In a recently published appellate division decision, Kennedy v. Weichert Co., a New Jersey court addressed the issue of classification of commissioned real estate salespeople as independent contractors.  The court ruled that fully commissioned real estate salespeople are not subject to the “ABC” test for purposes of determining whether salespeople are properly classified as independent contractors under the New Jersey Wage Payment Law (WPL). 

Under the ABC test, which originates from the New Jersey Unemployment Compensation Law (UCL), a real estate salesperson would need to be “free” from the direction and control of a licensed real estate broker to be properly classified as an independent contractor. The requirement to be free from direction and control, however, conflicts with the clear language of the New Jersey Real Estate Brokers and Salesman Act (“Brokers Act”), which mandates the supervision of salespeople by licensed brokers.  While the court held that the ABC test was not applicable in evaluating whether a salesperson is properly classified as an independent contractor, the court left open which test should apply in making that determination.

Background

The plaintiff worked as a fully commissioned salesperson with the defendant, a licensed real estate broker. The plaintiff executed an agreement classifying him as an independent contractor rather than as an employee, of the defendant.  The plaintiff brought a class action on behalf of himself and other salespeople against the defendant alleging that the defendant violated the WPL by deducting marketing, insurance, and other expenses from his wages.  The defendant moved to dismiss the case on the grounds that the plaintiff was an independent contractor, and the WPL applies to employees only. 

The trial court denied the defendant’s motion, concluding that the ABC test under the UCL is the applicable test to determine whether a real estate salesperson is an independent contractor or employee under the WPL.  That test presumes that an individual is an employee unless the following factors are satisfied in full:

(A) Such individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact; and

(B) Such service is either outside the usual course of the business for which such service is performed, or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and

(C) Such individual is customarily engaged in an independently established trade, occupation, profession or business.

Notably, under the Brokers Act, real estate salespeople are required to work “under the supervision” of a licensed real estate broker and can only accept a commission from their broker, among other requirements.  The court noted that the requirements of the Brokers Act “virtually compelled the conclusion” that “every fully commissioned real estate salesperson presumptively was an employee” if the ABC test were to apply.

The court concluded that the ABC test did not apply to WPL claims asserted by fully commissioned real estate salespeople because the Brokers Act forecloses application of the ABC test.  A 2018 amendment to the Brokers Act permits the “affiliation” between a broker and salesperson to “be that of an employment relationship or the provision of services by an independent contractor.”  Moreover, on January 18, 2022, the state legislature enacted a bill amending the Brokers Act to retroactively enforce written agreements between salespeople and brokers where the agreements define the salespeople as independent contractors.  Given the language in the Brokers Act allowing for employee and independent contractor relationships, the appellate court concluded that the ABC test did not apply to WPL claims because the ABC test was “a standard virtually unattainable for real estate salespeople who comply with the Brokers Act.” 

In reaching this conclusion, the court referenced the governor’s veto message concerning an earlier version of the January 18, 2022 bill in which the governor stressed his concern that the legislature had broadly drafted the prior version of the bill such that it could be “used as a basis for other employers in the State to misclassify workers.”  Indeed, the governor specifically stated that the 2022 amendment to the Brokers Act should not be construed to adopt any of the other 25 UCL exemptions in areas outside of the unemployment context, such as the WPL.

Even though the court held that the ABC test did not apply to real estate salespeople, it did not set forth a test that should apply to salespeople, refused to dismiss the plaintiff’s lawsuit even though he had executed an independent contractor agreement and clearly indicated that its analysis concerning the ABC test was restricted to real state salespeople.  Significantly, consistent with well-established law, the court held that how the parties denominate their relationship in a written agreement is only one factor to be considered when determining whether a salesperson is an independent contractor or employee.

Looking Ahead

Whether an individual is an independent contractor or an employee is a highly fact-specific analysis, which generally requires analysis under the ABC test for claims under the WPL.  The court’s opinion should not be construed as creating an exception to that general rule outside the context of a real estate broker and a salesperson governed by the Brokers Act. 

While the court did not provide clear guidance on the standard for determining whether a real estate salesperson is an independent contractor as a matter of law, this decision is critical as it rejects the application of an otherwise robust and employee-friendly standard in assessing employment status.  The main takeaway is that real estate brokers should continue following the requirements of supervision set forth in the Brokers Act but should limit any further direction or control beyond such requirements, as doing so could suggest an employment relationship. 

As a starting point, brokers who hire salespeople should review their written independent contractor agreements to ensure that the agreements do not provide for direction and control beyond the requirements of supervision in the Brokers Act.  To the extent a broker is exercising supervision or control beyond the requirements of the Brokers Act, the broker may be exposed to misclassification claims as well as claims under various laws that traditionally only applied to employees and not independent contractors.  As stated by the appellate division, however, the written agreement between the parties is just the starting point for the classification analysis. Companies that utilize independent contractors are encouraged to consult with counsel on questions regarding worker status to ensure compliance with New Jersey law to minimize their risk.