Hello everybody. Most everyone hopes that 2017 will bring about a strong economy, an end to higher taxes, a peaceful transition for the new presidential administration, and other important things like that.
As the legal writer for the Apartment Owners Association, my wish and 2017 New Year’s Resolution for AOA members is more modest, but nonetheless extremely important for owners and management companies of apartment buildings throughout California.
In fact, it is the same Resolution I have proposed to members for the past 16 years or so: Prepare and sign a written employment agreement with each of your resident managers.
Failure to comply with statewide wage and hour laws can be financially devastating as it has become commonplace for lawyers representing resident managers to sue for, or at least threaten, damages ranging from $150,000.00 to $250,000.00 for unpaid wages, penalties and other related amounts even though the manager was only employed for as little as 1 to 4 years.
In light of claims such as those, not to mention complaints managers may file with the California State Labor Commissioner, it is important that AOA members understand the applicable labor regulations and sign written agreements with their managers consistent with law so as to avoid liability.
Overview of fhe Law
For 2017, the California statewide minimum wage is $10.50/hour for employers with 26 or more employees. It remains at $10.00 per hour for employers with less than 26 employees, and does not increase to $10.50/hr. for them until January 1, 2018. Certain cities in California, such as San Francisco and Oakland, have even higher minimum wages.
The minimum wage for resident managers residing in the City of Los Angeles will be $10.50 per hour through June 2017, and then increase to $12/hour on July 1, 2017, if the employer employs 26 or more employees. If the Los Angeles employer employs less than 26, then the minimum wage will remain at $10/hour through June and then increase to $10.50/hr. on July 1, 2017. (If a city has a wage requirement higher than California’s minimum wage, employers must comply with the city’s more onerous ordinance.)
Also, throughout 2017, the maximum allowable rent reduction offset that can be applied against wages owed based on reduced or free rent is $564.81 per month for a single manager and $835.49 per month where a couple is employed if the employer has less than 26 employees.
Further, the maximum rent in 2017 which can be charged to a manager whose residence in the apartment complex is required as a condition of employment is $564.81 per month for a single manager and $835.49 per month for a couple if the employer has less than 26 employees.
Also bear in mind: A resident manager is an employee, not an independent contractor, of the owner or management company who hired him.
The remainder of this article will assume that the employer has less than 26 employees. If the employer has 26 or more, legal counsel should be sought to discuss the applicable laws because they are different, technical and confusing.
The California Industrial Welfare Commission (IWC), as well as the State Legislature, promulgate wage and hour laws for resident managers. The IWC authorizes substantial sanctions against an owner who does not pay the manager the proper minimum wage. Of those, one of the most oppressive penalties is that if the owner or management company does not obtain the manager’s signature on a properly drafted agreement, the reduced or free rent the owner or management company gave the manager may not be credited (i.e., offset) against the wages the manager otherwise earned during the Statute of Limitations periods of the preceding four years. That means that the employer will then have to write a check to the manager for what may amount to tens of thousands of dollars for back wages, plus penalties. Insurance will not cover that obligation.
The General Rules
Here are the two California statewide general rules for 2017:
Rule No. 1: Payment of Minimum Wage: Virtually all resident managers are governed by so-called minimum wage and hour laws which require that they be paid at least $10.00 per hour for each hour worked. Managers who work more than 40 hours per week, 8 hours per day, or more than 6 consecutive days, are entitled to receive “time and one-half” at $15.00 for each excess hour. Double time payment may also be required in some circumstances. As noted previously, certain cities (and counties) impose a higher minimum wage.
Rule No. 2: Maximum Rent that May Be Charged: During 2017, if one or more managers are required to live at the property as a condition of employment, their rent may not exceed $564.81 or 835.49 per month, depending whether one manager or a couple is hired.
Much of the remainder of this article will explain the exceptions and qualifications to the two General Rules. However, bear in mind that the exceptions and qualifications will not apply unless a properly drafted employment agreement is signed by both the manager and the owner or the owner’s management company.
Exception to Having to Pay Minimum Wage
There is an exception to the general rule that a manager must actually be paid wages for the hours he or she works. The exception involves a reduction in the compensation owed in exchange for the owner or other employer providing free or reduced rent for the manager’s living quarters.
An owner may reduce the payment of the monthly wages owed by the lesser of (1) two thirds the ordinary rental value of the unit, or (2) $564.81 per month if one manager is employed, or $835.49 per month if a couple is employed, such as a husband and wife management team.
Stated in a slightly different manner, an owner may not offset more than $564.81 per month or 835.49 per month, respectively, from the payment of the manager’s minimum wages even though the rental reduction of the apartment unit might be substantially more.
Here is an example: If the rental value for the unit is $1,800 per month but the manager is not charged any rent and the manager works 60 hours each month, he is entitled to receive $35.19 per month from the employer. This is computed as follows: 60 hours at $10.00 per hour = $600, which is the minimum wage due. A rent reduction of $564.81 is proper as the lesser of $564.81 and two-thirds the ordinary rental value of the unit (which would be $1,200). Deducting $564.81 from $600 leaves a balance due of $35.19 per month.
The law is similar where a couple is employed to manage the building. In that case, the maximum wage offset is the lesser of $835.49 per month and two-thirds the rental value of the unit. Thus, if the ordinary rental value of the unit is $1,800 per month (but no rent is paid) and the husband and wife managers collectively work 60 hours a month, the employer need not pay the couple any wages. This is determined as follows: 60 hours at $10.00 per hour = $600, which is the minimum wage due. A wage reduction therefrom of up to $835.49 is proper as the lesser of $835.49 and two-thirds the value of the unit.
Bear in mind that the above Minimum Wage offset exception does not apply unless a legally sound agreement is voluntarily signed by the manager.
Compensation For “On-Call” Hours,
Waiting Time and Stand-By Time
After being terminated, disgruntled managers sometimes seek compensation from their former employer under a contention that since they were available 24 hours a day on an “On-Call” basis, they should receive compensation for all of that time, even though they were not actually performing services throughout the period.
Recently, the California Court of Appeal rejected that argument in Isner v. Falkerberg by holding that the owner or management company need only pay the manager for the “time spent carrying out assigned duties.” Thus, hours spent sleeping, resting, cooking, eating, talking with friends on the telephone, watching television, playing computer games and engaging in other personal activities are not compensable even though the manager may be “waiting” for a repairman to arrive or sitting around all day during an “open house” to exhibit a vacant unit to prospective tenants.
Accordingly, an owner or management company does not need to pay a resident manager who is required to live on site for “on call,” “stand by” or “waiting” time if the manager is not actively working. However, the time the manager spends, for example, overseeing the repairman or actually showing a vacancy to potential applicants is compensable because the manager is actually carrying out an assigned duty.
Maximum Rent Qualifications
16 UNITS OR MORE: If an apartment building consists of 16 rental units or more, the owner is required to have a “responsible person” residing on the premises who has “charge of the apartment house.” Usually that person is a manager, but he or she could also be a caretaker, janitor, school teacher or any other responsible individual. Regardless of the title given, that person benefits from the same wage, hour and rent laws applicable to a manager. (For purposes of this article, I refer to all such “responsible persons” as “managers.”)
The maximum rent that an owner may charge a required resident manager for his apartment in a 16 or more unit building is limited by law. No matter how much of the minimum wage the owner pays the manager of such a building (even if the owner pays the full minimum wage or even more), the owner may not charge the manager(s) more than $564.81 or $835.49 per month, respectively, for the manager’s unit. (It is my opinion that there is a legal, but highly technical way to avoid those monetary limitations on a 16 or more unit building. While I am not comfortable publishing them, I am willing to discuss them privately with AOA members, management companies and attorneys.)
The reason for the rental restrictions is that the IWC has decided that if a manager is required to live at the premises, he or she has given up some personal freedom. In exchange for this confinement, the landlord is limited as to the amount of rent that he can charge the manager for the unit.
Typically, an owner will offer the manager a reduction in his or her monthly rent in exchange for managerial services. While a rent reduction is proper, the maximum rent which may be charged for the manager’s unit still remains as the lesser of 564.81 or $835.49 a month, and two-thirds the ordinary rental value of the unit, if the manager(s) must live on site.
There is one recognized exception to the “Maximum Rent” limitation for a 16 or more unit building. I call it the “Check Exchange” exception.
Check Exchange Exception: Under the Labor Code an employer may charge up to two-thirds of the ordinary rental value of the unit without regard to the 564.81 and $835.49 limitations, provided that separate checks for the minimum wage payment and the rent are exchanged between the owner and the manager.
In order to take advantage of this exception, the owner must pay the manager the full minimum wage (presently $10.00 per hour under State law for all hours worked) by one check and the manager must pay the owner rent in an amount not exceeding two-thirds the ordinary rental value by a separate check.
Under this arrangement, the employer is not permitted to offset the minimum wage he owes by the rent due from the manager. The theory is that payments for labor are absolutely required regardless of whether the manager pays the agreed rent.
UNDER 16 UNITS: If the apartment building has under 16 units and the manager’s employment agreement is properly prepared so that the manager is not required to live on the premises as a condition of his employment, then the 564.81 and $835.49 maximum rent limitations discussed previously are not applicable. In such an event, the employer may charge the manager the full amount (or any other lesser amount) for the unit, provided that the employer separately pays to the manager the full minimum wage which the manager earns based on the number of hours worked.
For example, if the value of the unit is $1,800 and the manager works 50 hours a month, the owner may charge the full $1,800 as rent provided that he also pays the manager $500 for services rendered during the month.
However, if the manager is required to live in the “under 16 unit” building as a condition of employment, then the 564.81 and $835.49 wage and rent limitations discussed previously do apply just as though the building contained 16 or more units.
Raising a Manager’s Rent in a Rent Controlled Building
There are a multitude of rules and limitations concerning rental increases of apartment managers residing in rent controlled units. Owners having rent controlled buildings in Los Angeles and who wish information on that topic may review the City’s “Resident Managers as Tenants” publication. That promulgation may be found at the following website: http://hcidla.lacity.org/resident-managers-tenants”. The publication was last revised in May 2014, but remains applicable as of the present.
AOA members who are attorneys will find a further discussion of raising a manager’s rent in Von Nothdurft v. Steck. AOA members who are not lawyers should confer with legal counsel about the Von Northdurft case.
Penalties for not Complying with Wage Laws
The Labor Code provides that an employer (including an apartment owner and management company) may be liable for liquidated damages to the resident manager in an amount equal to the unpaid minimum wages if the employer was not acting in good faith or did not have reasonable grounds for believing that he/she was not in violation of the minimum wage law. Thus, the effect of the liquidated damages assessment will be that the employer will owe the manager double the unpaid wages. (Labor Code Section 1194.2.)
Numerous other penalties may apply to unpaid wages. Suffice it to say that AOA members do not want to have to defend against them.
Cell Phone Usage
Owners and management companies who require the resident manager to use his personal cell phone in the performance of his duties are required to reimburse the manager a “reasonable percentage” of the manager’s cell phone bill. If the employer does not require the manager to use a personal cell phone, then no reimbursement is required. For a full discussion of the cell phone reimbursement law and what may constitute a “reasonable” percentage for reimbursement, please see my column in the October 2014 issue of AOA Magazine.
California has a relatively new sick leave law. It applies to every employee in the State of California that works more than 30 hours per year (repeat, 30 hours per year, not 30 hours per month). That calculates to about 8-2/3 paid sick days per year for a full time employee resident manager.
However, the amount of paid sick leave may be reduced to as little as 3 days or 24 hours per year, but only if the manager signs a written agreement containing the proper legalese for that reduction. That verbiage is quite technical and should be drafted by seasoned counsel.
Additionally, some cities have enacted their own sick leave law which is more onerous than the California statewide law. For example, in Los Angeles, employees are allowed as many as 48 hours of sick leave which, if not used, will be rolled over to the following year, for a total of 96 hours of sick leave. With a properly drafted employment agreement with the resident manager, those 96 hours can be reduced to and capped at 72 hours.
California’s labor laws are exacting. The failure of owners or management companies to comply will easily expose them to $100,000 to $200,000 as back compensation to their managers, including substantial civil penalties, as well as potential criminal sanctions. In order to comply with the various laws, I recommend the following:
- Sign an Employment Agreement: It is absolutely essential that every owner and management company who employs a resident manager enter into a written employment contract which is voluntarily signed by both the employer and employee. The specific provisions to include in the contract are technical, but the general requirements concerning the wage and hour laws are contained in this article. Remember, resident managers are employees, not independent contractors.
- Review Your Existing Agreement: If you already have an employment agreement, review it for consistency with the wage and hour laws for 2017 as I have discussed them. Also, be certain they address cell phone usage and the requirement for paid sick leave. Most existing agreements will need to be modified.
- Keep Time Sheets: Keep time records signed by the manager attesting to the days and hours he or she works.
- Management Certification: Require the manager to sum up all the hours that the manager worked during each month. Then require the manager to submit a written certification to the owner at the beginning of each following month setting forth the total number of hours worked the preceding month. That is the key to deterring disgruntled managers from later claiming that they worked more time than they actually did. The law requires the employer to maintain daily time records for his manager. It is important to do so. But it is also important (from the standpoint of having me or any other attorney defend an owner or management company in Court or at a Labor Commissioner Hearing) to have the manager certify the total number of hours he/she worked during the entire month.
- Post Manager’s Name and Address: Post the name and the address of the manager in charge of the apartment building. Also post the hours and days that the manager will be available for assistance if the manager has a fixed work schedule.
- Obtain A Copy of Minimum Wage Order No. 5 and MW-2014: The current wage and hour regulations for apartment managers can be obtained by calling the California Department of Industrial Relations at 844-522-6734. For a copy of the complete wage and hour publications affecting resident managers, ask for: “Public Housekeeping Order No. 5” (also known as IWC Order 5-2001) as well as “MW-2014.” MW-2014 is a short version of Order No. 5, but omits some of the longer version’s important provisions. The long version may be found online at www.dir.ca.gov/iwc. Once there, click on “View or download wage orders.”
The key to complying with the wage and hour laws when employing a manager is that the owner or management company obtains a voluntarily signed, properly drafted written employment agreement and thereafter receives from the employee monthly certifications setting forth the total number of hours that he/she worked. By doing so, the employer can avoid thousands of dollars of potential liability to the manager under the wage regulations. Better still, the contract and certifications will deter litigation. The manager’s attorney is not likely to sue if he does not expect to win the case in any substantial way.
A handy “Cut Out Summary” of resident manager wage, hour and rent laws for 2017 immediately follows this article. Have a healthy and prosperous New Year!
Dale Alberstone is a prominent litigation and transactional real estate attorney who has specialized in real property law for the past 40 years. He has been appointed to periodically serve as a judge pro tem of the Los Angeles Superior Court and is a former arbitrator for the American Arbitration Association. He also testifies as an expert witness for and against other attorneys who have been accused of legal malpractice.
Mr. Alberstone has been awarded an AV rating from Martindale-Hubbell. An AV rating reflects an attorney who has reached the heights of professional excellence and is recognized for the highest levels of skill and integrity.
The foregoing article was authored in December 2016 and effective as of January 1, 2017. It is intended as a general overview of the law and may not apply to the reader’s particular case. Readers are cautioned to consult an advisor of their own selection with respect to any particular situation.
Address correspondence to Dale S. Alberstone, Esq., ALBERSTONE & ALBERSTONE, 1900 Avenue of the Stars, Suite 650, Los Angeles, California 90067. Phone: (310) 277-7300.