Whitlach v. Premier Valley, Inc.
Filed 11/18/22; Certified for Publication 12/19/22 (2022)
Rule of Law:
The applicable test for determining whether a real estate salesperson is an “employee” or an “independent contractor” for purposes of the California Labor Code’s wage and hour provisions is the three-factor test set forth in Unemployment Insurance Code sections 650 and 13004.1, as incorporated by Business and Professions Code section 10032, subdivision (b), and further affirmed by Labor Code section 2778, subdivision (c)(1).
Facts:
- James Whitlach was a licensed real estate agent affiliated with Premier Valley, Inc., a real estate brokerage firm operating as Century 21 MM.
- Premier Valley, Inc. is a franchisee of co-defendant Century 21 Real Estate LLC.
- Whitlach performed services as a real estate agent and was paid primarily by commission.
- Whitlach entered into a written "Independent Contractor Agreement" (ICA) with Premier Valley, Inc. which specified that he would be treated as an independent contractor for state tax purposes.
- Whitlach also had a separate management employment agreement with Premier Valley, Inc. for a sales manager position, under which he received a salary.
Procedural Posture:
- James Whitlach filed a class action complaint alleging multiple Labor Code violations against Premier Valley, Inc. and Century 21 Real Estate LLC.
- Whitlach filed a first amended complaint (FAC) adding a representative claim under the Labor Code Private Attorney General Act of 2004 (PAGA).
- Whitlach's class claims in the FAC were dismissed upon the trial court’s adoption of a stipulated order to this effect.
- Premier Valley, Inc. and Century 21 demurred to the FAC, arguing Whitlach was precluded from asserting a PAGA claim because he was an independent contractor.
- The trial court sustained the demurrer, concluded the Unemployment Insurance Code section 650 test applied, found Whitlach an independent contractor as a matter of law, and dismissed the FAC with leave to amend.
- Whitlach filed a second amended complaint (SAC), which is the operative complaint, asserting a single PAGA cause of action, and alleging the independent contractor agreement was unconscionable, Labor Code section 2778(c)(1) was unconstitutional, and his separate management employment agreement was relevant.
- Defendants Premier Valley, Inc. and Century 21 demurred to the SAC.
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Issue:
Does the three-factor test from Unemployment Insurance Code sections 650 and 13004.1, as incorporated in Business and Professions Code section 10032, subdivision (b), govern the determination of whether a real estate salesperson is an employee or independent contractor for purposes of the Labor Code's wage and hour provisions, thereby exempting them from the ABC test codified in Labor Code section 2775, subdivision (b)(1)?
Opinions:
Majority - Smith, J.
Yes, the three-factor test from Unemployment Insurance Code sections 650 and 13004.1, as incorporated in Business and Professions Code section 10032, subdivision (b), governs the determination of employee or independent contractor status for real estate salespersons concerning Labor Code wage and hour provisions, thereby exempting them from the ABC test codified in Labor Code section 2775, subdivision (b)(1). The court affirmed the trial court's judgment, concluding that Labor Code section 2778, subdivision (c)(1), enacted by Assembly Bill No. 5 (AB 5), explicitly provides that for real estate licensees, the determination of employment status is governed by Business and Professions Code section 10032, subdivision (b). This section, in turn, incorporates the three-factor test from Unemployment Insurance Code sections 650 and 13004.1. This test requires that the individual be: 1) a licensed real estate agent; 2) paid substantially by commission rather than hours worked; and 3) operating under a written contract specifying independent contractor status for state tax purposes. The legislative history of Senate Bill No. 630 (SB 630), which enacted Business and Professions Code section 10032, confirms the Legislature's intent for this test to apply broadly to the Labor Code's wage and hour provisions, evidenced by a specific carve-out mandating the Borello test only for workers' compensation purposes. Since Whitlach met all three conditions, he was an independent contractor as a matter of law. The court rejected Whitlach's arguments that Labor Code section 2778, subdivision (c)(1) violates equal protection, finding that real estate salespersons are not similarly situated to other workers due to the unique structure of their profession. It also rejected the claim that Whitlach’s Independent Contractor Agreement was unconscionable, noting that its core terms were statutorily authorized and other challenged provisions were either incidental to the business model or severable. Finally, the court found Whitlach’s separate management employment agreement irrelevant to his PAGA claims, which were brought on behalf of "real estate salespersons" regarding their sales-related duties, not their management roles.
Analysis:
This case provides crucial clarity regarding the application of AB 5 and the Dynamex ABC test to the real estate industry in California. By confirming that real estate salespersons are exempt from the ABC test and remain subject to a specific three-factor test, the decision establishes legal certainty for brokers and agents regarding independent contractor classifications. This ruling significantly impacts the real estate sector by preserving the established business model for broker-salesperson relationships, potentially limiting future misclassification lawsuits and ensuring that the unique regulatory framework of the industry is respected in labor law. The court's emphasis on legislative intent and the distinct nature of the real estate profession highlights that statutory exemptions to broad employment tests will be upheld when clearly defined.
