Legal Article by Will Martin 

I occasionally get calls from agents who have left their firms and who want to know what the rules are regarding payment by their former firms for commissions on transactions that had not closed prior to their departure.  My response is that I am not aware of any rules or statutes that dictate how a firm is to compensate an agent if the agent leaves the firm, either voluntarily or involuntarily. I tell these callers my understanding is that such matters are determined by the terms of the written independent contractor agreement that the agent hopefully has with the firm.  I use the word “hopefully” for a couple of reasons. 

First of all, as I explain to the callers, the Internal Revenue Code provides that a licensed real estate agent won’t be considered an employee for Federal tax purposes if (1) “substantially all of the remuneration… for the services performed by such individual as a real estate agent is directly related to sales or other output (including the performance of services) rather than to the number of hours worked, and (2) the services performed by the individual are performed pursuant to a written contract between such individual and the person for whom the services are performed and such contract provides that the individual will not be treated as an employee with respect to such services for Federal tax purposes.”  I diplomatically refrain from asking these callers whether they in fact have written independent contractor agreements with their firms.  Based on the silences that sometimes follow my explanation of the Internal Revenue Code provision, I get the feeling that some of them don’t.
 
Secondly, unless there is an employer-employee relationship between the firm and the agent, which is rare, entitlement to and responsibility for payment of real estate brokerage commissions is a matter of contract.  If the callers either don’t have a written contract at all or they do have a written contract that doesn’t specifically address the subject of their compensation rights on deals that haven’t closed when they leave the firm, it can be exceedingly difficult to determine the agent’s legal rights to commissions that are paid when the transactions do close.  Is the departing agent entitled to all, some percentage, or none of his or her regular proportionate share of the fee on a transaction when it closes?  In the absence of an express provision in a written agreement, it can be very difficult to say.  Sometimes the understanding of the parties as to this or any other issue may be inferred or implied by other terms of their agreement or by their words or actions or by other surrounding circumstances, but unless you’re lucky, this exercise can be like trying to put together a puzzle when some of the pieces are missing and the ones you do have don’t fit together very well. 

Of course, there are many other issues which should be addressed in a good independent contractor agreement.  I am singling out the departing-agent-compensation issue because it’s an issue I get calls about.  (Another is what happens to the agent’s listings and/or buyer agency agreements, but that’s a column for another day.)  I am convinced that many of those calls would be unnecessary if firms and agents would take more care to see that their agreements are reduced to writing and that they clearly address issues regarding the compensation of the agents, while they are with the firm and after they depart as well.

Will Martin is a manager in the law firm of Martin & Gifford, PLLC, which practices primarily in the area of real estate brokerage law.  For more information about the firm, go to www.martingiffordlaw.com.  Copyright © 2009, Martin & Gifford, PLLC.