3 Important Court Decisions Affecting California Real Estate

The legal landscape in Real Estate is everchanging and recently there have been a few important court decisions real estate professionals should be aware of. Here’s a quick summary of the decisions made regarding Independent Contractor Status, redlining (explicit and implicit), and Department of Justice investigations of rules and policies.

Whitlach v. Premier Valley, Inc. (2022)

Independent Contractor Status Dispute

In November of 2022, the Court of Appeals for the Fifth District of California issued a decision providing important guidance for future legal disputes involving the test for determining whether a real estate agent is an independent contractor or an employee for the purposes of the Labor Code. This is an overview of the facts of the case, the analysis the Court used in reaching its decision, and highlight some of the practical implications the decision has for real estate professionals. A quick aside, while the scope of this review is limited, if you are interested in the history of how California has made determinations about whether a person is an independent contractor or employee, the discussion the court provides in the case is lengthy and detailed. It covers the history and evolution of the law in this area and would benefit anyone seeking a deeper understanding of some of the background and policy concerns underlying this issue.

As to the facts of this case, the Plaintiff filed a class action and Private Attorney General Act (“PAGA”) claim against Premier Valley, Inc., and Century 21 Real Estate LLC. (Whitlach v. Premier Valley, Inc. (2022) 86 Cal.App.5th 673, 681.) Premier Valley was franchisee of Century 21. (Ibid.) Under the law, a PAGA claim can only be brought by an “aggrieved employee.” (Lab. Code, § 2699(c), emphasis added.) Whitlach’s complaint alleged that because he was an employee, and not an independent contractor, he “was not properly paid all wages due and owing, [was] subjected to unlawful deductions, and [was] not reimbursed for reasonable and necessary business purposes.” (Whitlach 86 Cal.App.5th at 681.) Mr. Whitlach’s argument was important, because if he indeed was an employee and not an independent contractor, then his employer, Premier Valley, would have significantly increased responsibilities and duties owed to him. On the other side, Premier Valley argued Mr. Whitlach was an independent contractor and therefore they did not owe him increased duties.

In particular, the parties in Whitlach disagreed as to what the proper test was to determine if someone was an independent contractor or employee. Premier Valley argued that under Business and Professions Code section 10032(b), there was a three-factor test which applied to labor code claims, such as Mr. Whitlatch’s. Under this three-part test, a real estate agent is an independent contractor if: “(1) the agent is licensed; (2) the agent is paid through commissions; and (3) the agent has signed an independent contractor agreement.” (Whitlach 86 Cal.App.5th at 694.) This is a straightforward and simple test, and one that is easily satisfied by the facts of this case in favor of Premier Valley because Mr. Whitlach was licensed, he was paid through commissions, and he had signed an independent contractor agreement. Under this test, Premier Valley did not owe him the more burdensome duties as it would if Mr. Whitlach was their employee.

In arguing this was not the proper test to be used, Mr. Whitlach advocated the correct test was the “ABC test” found in Dynamex Operations W. v. Superior Court (2018), 4 Cal.5th 903. Under the ABC test, all workers are presumptively employees. (Id. at 955.) Further, workers under the ABC test are only independent contractors when the hiring business proves that:

“The worker in question satisfies each of three conditions: (a) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and (b) that the worker performs work that is outside the usual course of the hiring entity's business; and (c) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.” (Id. at 955–56.)

This would have been a much better test for Mr. Whitlach because it means the courts would presume he was an employee unless Premier could prove the three elements noted in the test. Proving the more complicated factors of the ABC test would be much more difficult (and expensive) than merely proving Mr. Whitlach was a real estate agent, had a license, and signed an agreement.

Ultimately after a lengthy discussion of the history and evolution of these tests, the court held in favor of the easier test favored by Premier that requires a valid broker or sales license, a written contract (see C.A.R. form) and income based primarily on output. (Whitlach 86 Cal.App.5th at 690.)

How does this affect real estate agents and brokers?

At this point, if you are a real estate agent or real estate business, you may be wondering what this has to do with you. This decision matters for several reasons. First, California had not designated the three-factor test as the test for determining if a real estate agent was an independent contractor or employee until now. This means an exact test has finally been clarified for determining if a real estate agent is an employee or independent contractor. Second, this decision is more favorable to brokers and businesses who hire real estate agents as independent contractors because in the event of litigation, arbitration, or mediation, proving that one of their agents was an independent contractor is a much easier (and cheaper) thing to do. It is also more efficient and cost effective for brokers and real estate businesses who hire independent contractors versus employees because independent contractors are not subject to many of the laws which regulate labor in California. For example, when an employment relationship is based on independent contractor status, the employer will not be subject to wage and hour requirements, requirements for providing healthcare, etc. As the Whitlach court noted, from a practical perspective, much of the real estate industry in California has always operated upon the assumption that real estate agents were independent contractors and not employees, thus, the forms, systems, and employment structures used to employ real estate agents are still valid under this decision. This is unlikely if the court had adopted the test proposed by Mr. Whitlach, which would assume the real estate agent was an employee. Such a decision would have required a large-scale overhaul of the language of forms, systems, employment structures, and agreements to ensure compliance with the changed assumption.  

City National Bank and Redlining Settlement

Another case of note in the real estate world is the case of the United States versus City National Bank. In January, City National and the Department of Justice reached a settlement agreement totaling $31 million because of City National’s alleged “redlining” practices. Black’s Law Dictionary defines redlining as “credit discrimination […] by an institution that refuses to provide loans or insurance on properties in areas that are considered to be poor financial risks or to the people who live those areas.” (REDLINING, Black's Law Dictionary (11th ed. 2019).)

The lawsuit settlement is the product of the Department of Justice increasing its focus on civil rights prosecutions. (See Ken Sweet, AP NEWS, Bank to pay $31M redlining settlement, DOJ’s largest ever) Particularly, the Department of Justice accused City National’s Los Angeles branches of receiving six-times less number of mortgage applications in majority Black and Latino neighborhoods than competitors. (Ibid.)  Other allegations against City National included the fact the bank only opened one branch in neighborhoods made up predominately of minorities, versus eleven banks in other neighborhoods.

Real estate lenders and financial institutions should carefully review their policies to be proactive in trying to avoid redlining both “explicitly” and implicitly. The U.S. government is also focused on rooting out redlining practices that are the result of automated computer programs and algorithms. (Ibid.)

Inman: Federal Court Rules in Favor of NAR in Longtime DOJ Probe

January 2023 also saw an important decision regarding the National Association of Realtors (“NAR”). The issues surrounding the case arose from the Department of Justice (“DOJ”) flipflopping on its commitment to the terms of a settlement agreement it reached with NAR in 2019. (See, Andrea V. Brambila, inman, DOJ quietly resumed NAR probe days after settlement withdrawal) In 2019, the DOJ sent civil investigative demands regarding NAR’s “Clear Cooperation Policy” and its “Participation Rule.” The Clear Cooperation Policy requires that “within one (1) business day of marketing a property to the public, the listing broker must submit the listing to the MLS for cooperation with other MLS participants.” (National Association of Realtors, MLS Clear Cooperation Policy) The Participation Rule refers to the guidelines and rules regarding agent’s participation in Multiple Listing Service. (See National Association of Realtors, Handbook on Multiple Listing Policy 1, 3)  

In November 2020, a settlement was entered into between the NAR and the DOJ in which the DOJ agreed to drop its investigation into the rule and policy (while the Trump Administration was still in control of the DOJ). (Brambila, supra.) As is often the case when new Presidential Administrations take control of the executive branch, the priorities and policies of the executive branch agencies also tend to change, and in July 2021 (after the Biden Administration had taken control of the DOJ), the DOJ withdrew from the settlement agreement which NAR claimed was conditioned upon the termination of the investigation into the policy and rule. In January 2023, a Washington D.C. District court ruled in favor of the NAR holding that the DOJ could not back out of its previous agreement even though it was entered into by a previous administration. Importantly, the court noted this does not stop future investigations into the NAR or these specific rules and policies if they were ever to be changed or enforced in a different manner.

The legal landscape in Real Estate is everchanging and recently there have been a few important court decisions real estate professionals should be aware of. Here’s a quick summary of the decisions made regarding Independent Contractor Status, redlining (explicit and implicit), and Department of Justice investigations of rules and policies.

Whitlach v. Premier Valley, Inc. (2022)

Independent Contractor Status Dispute

In November of 2022, the Court of Appeals for the Fifth District of California issued a decision providing important guidance for future legal disputes involving the test for determining whether a real estate agent is an independent contractor or an employee for the purposes of the Labor Code. This is an overview of the facts of the case, the analysis the Court used in reaching its decision, and highlight some of the practical implications the decision has for real estate professionals. A quick aside, while the scope of this review is limited, if you are interested in the history of how California has made determinations about whether a person is an independent contractor or employee, the discussion the court provides in the case is lengthy and detailed. It covers the history and evolution of the law in this area and would benefit anyone seeking a deeper understanding of some of the background and policy concerns underlying this issue.

As to the facts of this case, the Plaintiff filed a class action and Private Attorney General Act (“PAGA”) claim against Premier Valley, Inc., and Century 21 Real Estate LLC. (Whitlach v. Premier Valley, Inc. (2022) 86 Cal.App.5th 673, 681.) Premier Valley was franchisee of Century 21. (Ibid.) Under the law, a PAGA claim can only be brought by an “aggrieved employee.” (Lab. Code, § 2699(c), emphasis added.) Whitlach’s complaint alleged that because he was an employee, and not an independent contractor, he “was not properly paid all wages due and owing, [was] subjected to unlawful deductions, and [was] not reimbursed for reasonable and necessary business purposes.” (Whitlach 86 Cal.App.5th at 681.) Mr. Whitlach’s argument was important, because if he indeed was an employee and not an independent contractor, then his employer, Premier Valley, would have significantly increased responsibilities and duties owed to him. On the other side, Premier Valley argued Mr. Whitlach was an independent contractor and therefore they did not owe him increased duties.

In particular, the parties in Whitlach disagreed as to what the proper test was to determine if someone was an independent contractor or employee. Premier Valley argued that under Business and Professions Code section 10032(b), there was a three-factor test which applied to labor code claims, such as Mr. Whitlatch’s. Under this three-part test, a real estate agent is an independent contractor if: “(1) the agent is licensed; (2) the agent is paid through commissions; and (3) the agent has signed an independent contractor agreement.” (Whitlach 86 Cal.App.5th at 694.) This is a straightforward and simple test, and one that is easily satisfied by the facts of this case in favor of Premier Valley because Mr. Whitlach was licensed, he was paid through commissions, and he had signed an independent contractor agreement. Under this test, Premier Valley did not owe him the more burdensome duties as it would if Mr. Whitlach was their employee.

In arguing this was not the proper test to be used, Mr. Whitlach advocated the correct test was the “ABC test” found in Dynamex Operations W. v. Superior Court (2018), 4 Cal.5th 903. Under the ABC test, all workers are presumptively employees. (Id. at 955.) Further, workers under the ABC test are only independent contractors when the hiring business proves that:

“The worker in question satisfies each of three conditions: (a) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and (b) that the worker performs work that is outside the usual course of the hiring entity's business; and (c) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.” (Id. at 955–56.)

This would have been a much better test for Mr. Whitlach because it means the courts would presume he was an employee unless Premier could prove the three elements noted in the test. Proving the more complicated factors of the ABC test would be much more difficult (and expensive) than merely proving Mr. Whitlach was a real estate agent, had a license, and signed an agreement.

Ultimately after a lengthy discussion of the history and evolution of these tests, the court held in favor of the easier test favored by Premier that requires a valid broker or sales license, a written contract (see C.A.R. form) and income based primarily on output. (Whitlach 86 Cal.App.5th at 690.)

How does this affect real estate agents and brokers?

At this point, if you are a real estate agent or real estate business, you may be wondering what this has to do with you. This decision matters for several reasons. First, California had not designated the three-factor test as the test for determining if a real estate agent was an independent contractor or employee until now. This means an exact test has finally been clarified for determining if a real estate agent is an employee or independent contractor. Second, this decision is more favorable to brokers and businesses who hire real estate agents as independent contractors because in the event of litigation, arbitration, or mediation, proving that one of their agents was an independent contractor is a much easier (and cheaper) thing to do. It is also more efficient and cost effective for brokers and real estate businesses who hire independent contractors versus employees because independent contractors are not subject to many of the laws which regulate labor in California. For example, when an employment relationship is based on independent contractor status, the employer will not be subject to wage and hour requirements, requirements for providing healthcare, etc. As the Whitlach court noted, from a practical perspective, much of the real estate industry in California has always operated upon the assumption that real estate agents were independent contractors and not employees, thus, the forms, systems, and employment structures used to employ real estate agents are still valid under this decision. This is unlikely if the court had adopted the test proposed by Mr. Whitlach, which would assume the real estate agent was an employee. Such a decision would have required a large-scale overhaul of the language of forms, systems, employment structures, and agreements to ensure compliance with the changed assumption.  

City National Bank and Redlining Settlement

Another case of note in the real estate world is the case of the United States versus City National Bank. In January, City National and the Department of Justice reached a settlement agreement totaling $31 million because of City National’s alleged “redlining” practices. Black’s Law Dictionary defines redlining as “credit discrimination […] by an institution that refuses to provide loans or insurance on properties in areas that are considered to be poor financial risks or to the people who live those areas.” (REDLINING, Black's Law Dictionary (11th ed. 2019).)

The lawsuit settlement is the product of the Department of Justice increasing its focus on civil rights prosecutions. (See Ken Sweet, AP NEWS, Bank to pay $31M redlining settlement, DOJ’s largest ever) Particularly, the Department of Justice accused City National’s Los Angeles branches of receiving six-times less number of mortgage applications in majority Black and Latino neighborhoods than competitors. (Ibid.)  Other allegations against City National included the fact the bank only opened one branch in neighborhoods made up predominately of minorities, versus eleven banks in other neighborhoods.

Real estate lenders and financial institutions should carefully review their policies to be proactive in trying to avoid redlining both “explicitly” and implicitly. The U.S. government is also focused on rooting out redlining practices that are the result of automated computer programs and algorithms. (Ibid.)

Inman: Federal Court Rules in Favor of NAR in Longtime DOJ Probe

January 2023 also saw an important decision regarding the National Association of Realtors (“NAR”). The issues surrounding the case arose from the Department of Justice (“DOJ”) flipflopping on its commitment to the terms of a settlement agreement it reached with NAR in 2019. (See, Andrea V. Brambila, inman, DOJ quietly resumed NAR probe days after settlement withdrawal) In 2019, the DOJ sent civil investigative demands regarding NAR’s “Clear Cooperation Policy” and its “Participation Rule.” The Clear Cooperation Policy requires that “within one (1) business day of marketing a property to the public, the listing broker must submit the listing to the MLS for cooperation with other MLS participants.” (National Association of Realtors, MLS Clear Cooperation Policy) The Participation Rule refers to the guidelines and rules regarding agent’s participation in Multiple Listing Service. (See National Association of Realtors, Handbook on Multiple Listing Policy 1, 3)  

In November 2020, a settlement was entered into between the NAR and the DOJ in which the DOJ agreed to drop its investigation into the rule and policy (while the Trump Administration was still in control of the DOJ). (Brambila, supra.) As is often the case when new Presidential Administrations take control of the executive branch, the priorities and policies of the executive branch agencies also tend to change, and in July 2021 (after the Biden Administration had taken control of the DOJ), the DOJ withdrew from the settlement agreement which NAR claimed was conditioned upon the termination of the investigation into the policy and rule. In January 2023, a Washington D.C. District court ruled in favor of the NAR holding that the DOJ could not back out of its previous agreement even though it was entered into by a previous administration. Importantly, the court noted this does not stop future investigations into the NAR or these specific rules and policies if they were ever to be changed or enforced in a different manner.