EMPLOYEE VS. INDEPENDENT CONTRACTOR

Additional light on the controversial question as to whether a broker's salesperson is an employee or an independent contractor has resulted from a research study, conducted by the University of Connecticut Center for Real Estate and Urban Economics.

In a very lucid and cogent report, furnished by James F. Carey, Executive Director of the Connecticut Real Estate Commission and a member of the Center's Advisory Committee, great stress is placed upon the early Missouri case of Dimmitt-Rickoff -Bayer Real Estate Co. v. Finnegan. There, the Court determined that a real estate salesman was an independent contractor. The opinion stated ". . . competent salesmen, almost entirely dependent upon their own initiative, efforts, skill and personality for success, working on their own time, at their own expense and deriving their remuneration from the results of their work will not be considered employees under the common low test."

The Internal Revenue Service then issued Min. 6555, a ruling which accepted the position of the case cited above and declared that real estate salesmen were not employees. There is no indication that the Common Low Test (26 U.S.C.A. 330116) was changed substantially by the later 1954 Code. The Connecticut treatise cites other authoritative cases, in point, quoting Lifetime Siding Inc. v. U.S. 359F (2d) 657, as follows:

"Generally, an employer - employee relationship exists when the person for whom the services are performed has the right to control and direct the individual who performs the service, not only as to the result to be accomplished by the work, but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what is to be done, but also as to how and when it shall be done."

In conclusion, the report states:

"The Regulations clearly state that individuals who are involved in on independent trade, profession, or business, in which they offer their services to the public, will, in most cases, be considered independent contractors. This would place the real estate salesman, who associates with other brokers under the normal conditions of association, in the position of an independent contractor. In addition to the above regulations, a previous ruling of the Internal Revenue Service specifically states that real estate salesmen will not be treated as employees under the normal contractual arrangements between real estate salesmen and brokers.

The normal relationship involved in an association of real estate salesmen and brokers with other brokers is one in which the salesman or broker is entirely dependent upon his own efforts, skill, and ability to earn his compensation. The company that he is associated with may provide him with:

(1) office space,
(2) listings,
(3) advice,
(4) business cards,
(5) forms and stationery.

The company may also receive and divide commissions on sales with him and require that he take his turn covering the office on weekends. The Company may prohibit him from selling for other brokers or in his own name.

The salesman should do the following:

(1) Pay his own association dues;
(2) Furnish his own transportation;
(3) Provide the license required by the state;
(4) Pay all his expenses.

He should not, however, be required to keep regular office hours.

Under the above conditions a real estate salesman will be treated as an independent contractor, and, therefore, no withholding is necessary.

It is important to remember that where relevant facts differ from the ones considered above, all factors must be reexamined. In cases where a salesman was on a guaranteed annual compensation basis, observed customary working hours, had an office on company premises, and followed regular office routine, he

was considered an employee. It is important to consider any guaranteed compensation, or even a draw, which is not treated strictly as a loan, with the possibility that this may change the status of the individual associating with a brokerage office from that of an independent contractor to an employee.

If a question arises as to whether or not an individual is an employee, a Form SS-8 can be filed requesting a ruling. When requesting such a ruling, a copy of the contract, or any other written agreement covering the work to be performed, must be submitted along with the above Form. These Forms can be obtained from the District Director of Internal Revenue or a local Internal Revenue Office."