Hiring independent contractors is popular in the real estate industry, with many high performers insisting on this type of arrangement in order to save tax. But O*NO Legal founder Kristen Porter warns, if your contracting agent couldn’t pass the ‘contractor test’, it could cost you big time in the future.
We once saw a claim involving a contractor who had been with an agency for many years.
They started out as an employee, before moving to a contractor’s agreement. This is quite normal in the real estate industry, and everyone was happy. The contractor performed well, making the agency a heap of money.
The contractor was happy too, as they got to save a stack on tax by running their ‘commission’ through their family trust. All was well – until he left the company.
Now, there are usually reasons why people leave a job, and often it’s because the dynamic has changed, meaning relationships may not end quite as well as they started out.
Long story short, this contractor made a claim against the agency insisting they were an employee at law and demanded all their annual leave, long service leave, and superannuation for the duration of the contractor period. The claim came to $900,000.
Like many agencies, this one didn’t have employee practices/management liability insurance, meaning the claim was an uninsured event, and any settlement would have to come out of the agency or principal’s pocket.
It was clear that the required ‘contractor test’ had not been met, and whilst the ‘contractor’ didn’t receive the full $900k, they did receive a significant settlement.
Whether you are an established real estate agency or just starting up – using contractors is commonplace, however if not structured correctly, the arrangement can be extremely risky for your business.
Put simply, you need to be able to demonstrate to a court that your contractor is really a contractor, and not an employee, through actions and structure – it’s not just about the contract.
Creating an independent contractual regime is not simple, and there are three key mistakes agency principals commonly make.
1: If I issue a contractor contract and not an employee contract, then my team member is a contractor.
TRUTH: What the contract says doesn’t actually matter. If it looks like a duck and quacks like a duck, it is a duck – no matter if you call it a chicken.
It’s a matter of fact and it’s important to understand each criteria that the court looks at when determining whether your team member is a contractor or an employee.
2: If my team member’s contract expressly states they are a contractor, then I have no issues here.
TRUTH: You cannot ‘contract out’ of this regime. The law works to protect your staff, even if they have agreed to be a contractor. If they’ve been treated like an employee, or are acting like one, then they’ll receive the benefits accordingly.
3: Everyone else uses contractors, so it must be fine.
TRUTH: Again, just because everyone does something, doesn’t mean it’s without risk. I’m sure your mother probably said to you in the past ‘well if Kristen jumped off a cliff would you?’ Just because other agencies are taking shortcuts, doesn’t mean you should too.
At the end of the day, it doesn’t matter what we call an arrangement, if it meets the legal test for being an employee, your team member will be an employee. As we know, with employees we also need to factor in leave, other entitlements but also superannuation and payroll tax.
So, why use a contractor at all? Often, the contractor arrangement is at the request of the contractor due to tax reasons. High earners may wish to run their earnings through a company or family trust as a tax minimisation strategy, and agency owners often agree for fear of losing talented agents.
There are some key elements courts will look for when determining whether a contractor is really a contractor.
Many business advisors discuss the 80/20 rule. This particular rule is only a rule of thumb, and has no legal significance. What’s important is that the contractor’s primary source of income does not come from one person, for example, your agency.
You can’t use an independent contractor to deliver services that you would normally require an employee to provide. Therefore, the agency needs to change its mentality from having independent sales persons, to providing a service hub to those who wish to conduct sales businesses.
In other words, instead of the agency being a business of selling property and hiring people to sell property on their behalf, it becomes a hub for people conducting business for the purposes of selling property. It is a subtle change, but is absolutely imperative if you wish to prove an independent contract.
Essentially, you have to show that your contractor is running their own business. Here are some of the other factors the court will look at:
- If the contractor is a company or sole trader
- Evidence the contractor is running their own real estate business
- How remuneration is structured
- Who provides equipment and office space
- The degree of independence, supervision and ability to delegate
- Who pays for insurances
- How leave, GST and clients are dealt with.
To find out how to avoid large claims and learn all the legal factors the court looks for, join O*NO Legal’s REAL membership, (for as little as $97+GST/mth) and receive access to an exclusive member webinar, where you’ll learn the structure and practical operational items you need to use contractors in real estate and you will receive O*NO Legal’s Contractor Pack (valued at $1500) so you can roll out your own contractor regime and contracts in your agency yourself, without the risk.