LEGAL CORNER: Broker’s Duty to Supervise: Changes in Light of the New Housing Discrimination Legislation

John Dolgetta, Esq. | January 12, 2022

John Dolgetta, Esq., Dolgetta Law, PLLC.

On Dec. 21, 2021, Gov. Kathy Hochul signed expansive new legislation contained in nine bills aimed to combat housing discrimination in New York State [see https://on.ny.gov/3FfcBXJ]. The legislation was passed as a direct result of Newsday’s investigative report entitled “Long Island Divided” [see https://bit.ly/3zKUQP0] and addresses many of the concerns and issues uncovered in the investigation.

Some critical elements of the legislation deal with the added requirements of brokers, as well as associate brokers, relating to their duty to supervise and the implementation of standardized operating procedures for all brokerage firms. The new legislation also implements additional anti-discrimination, anti-bias, cultural competency training requirements, as well as increasing the amount of maximum fines and licensing and renewal fees for all licensees.

Broker’s Duty to Supervise Under RPL § 441 And § 175.21 of the Rules and Regulations: A Review of The Existing Standards

Section §175.21(a) of the Department of State’s Rules and Regulations provides that “[t]he supervision of a real estate salesperson by a licensed real estate broker, required by subdivision l(d) of §441 of the Real Property Law, shall consist of regular, frequent and consistent personal guidance, instruction, oversight and superintendence by the real estate broker with respect to the general real estate brokerage business conducted by the broker, and all matters relating thereto.”

In light of the recent developments stemming from the Newsday report and the new legislation, it is now more important than ever for brokers to think about the procedures they currently have in place to supervise the actions of their licensees. As pointed out in my December 2021 column in Real Estate In-Depth, the DOS and NYS Human Rights Commission have filed complaints against many of the brokers and salespersons involved in the investigation which are making their way through the system.

Review of Court of Appeals Decision in Roberts Real Estate, Inc.

In 1992, the New York Court of Appeals issued a landmark decision in Roberts Real Estate, Inc. v. Department of State (80 NY2d 116, 589 NYS2d 392 (1992)). New York’s highest court held that when a supervising broker is unaware (i.e., does not have “actual knowledge”) of the actions of a salesperson and upon finding that the salesperson has acted improperly, even where there may be a failure to supervise, the penalty to the principal broker is limited to a fine pursuant to Real Property Law § 442-c.

In Roberts, the New York State Department of State “…sought judicial interpretation of Real Property Law § 442-c that would allow it to suspend or revoke a corporate broker’s license based on interpreting ‘actual knowledge’ to include imputed knowledge of employee-salespersons.” The Court of Appeals concluded that the interpretation of the DOS was not supported by the RPL and held that the DOS was not permitted to suspend the license of the broker based upon an “imputed knowledge” standard. The court did indicate, however, that the “…absence of actual knowledge does not insulate real estate brokers from disciplinary measures less severe than license suspension or revocation…” and remanded the case back to the DOS to allow it to consider a lesser sanction (i.e., a fine).

The DOS in Division of Licensing Services v Bell, 21 DOS 89 (1989), also similarly held that “…[w]here…the salesperson acts in such a way as to prevent the broker from being aware of his conduct, it cannot be said that the broker failed to meet his supervisory obligations.” While the current standard would seem to protect a broker against revocation or suspension if the broker was not aware of the discrimination, several DOS complaints filed as a result of the Newsday investigation also name the brokers for “failure to supervise.”

‘Standardized Operating Procedures’ Implemented Under the New Legislation

One part of the newly enacted legislation (S.2131-A/A.618 [see https://bit.ly/3zQfDAH]) amends RPL § 442-h of the real property law by adding subdivision 4, which “…directs the Secretary of State…to promulgate rules and regulations requiring real estate brokers to institute standardized operating procedures for the prerequisites prospective homebuyers must meet prior to receiving any services.” The legislation will require brokers to submit these procedures to the DOS. The DOS will be required to maintain a copy of the procedures while the broker is licensed “…and for at least five years thereafter.” The broker will also be required to submit any changes to the procedures to DOS within 30 days of any such change thereto.

The legislation provides that any salesperson who fails to abide by the procedures will be subject to the penalties under RPL § 441-c. Additionally, the legislation further amends RPL § 441-c by permitting the DOS to revoke or suspend the license of a real estate broker or salesperson should they violate this new subdivision 4 of RPL § 442-h. The legislature explains that this requirement will “…allow for client intake procedures to be monitored and standardized, preventing discriminatory practices.”

Associate Brokers Serving as Office Managers Must Now Supervise Other Real Estate Professionals

This new legislation (S.2157-A/A.6355 [see https://bit.ly/33fiGGy]) introduces a critical change to the existing law with respect to the oversight standards of associate brokers who act as office managers. Under the new law, associate brokers who serve as office managers must now supervise other licensed salespersons and associate brokers in their office. Additionally, in order to qualify to be appointed as an office manager, the associate broker “…must have been active in the real estate industry two of the four years before beginning duties as office manager.” This new legislation now holds an associate broker, who is an office manager, to the same oversight standards of a principal broker.

Brokers having multiple locations usually appoint associate brokers as office managers to supervise branch offices. The legislature points out that associate brokers, while licensed under the same standards as brokers, “…are not held to the same statutory obligations of oversight placed on brokers at their principal place of business.” Under the previous law, an office manager/associate broker was only “…held to the same standards as a real estate agent while [at the same time] maintaining their broker’s license.”

It is the legislature’s view that the “…lack of oversight over agents by office managers can manifest itself with agents who are not properly trained and supervised in their behavior, performance, and compliance with fair housing regulations.” According to the legislature, the “…bill ensures that proper oversight is given over real estate agents irrespective of whether they are working out of a broker’s principal place of business or branch office under an office manager.” This is a major change in the current law. The “duty to supervise” now extends to associate brokers acting as office managers. In most proceedings brought against licensees by the DOS, the DOS commonly names the principal broker in the complaint for a “failure to supervise.” The DOS will now certainly name the associate broker-office manager in a complaint.

The Independent Contractor Relationship In Light of the New Legislation

The independent contractor relationship, which requires payment of compensation to salespersons based only on sales production, requires that the employing broker not “direct and control” the salesperson. The DOS requirement to supervise the activities of the salesperson does not give the principal broker the right to “direct and control” the activities of the licensed salesperson or associate broker. The principal broker cannot instruct a salesperson to be in the office at a particular time, work specific hours or to take specific customers to properties designated by the principal broker.

The DOS and RPL, however, require brokers (and now associate brokers-office managers) to monitor the activities of the salesperson and have the “duty to supervise.” This duty of supervision consists of “…regular, frequent and consistent personal guidance, instruction, oversight and superintendence….” There has always been a concern for principal brokers when dealing with the “direction and control” versus “supervision” issue. This was lessened after amendments to the Workers Compensation Law and Labor Law which outlined clearly the circumstances under which a salesperson would be considered an independent contractor in New York.

An additional requirement is that there be a written contract with the salesperson in the form prescribed by statute and that the principal broker and salesperson live to the letter of New York law. Doing so also complies with the Internal Revenue Code provisions (IRC Section 3508) which indicate that if a real estate salesperson has a written contract, he or she will be presumed to be an independent contractor.

While all of the above independent contractor standards remain in place, the new legislation does introduce many additional supervision and training requirements for the broker, and for those associate brokers who are appointed as office managers. For years, principal brokers were discouraged from creating office manuals because they might be construed as an indication of “direction and control,” but the new legislation now mandates the creation of “standardized operating procedures” to be provided to prospective clients before they are permitted to provide real estate brokerage services. While the rules and regulations have yet to be promulgated, it is important that brokers continue to consider and comply with all of the independent contractor standards previously considered, and to closely monitor the progress of these yet to be promulgated rules and regulations.

Additional Highlights of the New Discrimination Legislation

Two of the bills signed into law (S.945-B/A.6866 [see https://bit.ly/3Fdmbuc] and S.2133-A/A.5363 [see https://bit.ly/3nkzqTU]) provide for increases in surcharges and fines payable by licensees and also establish an Anti-Discrimination in Housing Fund. The fines contained in paragraph (a) of subdivision 1 of § 441-c have been increased from a maximum of $1,000 to a maximum of $2,000. The legislation also provides that 50% of the revenue from these fines are directed to the Anti-Discrimination in Housing Fund. The funds will be used for fair housing testing and the Attorney General is authorized to “…allocate grants to various government and non-governmental entities specializing in anti-housing discrimination.”

Brokers and salespersons will now be required to pay surcharges when paying licensing and renewal fees. Brokers will be required to pay $30 and licensed real estate salespersons will be required to pay $10. The funds generated from these surcharges will also go to the Anti-Discrimination in Housing Fund for fair housing testing efforts. Therefore, with the increased funding available, expansion of testing efforts will undoubtedly begin to ramp up. Brokers and agents need to make every effort to comply with all anti-discrimination and fair housing laws.

Increased Anti-Discrimination and Fair Housing Training

Three of the bills (S.2132-B/A.5359 [see https://bit.ly/3HZIZ2a]; S.538-B/S.4638-A [https://bit.ly/3nkD5RE]; and S.979-A/A.844-A [https://bit.ly/3Fle5j4]) also expanded continuing education requirements relating to implicit bias training, anti-bias training, education based on historical “legacy of segregation, unequal treatment and…lack of access to housing.” Training must include, but is not limited to, the following:

• The legacy of segregation, unequal treatment, and historic lack of access to housing opportunities.

• Unequal access to amenities and resources on the basis of race, disability and other protected characteristics.

• Federal, state, and local fair housing laws.

• Anti-bias training.

Brokers and salespersons are also required to take two hours of training relating to implicit bias as part of their continuing education requirements and license renewal process. According to the legislature, the new law “…ensures that all real estate professionals are made aware of how harmful implicit bias can be and how to ensure they follow fair housing guidelines.”

Finally, the legislation also requires that courses in “cultural competency” be included in the licensing curriculum for brokers and salespersons. Brokers and salespersons must take two hours of training in “comprehensive cultural competency.” These additional hourly course requirements are included within, and are not in addition to, the current 22.5 hours of continuing education required for renewal.

Understanding the Changes in the Regulatory Landscape

The regulatory landscape in New York’s real estate industry has experienced many critical and substantive changes over the past few years. Brokers and agents have had to deal with not only the regulatory changes but also the challenges brought about by the COVID-19 pandemic. It has not been easy, but through it all real estate agents have remained resolute and strong. Licensees have represented their clients to the best of their abilities through these difficult times and will continue to do so.

At the same time, licensees must keep up with the ever-changing regulatory landscape and while it may not be easy, understanding and complying with the new legislative initiatives is an important part of the business of being a real estate professional. Anti-discrimination laws are a critical component of the real estate industry and must always be at the forefront of any real estate transaction and must be a primary consideration and concern of all agents.

John Dolgetta, Esq.
Legal Corner author John Dolgetta, Esq. is the principal of the law firm of Dolgetta Law, PLLC. For information about Dolgetta Law, PLLC, please visit http://www.dolgettalaw.com. The foregoing article is for informational purposes only and does not confer an attorney-client relationship.”