Recovering Lost Real Estate Commissions
Minnesota's commission salesperson statute may provide a remedy to the real estate broker-client seeking to recover a lost real estate commission.
by Thomas B. Olson and Scott M. Lucas
Minnesotans, more than most folks, are used to hearing about "the one that got away" -- usually a walleye over 40 inches long. Talk to a real estate professional about the one that got away, though, and you will probably hear about a lost real estate commission. While you can probably write off most of the stories you hear about the monster fishes of Lake Calhoun, many of the commission stories out there are true.
The loss of a commission may take various forms. It may occur through a "commission-ectomy," a procedure usually performed at a closing table, invariably without anesthetic. Or, maybe the loss will occur through a transaction between parties a broker has introduced, but who now think that the broker is safely out of the picture. Regardless of the particulars, a careful reading of Minnesota's commission salesperson statute reveals that help may be on the way for the broker who feels the dull sensation of loss in the wallet or purse, and needs your help to recover a fee.
A Powerful Incentive
It is widely known that Minn. Stat. §181.145 protects commission salespersons denied commissions owed after a sale, something evident even after a quick reading of the statute:
The statutory penalty referenced above provides real teeth. First, the commission can be doubled if not paid within 15 days:
Second, the statute provides for attorney's fees, if the matter is litigated. In fact, the statute appears to give strong encouragement to the courts to award fees:
Faced with the possibility of a double commission and liability for attorney's fees, the recalcitrant client has a strong incentive to pay the salesperson's fee. It has been the authors' experience that this incentive is often effective.
Real Estate Transactions
While there does not appear to be any case law in Minnesota that states that the commission salesperson statute applies to lost real estate commissions, a careful reading of the statutory scheme indicates that it appears to protect brokers, although certain requirements must be met.
First, one claiming rights under the commission salesperson statute must be "paid on the basis of commissions."4 And, the Court of Appeals of Minnesota has noted that "[i]mplicit throughout the statute is the notion that the salesperson is paid by the principal on the basis of commissions."5
Second, although the statute uses the term "employ" to describe the relationship between the parties, Minn. Stat. §181.145 specifically provides that one must be an independent contractor to be protected by it:
Note that this phrase distinguishes this section from the other statutes in the chapter, which contemplate an employee-employer relationship.
Said statutes are similar, and utilize analogous penalty schemes. The first, Minn. Stat. §181.13, applies where an "employer employing labor within this state discharges an employee."7 It is important to note, for the purposes of this article, that the term "employee" is not specifically defined by this provision.8 After the employee has been discharged, the employer must pay the employee his or her wages quickly. Said wages are due immediately upon demand, and the employer is in default if they are not paid within 20 hours of the demand.9 At that point, a double damages scheme similar to the one applicable under the commission salesperson statute kicks in: "The discharged employee may charge and collect the amount of the employee's average daily earnings at the rate agreed upon in the contract of employment, for each day up to 15 days, that the employer is in default. . ."10
Likewise, Minn. Stat. §181.14 protects the employee who "quits or resigns employment."11 The resigning employee does not have the right to be paid as quickly as the employee who is discharged, and typically must wait to be paid in full as long as until "the first regularly scheduled payday."12 At that point, the employee can typically demand the wages, after which double damages will accrue if the wages are not paid:
The scope of Minn. Stat. §181.13 and Minn. Stat. §181.14 establishes that if the commission salesperson's statute did not apply to independent contractors, there would be no reason for the commission salesperson's statute to exist. Employees are already broadly protected by Minn. Stat. §181.13 and Minn. Stat. §181.14 .
While the difference between the statutes is clear-cut, the factual determination involved may not be. Under Minnesota law, determining whether one demanding compensation is an independent contractor or an employee depends on the facts of each individual case, and usually turns on the principal's level of control. In general, "the independent contractor, as distinguished from an employee, performs work according to his own methods and without being subject to the control of his employer, except as to the result of the work."14 While there is no single distinguishing characteristic, the courts have set forth factors that can be used to make the distinction:
In the typical client/broker relationship, the broker operates in a very independent fashion, using sales methods he or she has developed over time, and receiving compensation only when the terms of the listing agreement are met. And, the authors have never encountered a situation where a client treated the relationship as an employer-employee relationship in the tax withholding and reporting sense. Therefore, in the vast majority of situations, the broker complaining of not receiving a commission will be an independent contractor under Minnesota law.
As most real estate transactions meet the qualifying definitions set forth in the commission salesperson statute, and since there is no indication in the statute that real estate brokers are to be treated any differently than other commission salespersons, or that real estate sales are to be treated any differently than other transactions, most real estate transactions will fit within the confines of the commission salesperson statute. However, this does not necessarily mean that your client is ready to pose for a picture on the dock with his or her commission check and statutory penalty.
Expired Listing Contract
Circumstances may conspire to deny your client the prize. Consider, for example, the situation in which the "one that got away" was a sale consummated after the listing agreement expired or was terminated. The principal is likely to claim that the transaction, occurring after the agreement ended, does not constitute timely performance. Does the broker still have a remedy?
The first step in answering that question is to determine what the broker was required to do to earn a commission, which requires a reading of the broker's listing agreement. For example, the listing form approved by the Minnesota Association of Realtors provides that the principal is liable for the commission if he sells or agrees to sell the property before this contract ends, if the broker produces a ready, willing and able buyer during the term, or if a buyer meeting certain qualifications purchases the subject property after the term has expired.16 On the other hand, the form approved by the Minnesota State Bar Association shows that liability for the commission is triggered by "the successful closing of the sale of the [p]roperty."17
This is important because the 15-day, double-damages provision of the commission salesperson statute "appl[ies] only with respect to the payment of commissions earned through the last day of employment."18 Furthermore, the attorney fees provision indicates that the broker is entitled to attorney fees only if the broker was not promptly paid "commissions earned through the last day of employment."19 The phrase "earned through the last day of employment" is defined by the statute to mean that the services or merchandise in question must be "delivered to and accepted by the customer by the final day of the salesperson's employment."20
Arguably, then, if the parties use the listing form requiring the sale to be closed before a commission is owed, and the closing occurs after the listing agreement expires, the broker is not entitled to relief under the statute. However, if the closing occurs after the listing agreement is terminated by the principal, or if the principal defaults in some other way, the relief created by the statute should still apply. There is case law in Minnesota standing for the proposition that where a broker produces a ready, willing and able buyer, but the principal defaults, the principal is liable for the broker's commission anyway.21
Written Agreement Essential
Finally, it is important to remember that none of the protections discussed above apply to a broker who does not have a signed listing or fee agreement with the client. The reason for this is two-fold: First, real estate brokers in Minnesota are subject to the requirement that all listing agreements be in writing and meet other statutory requirements, such as indicating "the amount of any compensation or commission or the basis for computing the commission," and providing "a clear statement explaining the events or conditions that will entitle a broker to a commission."22 Second, a broker cannot bring a civil action to recover a fee unless there is a written listing or fee agreement.23 Therefore, availability of the commission salesperson statute is simply another in a long list of reasons why brokers should scrupulously adhere to the use of written listing or fee agreements.
Maybe it won't help you catch that huge walleye, but the commission salesperson's statute is an effective and compelling collection tool. And, it is applicable to most unpaid real estate commission scenarios.
2 Minn. Stat. §181.145, subd. (3) (West, 2002) [emphasis added].
3 Minn. Stat. §181.145, subd. (4)(b) (West, 2002) [emphasis added].
4 Minn. Stat. §181.145, subd. (1) (West, 2002).
5 Midwest Sports Marketing, Inc. et al. v. Hillerich & Bradsby of Canada, Ltd., 552 N.W.2d 254, 262 (Minn.App. 1996) [emphasis in original].
6 Minn. Stat. §181.145, subd. (1) (West, 2002) [emphasis added].
7 Minn. Stat. §181.13(a) (West, 2002).
8 It is the case, however, that "employer" is defined as meaning "any person having one or more employees in Minnesota," Minn. Stat. §181.171, subd. (4 )(West, 2002). However, this subdivision does not apply to Minn. Stat. §181.145. Id.
9 Minn. Stat. §181.13(a) (West, 2002).
11 Minn. Stat. §181.14, subd. 1 (a) (West, 2002).
13 Minn. Stat. §181.14, subd. 2 (West, 2002).
14 Mount v. City of Redwood Falls, 108 N.W.2d 443, 446 (Minn. 1961) (discussing the independent contractor-employee distinction in a workers' compensation context).
15 American Federation of State, County, and Municipal Employees, Council No. 14, St. Paul v. City of Ramsey, 513 N.W.2d 257, 259 (Minn. App. 1994) (discussing the independent contractor-employee distinction in a labor law context).
16 Exclusive Right to Sell Listing Contract, p. 1, ll. 28-46, Miller/Davis Co. Form 1519X (©Minnesota Association of REALTORS 2001,© Miller/Davis Co.).
17 Listing Contract, p. 1, l. 46, M.S.B.A. Real Property Form No. 51 (© Minnesota State Bar Association, 1996).
18 Minn. Stat. §181.145 subd. 5 (West, 2002).
19 Minn. Stat. §181.145, subd. 4(b) (West, 2002).
20 Minn. Stat. §181.145, subd. 1 (West, 2002).
21 E.g, Hamlin v. Schulte, 27 N.W. 301, 302 (Minn. 1896); see also ERA Town and Country Realty, Inc. v. TEVAC, Inc., 376 N.W.2d 526 (Minn.App. 1985).
22 Minn. Stat. §82.195, subd. 2(4), subd. 2(5) (West, 2002). A careful review of this statute should be made to confirm that a given listing agreement meets the requirements set forth in the statute.
23 Minn. Stat. §82.33, subd. (2) (West, 2002).
The authors are indebted to Neal Freese for his expert and invaluable research assistance.
TOM OLSON practices real estate, business, and construction law with the law firm of Thomas B. Olson & Associates, P.A., in Edina, MN.
SCOTT LUCAS practices real estate, business, and construction law with the law firm of Thomas B. Olson & Associates, P.A., in Edina, MN.