Classification of Real Estate Appraisers as Independent Contractors by Appraisal Firms

Author’s note: This article is geared to smaller appraisal firms, not AMCs or large firms.

Across many different industries, the alleged misclassification of workers and service providers as independent contractors is a hot legal issue. In recent years, the issue has attracted the attention of government agencies as they grapple with regulating “gig” economy companies like Uber. The issue also has grabbed the attention of plaintiffs’ lawyers who are filing lawsuits against unprepared employers. It should get the attention of appraisal firms too because the classification of appraisers as independent contractors is a prevalent practice. 

Many owners and managers of appraisal firms already know that whether an appraiser working for a firm can properly be treated as an independent contractor is with a thorny issue and fear the serious pain those thorns can inflict. For this reason, I will offer this observation up front because it may soothe some readers’ fears: smaller appraisal firms who treat their nonowner appraisers as contractors generally have avoided ill consequences when they understand the relevant factors and do a good job following the rules. Some bigger firms, however, may have more to worry about. 

A Misclassification Nightmare for a Large “Vendor Management Company” 

A case that went to trial in California in 2018 may be a harbinger for appraisal management companies on the issue of appraiser classification in particular, but it offers key takeaways for all types and sizes of appraisal firms. The case is entitled Bowerman v. Field Asset Services, LLC (U.S. District Court, N.D. Cal. 2013).FASThe defendant company – Field Asset Services (“FAS”) – was not an appraisal management company (AMC), but its business model was very similar to one. FASFAS’s business was “vendor management”— it managed a nationwide panel of several thousand vendors for performing REO property field services for lender clients and loan servicers. In 2013, one of its California vendor panelists sued the company on behalf of himself and an alleged class of hundreds of other vendors on FAS’s panel in California.   

A central point of the lawsuit was the plaintiff’s contention that he and other panelists were effectively and legally employees rather than independent contractors, and that as employees, FAS was liable to them for unpaid overtime and unpaid business expenses. A true employer would be legally responsible for overtime under federal and state law and responsible for employee-incurred expenses under California law. 

To prove the key point that FAS’s vendor panelists should be classified as employees rather than contractors, the plaintiff’s counsel offered evidence that FAS told “vendors where to go, when to go, what to do, when to get it done, and how much and when they will be paid for their efforts.” The evidence included the following:

  • As part of being approved for FAS’s panel, vendors signed an agreement which, although referring to vendors as independent contractors, set forth detailed requirements for accepting assignments, scheduling property access, timely job performance, photo requirements, status updating, and quality control.
  • Panelists were not given a meaningful opportunity to negotiate the contractor agreement.
  • Panelists also authorized FAS to perform background checks.
  • FAS offered assignments to panelists through its proprietary software platform, and panelists were required to use this platform to upload their status reports, photos, and invoices.
  • Panelists were required to respond to assignment requests within 24 hours and complete assignments within a stated time period, which was sometimes just three days.
  • Declining too many assignments or cherry-picking the best assignments could result in fewer assignments being offered to a vendor.
  • FAS “score carded” panelists based on their acceptance/declination of assignments, status communications, timeliness of assignment completion, and quality of work. A low rating could result in a warning, reduction of work, or ineligibility to work.
  • FAS tracked its panelists’ performance and recorded warnings, counseling, and eligibility suspensions in “vendor profiles.”

The above list of items, of course, reads very much like a list of activities performed by AMCs in managing residential appraisals.

At trial, FAS’s panelists testified that they worked long hours, often 10 hours per day and 6 days per week. Of course, since the panelists were classified as independent contractors, they did not receive overtime. Nor did FAS reimburse them for expenses such as mileage, insurance, equipment, cell phones, internet use, or computers.

After four years of litigation, the court ruled that any vendor who derived more than 70% of his or her income from FAS should be classified as an employee and was thus entitled to overtime and payment of expenses. The essential reasoning was that FAS had the right to so closely control the work of its contractors (and also exercised that right) and the contractors were so dependent on FAS that the contractors were employees under California law (as the state’s law then stood).[1]

With liability established, the issue then became how much FAS owed its reclassified contractors. The issue of damages claimed by the named plaintiff and a sampling of 10 class members went to trial first. The jury awarded a total of $2,060,237 to those 11 individuals for unpaid overtime, unpaid expenses, penalties, and interest. The award to the named plaintiff was a striking example. The jury determined that he worked 4,845 hours of overtime from 2010 through 2016, for which he should recover $98,615 in overtime payments (on top of the payments he actually received for doing the work) and that he should be awarded $168,746 for his unpaid expenses (including $95,247 for mileage alone). In 2019, the federal court then ruled that the plaintiffs’ attorneys were also entitled to an award of more than $5 million in attorneys’ fees. This was even before FAS’s liability to the rest of the class members was determined.

While the case should cause some AMCs to evaluate certain of their practices (particularly the degree to which they control and supervise panelist appraiser work), it highlights key issues for all types of appraisal firms who choose to classify their appraisers as independent contractors rather than employees.  We’ll look at those issues below – mainly from the perspective of true appraisal firms, rather AMCs.

The Strong Incentives for Treating Real Estate Appraisers as Independent Contractors

Most firms that treat appraisers as independent contractors recognize the business reasons for doing so. The incentives are strong:

  • Independent contractors are not paid overtime for working more than 8 hours in a day or 40 hours in a week, nor are they entitled to minimum wage.
  • Firms do not withhold taxes or make Social Security and Medicare contributions for contractors and need only to report payments on an annual 1099 Form.
  • Firms generally do not pay unemployment or workers’ compensation premiums for contractors (though auditors for workers’ compensation insurers are increasingly seeking to require that firms pay premiums even for contractors).
  • Contractors don’t count for purposes of the Affordable Care Act, under which health insurance must be provided when a firm reaches 50 full-time equivalent employees.
  • Contractors can be “hired and fired” more easily and have a harder time pursuing discrimination claims.
  • When contractor appraisers are sued for professional negligence, their firms may not have any legal obligation to pay their legal bills and contractors may be on their own.

It is not only firms that may prefer contractor classification. Appraisers often prefer this arrangement for personal tax reasons because it enables them to deduct business-related expenses to a much greater degree than they would be able to as employees of a firm. Many appraisers also prefer to “be their own boss.” 

Evaluating Whether Appraisers Working for a Firm Are Properly Treated as Contractors

While the economic incentives are strong, we know based on the trial result in Bowerman v. Field Asset Services that there is significant legal risk to improperly classifying employees as contractors. An employer can find itself liable for unpaid overtime, employee expenses, penalties, and interest. An employer also faces potential liability to state agencies for unpaid unemployment and workers compensation costs, and to the IRS for unpaid employment taxes and Social Security contributions.

I’m going to leave the specter of misclassification involving AMCs for those companies to ponder with their own legal counsel. Moreover, all firms treating appraisers as contractors are best advised to seek knowledgeable, local legal counsel about handling independent contractor arrangements properly within the framework of their states’ specific laws. Indeed, the laws and regulations of a few states specifically exempt appraisers from being treated as employees for certain purposes.[2] To inform the discussion, however, let’s look closer at the classification issue for “true” appraisal firms in which the appraisal work is performed by regular staff members and in which the appraisals go out under the name of the firm. 

Whether classification of an appraiser as a contractor is legally correct for a particular appraisal firm is unfortunately a difficult question. It depends on the purposes for which the appraiser is being classified because there are different tests used for federal tax purposes versus those used for overtime, unemployment insurance, workers compensation, or liability. The details of these tests also vary by state. As a result, there is no single standard for determining whether an appraiser is properly treated as an independent contractor.

While specific tests and their factors vary significantly, a general theme runs through most tests. The key issue under what is referred to as the “common law” test is the firm’s control over the worker. The IRS has summarized the common law test in its wage withholding regulations and states that a worker is generally considered an employee when:

the person for whom services are performed [the appraisal firm] has the right to control and direct the individual who performs the services [the appraiser], not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done.[3]

The following are some key factors relating to control that need to be considered. When answers to these questions are “yes,” it is more likely that the appraiser is really an employee:

•        Does the firm train the appraiser in how to perform his or her work?

•        Is the appraiser required to be present on the firm’s premises? 

•        Is the appraiser required to work certain hours or days? 

•        Is the appraiser required by the firm to devote substantially full time to the firm?

•        Does the firm pay for the appraiser’s “tools”—computer, appraisal software, MLS, laser measuring device, etc.? 

•        Is the appraiser paid by the hour or week (as opposed to by project)? 

•        Is the appraiser permitted to accept and be paid for work independently of the firm, and does the appraiser actually take on independent work?   

•        Are other appraisers in the firm (other than the firm’s owners) treated as employees?

•        Can the appraiser realize a profit or suffer a loss as a result of his or her services for the firm?

•        Do either of the parties believe an employment relationship exists?

If the answer to any of these questions is a strong “yes” or if the answer to more than a few of these questions is “yes,” the firm should probably think twice before treating its appraisers as contractors.

Creating a More Defensible Independent Contractor Relationship

For small appraisal firms, the actual risk of liability for misclassification has so been relatively low. (The big problem is that the consequences are so high). First of all, many firms can and do properly structure their independent contractor arrangements to minimize potential problems. Second, and very frankly, even for firms that don’t get all the details right, the risk of actual enforcement (“getting caught”) has proven low. This is why I hear from many firms something along the lines of “We’ve been doing it this way for 20 years and never had a problem.” The genesis of many state audits and even class action reclassification lawsuits is often a single independent contractor who has filed unsuccessfully for unemployment or disability benefits. Thus, the bigger the firm, the more likely this scenario becomes—and also the more likely the firm will be a profitable target for a multiplaintiff or class action case.

To decrease the risk of a misclassification problem, any firm treating appraisers as independent contractors should use a written independent contractor agreement spelling out the relationship and make sure that both parties sign it. Such an agreement is almost never a controlling factor in a test, but it can provide clarity regarding the firm’s and the appraiser’s intentions. Here are some key points the agreement should cover and that should be true:

  • The independent contractor appraiser has the right and freedom to work the hours that he or she deems necessary to perform accepted projects, and the manner of performing appraisals is under the exclusive control of the appraiser.
  • The appraiser will not be treated as an employee for state or federal tax purposes or for the purposes of workers’ compensation or unemployment insurance.
  • The appraiser may perform appraisals on behalf of himself or herself or for other firms, and may market his or her services to others.
  • The appraiser is responsible for his or her own “tools” for the job, such as computers, tablets, or software.
  • The appraiser is responsible for his or her own training and continuing education.

The following are some red flag practices to avoid:

  • Referring to contractor appraisers as “staff appraisers” in firm brochures or on firm websites, or listing appraisers without stating specifically that they are independent contractors to the firm.
  • Requiring a contractor appraiser to sign a non-compete agreement or other agreement to perform services exclusively for the firm. 
  • Classifying some appraisers in the firm as employees and others as contractors even when they all perform the same type of work.  
  • Treating an appraisal trainee as an independent contractor (a trainee is by definition not an independent contractor because of the required supervision of his or her appraisal work).
The Changed Law in California and the Difficult “ABC Test”

In April 2018, the California Supreme Court issued a landmark decision in Dynamex Operations West, Inc. v. Superior Court.[4]  In its opinion, the Court held that for purposes of California’s Industrial Wage Orders, which specify overtime requirements among other things, a firm classifying a worker as an independent contractor bears the burden of establishing that such a classification is proper under a strictly applied version of the so-called “A-B-C test.”  To meet this burden, the firm must establish all three of the following factors to justify treating workers as independent contractors:

(A) that the worker is free from the control and direction of the hiring firm 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 firm’s business; and 

(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. 

This is a significantly different and tougher test than has been applied under prior California precedent. The only other states that apply this test in such a strict manner – requiring all three elements to be proven by the employer – are recognized generally by employment lawyers as Massachusetts and New Jersey.

While the full effect of the decision may take some time to settle in, and while the decision also doesn’t resolve employee/contractor determination for every purpose (such as reimbursement of expenses), I expect that increased litigation against appraisal firms that treat staff appraisers as independent contractors in California will be the result. Such firms should look carefully at their current practices and risk. Meeting any of the three parts of the test may be a difficult challenge for most firms, but among the three factors, the hardest one that firms will have to grapple with may be part (B) relating to whether a staff appraiser’s work falls outside the regular course of business of the firm. When an appraisal firm’s business is providing appraisals under its own name, rather than acting as a true AMC that solely manages appraisals performed by third party vendor appraisers, it will be difficult, perhaps implausible, for the firm to argue that the work of the appraiser wasn’t the regular business of the firm. 

[1] California’s law regarding the proper classification of workers has since changed as a result of the California Supreme Court’s 2018 landmark decision in Dynamex Operations West, Inc. v. Superior Court, adopting what it is called the “A-B-C test” and making it even more difficult to properly classify workers as contractors.  This case and the A-B-C test are discussed at the end of this chapter.

[2] Specific exemptions for appraisers are far and few between, but examples include: New Hampshire (NH Rev. Stat. §281-A:2 exempts appraisers from treatment as employees for workers’ compensation); Rhode Island (Gen. Laws 1956, §28-29-7.1 provides an exemption for workers’ compensation subject to specific requirements); Virginia (VA Code Ann. §60.2-212 and §65.2-101 provide exemptions for workers’ compensation and unemployment).

[3] Treas. Reg. §31.3401(c)-1(b) (annotations added in brackets)

[4] Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th (2018).