California generally uses the strict “ABC Test” to determine if a worker is an employee or an independent contractor. Under the ABC Test, a worker is presumed to be an employee unless the hiring company proves that the worker should instead be classified as an independent contractor. The ABC Test has been codified into law under Labor Code section 2775.

However, California’s ABC Test does not govern the classification of certain real estate licensees. Instead, Labor Code section 2778 points the analysis to Business and Professions Code section 10032(b) for real estate licensees. Under this statute, a real estate broker and a real estate salesperson licensed under that broker may form their relationship by contract and decide between classifications as independent contractors or as employees.

The statute also makes clear that regulatory and public-facing duties tied to licensure apply regardless of how the parties label the relationship. In other words, contract flexibility does not eliminate compliance obligations.

For employers/brokers aiming to maintain an independent contractor model, the most defensible approach is to align the relationship with the three conditions reflected in California’s statutory framework for real estate services performed outside “employment,” including:

  • Licensure: The individual must be properly licensed under the relevant provisions of the Business and Professions Code.
  • Commission-driven compensation: “Substantially all” remuneration should be tied to sales or other output instead of hours worked.
  • Written contract: Services should be performed under a written agreement stating that the individual will not be treated as an employee for state tax purposes for those services.

Classification for wage/hour or tax purposes is not the only consideration. Workers’ compensation rules can be a separate analysis, and California has issued specific notices to the real estate industry on coverage issues.

If you have questions on broker classification or related issues, contact a Jackson Lewis attorney to discuss.