The W2 Model Post COVID: A Reader Request

I don’t often check the “message request” function on Facebook, but did so earlier today and found a request from a reader, Shelley Scanlin, from the state of Houston in the Republic of Texas:

Hi Rob, would love to see you do a piece on w2 brokerages and if this has changed your opinion on that structure at all? Specifically the Redfin furlough announcement today. Hope you are well!

I thought I’d dash off a little something something before diving into actual work for the day. So here we go. In case you were wondering, no my opinion has not changed on the W2 model for real estate brokerage. I see no reason why it would.

The Fundamental Problems of Brokerage

Let’s start with the fundamental problems of real estate brokerage:

1. Inverse relationship between agent productivity and brokerage profitability; and
2. Lack of control over the consumer experience.

COVID doesn’t change either of that dynamic. Redfin’s layoffs do not change those.

In fact, in my mind, COVID makes #2 even more problematic for brokerages. Lacking control over independent contractors, a brokerage is going to have to figure something out when it comes to anti-infection protocols. For example, if a brokerage promises sellers that all showings are accompanied by all kinds of safety equipment, total wipedown of all surfaces, etc., it has to then figure out how to get its agents to actually do those things. Hopefully, everyone will be on the same page… but fundamentally, a W-2 based model has more control over who does what, when, where, and how.

The Redfin Layoffs

The second thing I’d like to point out is that Redfin’s layoffs are… interesting. Most of the haters are focusing on the fact that Redfin furloughed or laid off 40% of the agents. They’re not going a bit deeper.

From Geekwire:

Redfin will cut 7% of its staff and furlough hundreds of agents due to decreased housing demand amid the COVID-19 crisis.

The Seattle real estate giant will slash 41% of its field agent workforce, with a majority furloughed until Sept. 1, and the remaining laid off, Redfin CEO Glenn Kelman announced Tuesday.

The company is also making small cuts at its headquarters in Seattle, while temporarily slashing all salaries by 10-to-15% and canceling bonuses for the remainder of this year. It previously halted bonuses for just the first half of 2020.

Redfin had 3,377 total employees as of Dec. 31, and employed more than 1,500 lead agents.

Kelman said the company opted for a large-scale furlough in part because most agents will be able to earn more from unemployment insurance than from Redfin.

“We still have had to furlough people today because of a downturn, but it wasn’t because we didn’t try to trade growth for job security,” he wrote. “Every year, we’ve hired about 25% fewer agents than could be supported by the demand from Redfin.com, so that even if demand fell 25%, our workforce would still be at 100% productivity. Now housing demand is down much more than that.”

The more important number to me is the 7% cut to staff. 7% is not 35% that Opendoor did. That’s not cutting to the bone; it’s more of a trim. I actually think Redfin took advantage of COVID to get rid of some C-players and problem employees, like many other brokerage CEO’s have done.

The couple of million bucks that Redfin will spend on termination is easily absorbable by Redfin who has a ton of cash. So that’s not a huge deal.

The W-2 Model, Post COVID

So taking those into account, I see no reason to alter my beliefs about the W-2 model. Brokerage make more money with W-2 than with 1099; the difference is cash flow vs. profitability. But ultimately, cash flow depends on profitability so those companies that can afford to keep making payroll will eventually see higher cash flows from operations as well. W-2 also gives companies greater control over their workforce, which leads to greater control over the consumer experience, which will be critical when we come out of this crisis.

Finally, since I know that top agent teams have converted to W-2 models, or are actively considering converting to that model in order to make some of its operations profitable, I actually believe that we’ll see an acceleration of the W-2 model take hold in the aftermath.

Layoffs will happen as the business cycle goes down; but guess what? Hiring happens when the business cycle goes up.

A lot of the mid-level real estate agents who are good at real estate, know their markets, know how to provide excellent client service… but aren’t great at lead generation are facing really dark times right now. Those agents might find the prospect of a steady paycheck at some big agent team extremely attractive. And those teams will go on a hiring binge when we come out of this and the already-high demand that has been suppressed for months explode. Most will do the split-based model (but see below), but many will just pay those agents an hourly wage or a weekly salary and capture the higher margins that flow from that.

Finally… Government Intervention

I can’t leave off this brief post without mentioning the fact that I do think we’re going to see at least teams be forced into the W-2 model. I wrote a lengthy post about this, which you can find here. From that post:

You simply can’t exercise the level of control over “team members” that agent team leaders have and do and claim that they are “independent contractors.” And if you don’t exercise that level of control, then you can’t have a unified entity that makes the whole agent team concept work.

If this isn’t a big fat juicy target for state and local governments who are going to be looking for tax money under every rock, then I don’t know what is.

State governments in particular will be looking for tax revenues to offset spending on healthcare and unemployment — the two biggest areas during the pandemic. What are the two biggest taxes that teams didn’t pay by classifying their team members as independent contractors? Healthcare and unemployment.

It might not happen, of course, because politics. But I’d be surprised if it doesn’t.

Real estate brokerages may be immune, because of state law, but agent teams most likely are not. Which will flow upwards into the brokerages as well.

We’ll see, but like I said, I see no reason why post-COVID, the W-2 model is not even more attractive and even more powerful than it is today.

-rsh

PS: Been listening to a podcast about Tupac and Biggie, from whom this blog takes its name so…