Independent contractors and franchiser-franchisee business relationships face potential challenges ahead.
Recently, I read the 2020 Democratic Party Platform report (91 pages) and the 2020 Republican Party Platform report (59 pages). The Republican Party report is actually the same as the 2016 report.
The Republican Party Platform did not reference independent contractors or franchiser-franchisee business relation-ships. We do know from our research that the Republicans in the U.S. House of Representatives voted almost entirely against the PRO Act and further have read that the Trump administration’s National Labor Relations Board (NLRB) reversed the Obama administration’s rulings on the joint employer issue.
To be fair, there is much to like in both platforms in their support of home-ownership in general and the belief that more needs to be done to address both the critical areas of homelessness and affordability. Both parties discuss these two issues at some great length.
Regardless of your political or social views, there are a few provisions that could have a substantial and material effect on the residential brokerage business in the years ahead. These have to do with who can be classified as Independent Contractors (IC) and whether or not franchisers and their franchisees can be considered joint employers.
The ABC test and Its Impact on Independent Contractors
On page 15 of the Democratic Party report, it states, “Democrats believe employees who are being misclassified, including gig and platform workers, deserve wage and workplace protections including minimum wage and overtime pay, and we support using the ABC test to determine employees’ status.”
For those who didn’t follow the development of the ABC test in California over the past few years, the ABC test contains the following requirements used to determine whether one can be classified as an IC or not:
Part A of the test requires that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact, AND;
Part B of the test requires that the worker performs the work that is outside the normal course of the hiring entity’s business, AND;
Part C of the test requires that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
Further, the California Supreme Court noted that under the right-of-control test, it’s ‘not how much control a hirer actually exercises, but how much control the hirer retains the right to exercise.’
The outcome for Realtors® in California was that, through the efforts of the California Realtor® and others, Realtors were not covered under the ABC test and were deemed to be ICs. We won’t go into details as to how this was attained but, sufficient to say, it wasn’t without a great deal of effort by the Realtor Association. The reasons for the effort to keep the ABC test from applying to real estate professionals is self-evident. To escape the application of the ABC test, the employing entity has to survive all three of the ABC tests. A plain reading of the ABC test and its application to real estate professionals seems to indicate that Realtor independent contractors may fail at least Part B and perhaps even Part A of the ABC test.
If the ABC test was applied on a national basis, there would be a dramatic reduction of the number of real estate professionals. Given the requirement to pay agents minimum wage and other benefits, brokerage firms would cut the number of agents they employ drastically.
Whether this would be a good thing for our industry or not—fewer, more productive full-time agents—is not necessarily a bad thing. It would change the nature of everything in our industry. In talking with brokerage and Realtor® Association leaders, when this issue was first raised, they realized that the impact would be drastic.
Depending on whether this truly becomes a national regulation or remains at the state level, Realtor associations and industry leaders should be prepared to vigorously engage in this issue to protect the ability for real estate professionals to remain ICs. We’re not expert enough on the issue of whether the states would retain the right to supervise this within their own borders or whether, should it be passed by the Congress and signed into law, it will be a national regulatory issue.
The Joint Employer Issue
In early 2020, the U.S. House of Representatives passed HR 2474, the Protecting the Right to Organize (PRO) Act. The bill was not taken up by the Senate.
On page 14 of the Democratic Party Platform report, it states, “Democrats will prioritize the passing of the PRO Act and restoring worker’s rights, including the right to launch secondary boycotts.’
The PRO Act would make significant changes to the joint-employer standard under the National Labor Relations Board (NLRB). Joint-employer rules determine when two or more employers are jointly responsible for the same employees. Take, for example, the relationship between a real estate franchiser and its franchisees. A case filed with the NLRB in 2014-2015 referenced McDonalds, and others, as defendants in the action. Any franchiser-franchisee agreement could fall under a redefinition of the joint-employer rule under the NLRB.
In 2015, the NLRB, under the previous administration, issued a decision in the Brown-Ferris (BFI) case that sought to drastically expand the coverage of what constitutes a joint-employer relationship. For example, prior to this decision, a company was a joint employer if it exercised immediate and direct control over the employees of another company. Under the NLRB’s new standard, it expanded joint employment to situations where a company only had indirect or potential control over a group of another company’s employees.
Depending on its scope, the joint-employer standard can impact a variety of business-to-business relationships, including contractors, subcontractors and franchisees, according the American Action Forum (AAF), a conservative issues-focused business advocacy organization. According to the AAF, the new standard is so vague it could impact companies’ ability to impose minimum standards and for franchisers to assist franchisees with a host of business issues without triggering possible joint employment liability.
Imagine our industry’s leading franchisers faced with either having to enforce employment standards on their franchisees or not having the ability to enforce service standards or minimum standards. The underlying foundation of how franchisers work with their franchisees may be fundamentally changed through actions by the NLRB under the proposed PRO Act.
One other more minor part of the PRO Act would be to “rewrite the rules that have undermined worker’s ability to advocate for themselves, including non-compete clauses, and no-poaching agreements.” One can only imagine the impact on the merger and acquisition business when purchasers of brokerage firms no longer enforce non-solicitation agreements on the sellers. Not only would it kill brokerage firm valuations, but it would put a huge damper on any activity at all.
Remember, none of this is national law or regulation today. Whether it becomes law will be a matter of the national elections in November.