essentially become employees of their own entity, and their brokerage firm has a business-to-business independent contractor relationship with that firm. That change will cost the Realtor several hundred dollars a year and impose more paperwork, but little will change at the end of the day.
Not so, however, for those who do not self-incorporate, whose employers will now be responsible for compliance with labor laws and for employment taxes. Commission splits will need to be renegotiated to account for the shift regarding who pays the employer share of Medicare and Social Security (currently, Realtors pay all of this through self-employment taxes).
Herein lies a huge opportunity to revamp and modernize the industry. Brokers could insist that new agents start as employees and only be willing to enter into a business-to-business independent contractor arrangement with established, experienced agents. Many part-time “I only sell one house a year to my friends” agents may decide to drop out of the business. NAR may try to fight this change tooth and nail (remember NAR makes money based on the gross number of active agents; thus, anything which has the potential to reduce agent numbers is a threat), but the potential for positive change in the industry is a difficult one to meaningfully argue against.
We need to keep in mind this is unlikely to be a fight NAR can influence. The PRO Act (along with infrastructure) is one of the most promising arenas for bipartisanship. Passage is a battle to get 10 U.S. Senators. NAR instead must fight to retain the support of 41. Given the importance President Biden has placed on the PRO Act, it seems foolish to assume the bill will go down to defeat.
Realtors may have won a reprieve in California from AB5. No such rescue is likely at the national level. Welcome to real estate in the Dynamex era.
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