QUESTION: I am a broker of a midsize firm and have a number of issues regarding salespersons paying other salespersons for license activity. In one instance, a team leader with three licensed team members working on her team wants us, the brokerage, to pay the full agent portion of all commissions received on closed transactions to the team leader, who then pays the team members. She states that her former broker approved that practice.
In another situation, a salesperson hired a licensed assistant to work with him. The salesperson wants the brokerage to pay his corporation the full agent portion of the commission to his corporation, and the assistant will be paid out of the agent’s corporation.
I am confused as to what the law is on this topic.
ANSWER: California law is clear that Salespersons (a term which includes those with a Salesperson’s license and a Broker’s license) who are affiliated with a Broker can only be paid for licensed activity by the Responsible Broker with whom they are associated. The full text of the relevant California law is as follows:
“No real estate salesperson shall accept compensation for activity requiring a real estate license from any person other than the broker under whom he or she is at the time licensed.
It is unlawful for any licensed real estate salesperson to pay any compensation for performing any of the acts within the scope of this chapter to any real estate licensee except through the broker under whom he or she is at the time licensed. A licensee may enter into an agreement with another licensee to share that compensation provided that any compensation is paid through the responsible broker.
For a violation of any of the provisions of this section, the commissioner may temporarily suspend or permanently revoke the license of the real estate licensee, in accordance with the provisions of this part relating to hearings.” Business & Professions Code Section 10137
In view of these provisions, if a licensed assistant or Team member is being compensated for licensed activity, that compensation payment must be made to them by the Responsible Broker. Thus, the proper procedure would be for the Salesperson who has engaged a licensed assistant, or a Team leader who works with Team members, to instruct the Responsible Broker, in writing, how the commission earnings on any or all transactions should be paid out to the licensed assistants or Team members. The best practice is to provide those written instructions to the Responsible Broker as early as possible in the transaction, preferably approved, in writing, by the licensed assistants or Team members to avoid internal commission disputes.
This law clearly prohibits the Responsible Broker from paying the Team leader the full Agent share of the commission due on the transaction, and then allowing that Team leader to pay the Team members. An exception could exist if the entire amount (i.e., 100%) that is paid to a Team member by the Team leader is clearly for activity that does not require a real estate license. The problem with that exception is that it would legally put a burden on the Responsible Broker to verify whether that compensation is truly for unlicensed activities every single time the payment is made. This same rule applies to the payments made to licensed assistants.
CORPORATIONS: The DRE does not have a problem with a Salesperson instructing the Responsible Broker to pay some or all of their compensation on a closed transaction to the Agent’s corporation (or to any other person or entity for that matter) but it is critical that those instructions must be in writing from the Salesperson to the Responsible Broker.
NOTE: Even though the Agent’s corporation could be paid directly by the Responsible Broker, it would still not be permissible for a Team leader to receive the full commission due on a closed transaction paid to their corporation and then have the Agent’s corporation make the payments to the licensed assistants or Team members. The Agent’s corporation is not the Responsible Broker for the licensed assistants and/or Team members, and thus the existence of the Agent’s corporation does not change the rules regarding how payments are to be made.
PRACTICE TIPS:
- Many Brokers are not aware of the law and thus may have been allowing illegal payments by Salespersons to other Salespersons. Ignorance of the law will not be a defense if a DRE audit discovers illegal payments by one Salesperson to another Salesperson.
- Because the law is clear that it is illegal to both pay compensation and receive compensation for license activity from one Salesperson to another, both the Salesperson making the payment, and the Salesperson receiving that compensation, are subject to fines and/or license sanctions.
- A broker who is allowing, or even condoning, any illegal payment practice would also be subject to discipline by the DRE.
- All payments for licensed activities need to be made by the Responsible Broker.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright Broker Risk Management 2019 09/20/19