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CFPB Disregards Employment Classification to Find Kickbacks

JUN 16, 2014 3:31pm ET
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Last week the Consumer Financial Protection Bureau announced another enforcement action aimed at “kickbacks” prohibited by the Real Estate Settlement Procedures Act. This time, it was a title company that had received referrals of title business from independent sales agents. What is particularly interesting about the CFPB’s actions in this case, are that it recognized a distinction in terms of the treatment of persons working for a company based upon their classification as employees or contractors. Although it is clear that employees can receive referral payments under RESPA, there was a lack of clarity in the case of “independent contractors” who performed nearly the same services but were simply designated as stand-alone companies. Although some believed that this differentiated tax treatment would not necessarily matter as to kickbacks if the services were similar to those of employees, it appears from the CFPB’s actions, that the statute—which says “employees”—will be strictly construed. 

Even more important, however, is that in the instant enforcement action, the CFPB set aside the tax designation of the parties, relying instead upon legal definitions, to determine the classification. In other words, although the parties designated the relationship as employment and issued W-2 tax forms (for employees), the CFPB applied a legal standard used to determine employment status and found that in reality these individuals did not meet the definition of employees and were in fact contractors.  Specifically, because the CFPB found that the title company did not direct and control the means and manner of the work performed by the sales agents.  This lack of control vitiated the employment classification turning the sales agents into contractors and thus evoking Section 8 of RESPA.

This action is not without precedent. The CFPB has shown a clear willingness to call it like it sees it, and disregard agreements and classifications between parties when it views the relationship as a sham.  Moreover, courts have developed large bodies of law regarding employment misclassification. Lenders should pay careful attention to this case, however, as it could be used to impact not only RESPA, but also affiliated business disclosures and even QM status. Whereas the employment classification is beneficial for the purposes of RESPA, misclassified contractors who become reclassified as employees could potentially change the applicability of ABA disclosures and QM status. The bottom line is that lenders must pay attention to the designation of contractors (in both directions) and make sure they meet the legal definitions and standards for which they are classified.  Otherwise, a potential misclassification could prove costly in a variety of ways.

Comments (3)
I think that someone is overstepping the boundaries of logic and certainly their brainpower. A contractor can not be reclassified as an employee simply because they have latitude about how they go about their business. If a business chooses to take them on as an employee, they can be an employee. If they happen to be limited to working for only one "employer" (in that field) at a time, they are indeed allowed to be classified as employees.

At the same time, it is not true in reverse. An independent contractor can be reclassified as an employee if they are controlled and fit the employee definitions.





Posted by Deb V | Tuesday, June 17 2014 at 10:24AM ET
I would like to see the IRS add their input on this classification of employee vs. contractor. For decades the real estate industry has battled this classification issue with the IRS. The IRS has establishing specific requirements for the classification of both an independent contractor and an employee. One requirement listed by the IRS and is noted by the CFPB, "the title company did not direct and control the means and manner of the work performed by the sales agents" is 1 of a 20 question checklist to determine the proper classification of a worker. Are the FEDERAL agencies aligned in their determining requirements?
Posted by PHIL M | Tuesday, June 17 2014 at 2:09PM ET
Please, the CFPB has aleady demonstrated they have no intention of looking out for the consumer. They are an organization that is run by a politician that creates jobs for his buddies both while on the inside and when they leave. Declares bonuses are bad as it incentivizes bad behavior and then pays bonuses to his pals inside at CFPB. Harasses businesses to garner more renvenue for its organization. The CFPB has bureaucratically raised the cost of financial services while restricting access through anti-consumer regulations. The tactics of the mafia are close at hand.
Posted by Michael C | Wednesday, June 18 2014 at 7:41PM ET
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