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Independent Contractor or Employee-Employer: The Sequel

Merely signing an "independent contractor" agreement does not guarantee that independent contractor status will be recognized. This article reviews the applicable law and highlights that the "statutory" contract, which must be (re)signed every 12-15 months, does not absolutely prevent consideration of how the parties actually acted. There remains a risk that if the parties act as if an "employee" is involved, this treatment may apply for purposes of tax withholding, FICA contributions, unemployment insurance, workers' compensation, etc. For example, an "independent contractor" should not receive a draw against commissions or to be subject to minimum earnings requirements. Nor should mandatory training and education requirements be imposed on an "independent contractor," beyond the state required continuing education.

This sequel focuses on the rules applicable in New York. The critical distinction remains between "independent contractors" and "employees." This article is intended to emphasize that the statutory provisions furnish a "short hand" test for "independent contractor" status, but do not fundamentally change the common law relationships or enable the broker to exercise "control" of an "independent contractor."
Under the statutory "safe harbor" for independent contractors for federal income tax purposes, as well as state unemployment insurance and workers' compensation purposes, a "qualified real estate agent" is not considered as an employee. When NYSAR succeeded in gaining the enactment of Chapter 903 of the Laws of 1986, the New York Legislature acted consistently with Internal Revenue Code §3508 but added additional factors which the New York written contract had to include.

In order to be a "qualified real estate agent," it had to be proven that:

(a) substantially all of the remuneration (whether or not paid in cash) for the services performed by such broker or sales associate is directly related to sales or other output, including the performance of services), rather than to the number of hours worked;

(b) the services performed by the broker or sales associate are performed pursuant to a written contract executed between such broker or sales associate and the person for whom the services are performed within the past 12 to 15 months; and

(c) the prescribed written contract was not executed under duress and contains the following provisions:

(i) that the broker or sales associate is engaged as an independent contractor associated with the person for whom the services are performed pursuant to Article 12-A of the Real Property Law it shall be treated as such for all purposes, including but not limited to federal and state taxation, withholding, unemployment insurance and workers' compensation;

(ii) that the broker or sales associate

(A) shall be paid a commission on his or her gross sales, if any, without deduction for taxes, which commission shall be directly related to sales or other output;

(B) shall not receive any remuneration related to the number of hours worked;

(C) shall not be treated as an employee with respect to such services for federal and state tax purposes;

(iii) that the broker or sales associate shall be permitted to work any hours he or she chooses;

(iv) that the broker or sales associates shall be permitted to work out of his or her own home or the office of the person for whom the services are performed;

(v) that the broker or sales associate shall be free to engage in outside employment;

(vi) that the person for whom services are performed may provide office facilities and supplies for the use of the broker or sales associate, but the broker or sales associate shall otherwise bear his or her own expenses, including but not limited to automobile, travel and entertainment expenses;

(vii) that the person for whom services are performed and the broker or sales associate shall comply with the requirements of Article 12-A of the Real Property Law and the regulations pertaining thereto, but such compliance shall not affect the broker or sales associate's status as an independent contractor nor shall it be construed as an indication that the broker or sales associate is an employee of the person for whom the services are performed for any purpose whatsoever;

(viii) that the contract and association created thereby may be terminated by either party thereto at any time upon notice given to the other.

It bears emphasis that simply signing a contract providing for "independent contractor" status does not automatically prove that the parties act in accordance therewith. Stated otherwise, if the parties' conduct is at variance with the provisions which the contract must contain by statute, the independent contractor status will not be ensured.

By failing to abide by the prescribed contractual terms, the parties will be remitted to the common law control test to determine whether or not independent contractor status exists. The bottom line is that firms would be mistaken to simply rely on the existence of an agreement which contains the prescribed terms, as there is the risk of an inquiry regarding how the parties actually conducted themselves.

By following the factors prescribed in the contract, a firm should satisfy the common law control test. In any event, the contract does make it easier to persuade workers' compensation or unemployment insurance auditors of "independent contractor" status. NYSAR strongly recommends the use of such agreements in cases where the parties intend the sales associates to have "independent contractor" status.

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