Warning Signs for Title Companies as They Look to Use 1099 and "Contract" Staff To Bolster Variable Workforce

1099 Classifications Of Notaries, Abstractors, and Closers at New Jersey Title Insurance Company ruled as Misclassifications

1099 independent contractors are involved in nearly every aspect of a real estate settlement transaction. This includes real estate agents, appraisers, home inspectors, and notaries. These individuals work from their own home offices, using their own equipment, and setting their own appointments, operating as individual 1099 contractors.

With the onset of COVID-19, "work from home," hybrid work arrangements, etc., it seemed logical to consider individuals working from home as 1099 employees. Is this ruling a warning to Title Companies across the US to take a closer look not just at their independent contractor vendor relations agreements, but also at any employee classified as a 1099 worker? In fact, the Department of Labor (DOL) has indicated that the misclassification of worker pay is a top enforcement priority and published a final rule on March 11, 2024, replacing the existing rule with determining factors more consistent with longstanding judicial precedent.

In a recent appellate court case, the Department of Labor found that 11 employees working as Title Abstractors, Notaries, and Closers were misclassified as 1099 employees (Independent Contractors). 

It was determined that they should have been classified as W-2 employees under the "ABC Test," which outlines three specific conditions that must be met for a worker to be considered an independent contractor. The court found that the New Jersey Title Company had failed to satisfy these conditions. 

The NJ Department of Labor found that these 3 groups: Abstractors, Notaries, and Closers Failed to meet the conditions necessary to establish 1099 Status

Test A: Abstractors, Notaries, and Closers DID NOT MEET 1099 test

Control of the individual. "The individual must be free from control or direction over the performance of such service.

• The Commissioner relied on the Company’s  “Independent Vendor Services Agreement,” “Vendor Services Agreement,” “Witness Only Closer Instructions,” and “Notary Signing Agent Code of Conduct” and found that the “Title Company required the workers to complete their tasks in accordance with the strict guidelines, reporting requirements, and time restraints set forth by Title Company….  is the ‘very essence of direction and control.’”

Test B: Notaries and Closers DID NOT MEET 1099 Test

Business Nature: The service “is either outside the usual course of the business for which such service is performed” or the service is performed outside the regular place of business for that service.”

• Notaries Closers were W-2 Not 1099. The Court determined that as to closers and notary signing agents the service they provide at closing, which is a service performed by Title Company in its “usual course of business” and the location of the closing “are locations where the Title Company performs ‘an integral part of its business.’”...  the service fails Test B and employees are in fact W-2 employees.

Test B: Abstractors MET 1099 Test

In contrast, Abstractors maintained their current status as 1099 Independent Contractors and did not need to be reclassified as W-2 employees.  The Commissioner determined that categorizing the County Clerk’s office as the Title Company's place of business was “unfair.”

Test C: Abstractors, Notaries, Closers Met 1099 Test.

Independent Trade: “Does the work own and run their own business, as evidenced by having multiple clients, marketing their services, and maintaining their business infrastructure.”

• The Independent contractor owns a business that should not depend on the employer. They should have multiple clients and be able to offer their services to others. The court upheld the ruling that Notaries, Title Agents, and Closers owned legitimate independent businesses and derived only a minor portion of their income from the Title Company.

Appellate Ruling Finds Misapplication of Test A: Allows Earlier Ruling to Stand.

Specifically, the Court found that the company had failed to meet prong A and that "the Commissioner reasonably classified the closers, notary signing agents, and title abstractors as employees because they "were subject to a sufficient degree of control and therefore must be classified as W-2 employees. Upon finding that the Title Company had failed to satisfy prong A, the court declined to substantively address the remaining prongs of the ABC test. 

This decision has future implications and ongoing liability in cases where a strict interpretation of the ABC test was not adhered to. Acting US Labor Secretary Julia Su suggests all companies aggressively apply the A-B-C Test to their current 1099 Staff and familiarize themselves with the final rule regarding employee or independent contractor that became effective on March 11, 2024.

Read Further:

Final Rule: Employee or Independent Contractor Classification Under the Fair Labor Standards Act

For More on what is an A-B-C Test

To convert your 1099 staff to W2 Employees click here.