I probably am revealing no great secret by declaring that the legal structure for paying on-site managers is in many ways baffling, befuddling and confusing (choose your adjective). Numerous payment rules exist that we just don’t see in typical employment situations – rent caps, rent credit caps, etc.
Consistent with this theme, I want to share in this article one of the truly bizarre – and, to my knowledge, unique – features about paying resident managers. Reading this article will not make you an expert on this subject, but I hope it will make you at least sufficiently knowledgeable to be able, as we used to say in law school, “issue spot” – and plan around – problems that could arise.
As you probably know, resident managers under certain conditions can under California law be paid using a “rent credit,” i.e., a discount off their rent. However, the law limits how much rent you can apply towards the wages of on-site managers (and how much rent you can charge them). The exact rent credit cap depends on a few factors — one of which is whether you employ an individual or a couple.
You probably never have given much thought to what it means, exactly, to employ a “couple,” but I have – because I draft employment agreements and need to advise clients how to properly pay their managers. When you hire a “couple” – let’s say the Smiths – are you hiring them as a single entity? [“Hi, Bob, congratulations on purchasing another building. Are you hiring a resident manager?” “Oh, yes, I hired ‘the Smiths’”]. Or are you hiring two separate individuals? Or some kind of hybrid, sort of like the Sesame Street Two-Headed Monster? [I bet you don’t read many lawyer-written articles referencing Sesame Street.]
On a practical level, giving a rent credit to a “couple” – while enabling you to apply a higher rent credit cap – becomes incredibly awkward very quickly, because the Labor Code does not (to my knowledge) in any other respect discuss employing an entity known as a “couple.” Rather, the Labor Code demands that you, as an employer, comply with the employee rights of each Smith – separately. So, for example, let’s say you employ both Mr. and Mrs. Smith as resident managers and Mrs. Smith works 30 hours per week at $14.25 per hour. If you pay Mrs. Smith only $350, rather than the $427.50 you owe her, you cannot – when Mrs. Smith claims you failed to pay her the minimum wage – defend that claim by asserting, “no matter, I overpaid Mr. Smith.” This would not be a valid defense.
Similarly, how does the rent credit work? Under Industrial Wage Commission Order No. 5, you currently are allowed (under certain circumstances) to apply a rent credit of $1,086.07 per month “where a couple are both employed by the employer.” If you are employing both Mr. and Mrs. Smith, are you allowed to allocate the full $1,086.07 toward each of their wages? Assuredly not, since that would result in a rent credit of twice that amount.
How, then, does the allocation work? The Labor Code requires you to provide both Mr. and Mrs. Smith with separate pay stubs showing the hours they each worked and the compensation they each received, including their lodging credit. How much rent credit will you show for each? While your initial reaction might be to simply split the rent credit evenly, does that really make the most sense? What if they did not work the same number of hours?
For example, let’s say in a given month Mr. Smith worked 56 hours and Mrs. Smith 30 hours. You would owe Mr. Smith $912 (40 hours at regular time, and 16 hours of overtime) and Mrs. Smith $427.50. Combined, you would owe $1,337.50 – which, as you can see, exceeds the maximum rent credit.
If you simply split the rent credit evenly, then each would receive $543.04 in rent credit for the month. That would be fine, except that Mr. Smith earned $912 for the month, and Mrs. Smith $427.50. So, you are overpaying Mrs. Smith by allocating to her half the rent credit while; at the same time, to fully pay Mr. Smith, you will need to come out of pocket and pay him additional money – and more than you would have needed to pay had you not split the rent credit evenly.
In fact, not only are you “overpaying” Mrs. Smith, but now you have to recalculate her hourly wage for the purpose of reporting it in her wage statement (as required by the Labor Code). Why? Because you are not paying her $14.25 per hour, as you intended, but rather $18.10 per hour (the $543.04 rent credit divided by the 30 hours she actually worked).
Now can you see why I have trouble sleeping at night? And I actually am oversimplifying this, because you must pay and provide wage statements at least twice per month – so the question arises not only how to allocate the rent credit per employee (or, if you prefer, per Smith), but also how to allocate the rent credit per employee per pay period. Keep in mind that the law requires that each employee receive his or her full wages each pay period, and the two pay periods within a given month generally do not contain an identical number of work days.
The Labor Code similarly does not treat “the Smiths” as a single entity for overtime purposes. For example, if Mr. and Mrs. Smith each work five hours a day, for a total of 10 hours, you do not owe “the Smiths” two hours of overtime pay.
Furthermore, if you employ the Smiths as a “couple” and use a rent credit to pay them, what happens if, for example, Mr. Smith stops working or becomes injured – but you really want to keep Mrs. Smith, who is doing an excellent job? If it’s a two-person job then you have a problem, and may need to terminate both Smiths to bring in a new couple. As a practical matter, though, even if Mrs. Smith can pick up the slack, you no longer are employing a “couple” and, therefore, the rent credit cap drops significantly. You not only are now possibly paying Mrs. Smith for overtime that you previously did not have to pay, but the law is allotting you less rent credit with which to pay her.
The bottom line is that if you want to stay out of trouble and avoid potential wage and hour claims – and who doesn’t – in a space in which some lawyers prowl for such claims, you should not assume that hiring a couple and applying a larger rent credit protects you from all claims. Make sure you do it right.
Gary Ganchrow is a shareholder at the 107-year-old firm of Parker Milliken Clark O’Hara and Samuelian, has served as an Adjunct Professor at the USC School of Law, and is a frequent contributor to AOA Magazine. He regularly advises on, litigates and writes about a variety of employment, property management, and business matters, and can be reached at 213-683-6535 and [email protected]. This article is for informational purposes only, and should not be considered legal advice or establishing an attorney-client relationship.