A ruling expected this month by the state’s highest court could fundamentally redefine the business relationship between real estate brokerages and their agents, prompting warnings of turmoil from industry leaders.
At the heart of a case pending before the Supreme Judicial Court is the question of whether real estate agents and brokers are employees who are paid a salary or hourly wage and receive benefits, or independent contractors who live off commissions.
The case began in 2011, when six current and former contract sales people for several apartment brokerages in Boston sued the companies and their owners, saying they should have been treated as employees because they had to work long shifts doing office and administrative work.
If the court finds for the workers, industry associations cautioned, thousands of Massachusetts real estate brokerages that have treated their agents as contractors for decades could owe untold sums in back pay and benefits, possibly putting them out of business.
“If they find these people are employees, it would be a major sea change in real estate,” said Neil R. Markson, a real estate attorney at Bernkopf Goodman LLP who has followed the case. “Brokers have historically been treated as independent contractors, but right now there’s an inherent contradiction in the law.”
The lawsuit was brought against Boston Pads LLC, Jacob Realty LLC, and several other brokerages owned by Demetrios Salpoglou and Yuan Huang. The case was argued before the state’s high court in December, and attorneys for both sides expect a decision before fall, and most likely this month.
The issue involves two conflicting state laws. One is the main statute that governs independent contractors, which essentially presumes workers are employees unless they are free to work outside the company’s direction and specialize in a service outside the company’s normal business. A separate state law governing the real estate industry says agents may be either contractors or employees.
The National Association of Realtors said more than 80 percent of its members work as independent contractors; they set their own hours and derive all or most of their pay from commissions on sales.
Industry groups say that arrangement is good for consumers because it motivates agents to work a home sale at all costs, answering client calls on nights and weekends, and packing their weeks with showing after showing.
The arrangement also benefits brokerages that do not have to provide agents with benefits such as health insurance or calculate their tax withholdings, as employers must do for full-time workers.
And given the choice, industry leaders argued that many agents prefer to be independent contractors because of the flexibility it offers.
“The reason this model is prevalent is that it works,” said Robert N. Authier, chief executive of the Massachusetts Association of Realtors, which filed a brief supporting the defense. “Consumers would lose a lot if this became a 9-to-5 employee kind of model. Real estate is entrepreneurial — agents and brokers make their money for success.”
But Nesto Monell and the other agents who sued their brokerages said they were effectively employees and should have been paid as such.
In addition to leasing apartments, the agents said, they were required to sign up for long office shifts during which they were tightly controlled by managers, answering phones and taking out the trash. They also say they had to pay the companies “desk fees” of $50 to $75 a month and daily “farm fees” to have their apartment listings reposted on the online classified advertising site Craigslist.
“They felt exploited by the system,” said Hillary Schwab, an attorney at the firm Fair Work who is representing Monell and the other plaintiffs. “They had to work incredibly long hours they weren’t paid for and were heavily supervised by the management and not given any freedom whatsoever — but also expected to subsist only on commission.”
Many real estate agents subsist on commissions, but not all are subject to close supervision or required to keep certain hours, so it is unclear whether a ruling in favor of the plaintiffs would ricochet through the real estate world.
Schwab, for her part, dismissed such scenarios as scare tactics by the brokerages and real estate trade groups to keep the high court from disrupting the industry.
The SJC must now decide which of the two laws takes precedence and is weighing factors such as how recently each statute was amended by the Legislature.
“Typically, courts tend to try to restrict their rulings to a specific fact pattern as opposed to taking broad brush approaches,” Markson said. “More likely than not, this is going to be a limited decision.”