Legally speaking: Agents switching brokerages & the Broker’s duty to pay their commission
On January 6, 2014
By Peg Ritenour, OAR Vice President of Legal Services/Administration
Q: An agent recently left my brokerage and transferred to another company. At the time she left she had two properties that were in contract but the sales didn’t close until after she left. I had to do quite a bit of work to get these deals to close. She also owes me money for other expenses not related to these transactions. Do I have to pay this agent since she wasn’t licensed with me when the deals closed? If I do, can I make deductions for the work I had to do to get the transactions to close and the other amounts she owes me?
A: This is a very common situation that can involve license law implications for the broker if not handled correctly. That is because under Ohio law a broker is required to pay agents their “earned share” of a commission. So what is an agent’s “earned share?” It is the amount that was agreed upon between the agent and broker.
To determine the earned share the broker is required to pay an agent, the Ohio Division of Real Estate and Professional Licensing will first look to see if an independent contractor agreement was entered into between the broker and agent and if it contains any contractual provisions regarding the agent’s right to a commission after the agent leaves the brokerage. Certainly if that contract provides that the agent’s right to commissions is forfeited upon termination or permits the broker to make deductions for monies owed to the brokerage or work performed by others in the brokerage to get the transaction to closing, the broker can follow those contractual provisions. On the other hand, if the independent contractor agreement does not provide for such forfeiture or deductions from the agent’s earned commission, then they cannot be made.
Often, however, there is no independent contractor agreement between the broker and agent. In those situations the Division will consider any written brokerage office policy provisions that address the agent’s right to commissions upon termination. Absent such a written policy, the Division may look at other documentation establishing an agreement between the agent and broker regarding such deductions, such as email between the broker and agent, or established past practices followed when other agents left the brokerage, etc. However if no such policy or agreement can be established, the Division generally will take the position that agents must be paid their commission on any transactions that were in contract at the time they left the brokerage even though they closed following the agent’s termination. And absent proof of any agreement to the contrary, the Division will only permit deductions to be made for direct expenses related to the transaction, such as advertising or staging expenses — not unrelated monies owed to the brokerage or for work the broker had to perform to get the deal to close.
The “take away” for brokers from this article should be the importance of having a well written independent contractor agreement with affiliated agents that addresses the agent’s right to commissions after termination. Possible provisions that could be included in such a contract are:
- whether all commissions owed will be forfeited upon termination;
- whether the agent is entitled only to commission on transactions that are actually in contract prior to termination;
- whether the broker can make deductions for any outstanding amount owed to the brokerage (regardless of whether expenses are related to any transaction in existence);
- whether the broker may deduct a reasonable amount for any necessary work the broker or other agents of the firm performed to see the transaction through to closing; and
- whether the agent will be paid a share of commission on any options that are exercised, land contracts that close or leases that are renewed following termination.
Click here to access OAR’s Independent Contractor White Paper. The document contains a full discussion of independent contractor issues and a check list of other contract provisions brokers should consider including in such an agreement.
Tags: legal, Legally Speaking