BY: TAMAR GABRIEL,ATTORNEY AT LAW
CASEY MCINTOSH, PARALEGAL, researched and contributed to these articles.
California Business and Professions Code Section 10137 governs the circumstances under which a licensed real estate broker can compensate a person from the commissions obtained in a real estate transaction.
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REAL ESTATE CONCERNS: TO WHOM CAN COMMISSIONS BE PAID?
Specifically, this Code Section states that “it is unlawful for any licensed real estate broker to employ or compensate, directly or indirectly, any person for performing any of the acts within the scope of this chapter who is not licensed under the broker employing…” It further states that “no real estate broker shall be employed by or accept compensation from any person other than the broker under whom he or she is at the time licensed.” Unfortunately, the Code still seems to allow for some confusion as to the payment of third parties, former employees, and other aspects of commission payments that brokers are often faced with.
Pursuant to an interpretation by the California Department of Real Estate, the commission earned in a real estate transaction belongs solely to the employing broker. The employing broker must be involved in the distribution of commissions under his or her license. Any violations are subject to temporary suspension or revocation of his or her license. In light of this, a salesperson can instruct the employing broker to pay his or her commission to a third party, but that payment can only be made if the third party did not perform acts for which a real estate license is required. Business and Professions Code Section 10137 correlates with the Real Estate Law (Business and Professions Code Section 10000, et seq.) and is intended to prevent payment for unlicensed acts.
Commission sharing or splitting is not prohibited by Business and Professions Code Section 10000, et seq. However, prior to entering into an agreement for commission splitting or sharing, it is important to check with an attorney to make sure the agreement does not violate other laws pertaining to real estate, such as the Federal Real Estate Settlement Procedures Act (RESPA). In a situation where commissions are legally split or shared, the commissions still belong to the employing broker. Agents may work together and decide to share or split the commission only if the entity that they are sharing or splitting with has not performed any acts for which a real estate license is required. If the entity that the agent is sharing or splitting a fee with does have to perform the acts of a licensed real estate person, then he or she must also be licensed. Even then, it is only legal to share or split fees if the licensee was acting within the course and scope of his or her license.
Commissions earned by former employees also present a problem for brokers. Compliance with the Code requires brokers to issue checks for commissions to the former employee’s new employing broker. If such a person does not exist for whatever reason, it is the Department’s policy that an earned commission can be paid directly to a former employee. This remains consistent with an Attorney General Opinion dealing with the payment of earned commissions to suspended licensees.
Lastly, confusion often arises with regards to dual employment. This is most likely due to the fact that it may seem that brokers are allowed to work for two companies while agents are not. In reality, however, Business and Professions Code Section 10137 allows real estate brokers to act as salespeople or broker-associates for another broker. Real estate agents, however, are only allowed to work for one broker and may only accept compensation from their employing broker. This is to ensure that one employing broker is directing and controlling the licensed activity of an employed salesperson.
The bottom line when it comes to real estate commissions is that they are under the control of the employing broker. Commissions can be paid to someone else—it is one of the major perks of being a real estate agent! This includes third parties and suspended former employees, but Business and Professions Code Section 10137 was enacted to provide guidelines for the payment of compensation and to ensure that consumers are protected from unscrupulous people who attempt to perform the actions of a real estate broker or real estate agent without a license.