If a government auditor comes to your brokerage and asks for written proof that the real estate licensees who are affiliated with you are independent contractors, what would you do?

This scenario is occurring in real estate offices across the country – most recently in Rhode Island – because misclassification of employees as independent contractors is a serious issue. Federal and state penalties for violations include payment of back wages based on minimum wage for misclassified workers; fines totaling tens of thousands of dollars; and even criminal prosecution.

Federal and Rhode Island law presumes that all workers are employees (W-2) who are subject to tax withholding, workers’ compensation, minimum wage, unemployment compensation and other laws unless proven otherwise. There are some limited exemptions that allow brokerages to treat affiliated licensees as independent contractors (1099) but only if you have the documents and policies to prove it.

Protect yourself with this audit checklist of key documents:

• Independent Contractor Agreement: Does your brokerage have a signed independent contract agreement with each independent contractor who is affiliated with your office?  Rhode Island law requires all real estate licensees who wish to be treated as independent contractors to have one. The Rhode Island Association of REALTORS® has a sample on Instanet.
• Notice of Designation of Status of Independent Contractor form: Have all independent contractors who are affiliated with your office filed a DWC-11-IC Notice of Designation as an Independent Contractor form and with the RI Department of Labor and Training (“DLT”)?  Rhode Island law requires all real estate licensees who wish to be treated as independent contractors to file one. This form changed in 2019. Make sure that they are using the most current version. Once the DWC-11-IC form is filed, it will remain in effect until a real estate licensee files a Notice of Withdrawal.  TIP: Search the DLT database to make sure that each independent contractor has filed a registration form and a withdrawal after leaving your company.
• Notice of Withdrawal of Designation as Independent Contractor form: Have all independent contractors who have disaffiliated from your brokerage filed a DWC-11-ICR Notice of Withdrawal of Designation as an Independent Contractor form with the RI Department of Labor and Training?  Rhode Island law requires all real estate licensees who wish to be treated as independent contractors to file one. Again, this form changed in 2019. Make sure that they are using the most current version.
• Laws about real estate exemptions: Do you have a list of the laws that allow real estate licensees to work as independent contractors? Auditors may ask you to provide a list of exemptions for independent contractors who are real estate licensees. Keep this list handy in case the auditor is not familiar with these Rhode Island laws and regulations.
  • Licensing regulation requiring affiliation with a broker  – Section 2.5
  • Workers’ Comp Exemption for Independent Contractors
  • Unemployment Exemptions for Independent Contractors – paragraph (10)
• Office Policies: Does your brokerage have a written termination policy that covers each independent contractor who is affiliated with your office?  Rhode Island license law requires a written policy as to how compensation will be handled if a licensee changes to a new brokerage. Make sure that any other office policies don’t require floor time or other mandates that could give the impression that the salesperson is truly an employee who is controlled by an employer. The Rhode Island Association of REALTORS® has a sample termination policy on Instanet.

Questions? Please contact the RIAR Legal Department at 401-432-6945 or email [email protected].