As a rule, I do no write in this space about litigation. Most non-lawyers are not interested and many believe that lawsuits – like some dreaded disease – will not happen to them. But I am going to make an exception in this article – sort of. Because I have found that nearly all the people I represent in connection with claims that they improperly paid a resident manager end up needing to pay far more money than they ever could have imagined, have no advance understanding of how the amount at risk could possibly get so high, and cannot fathom how stacked the deck is against them.
So below I break down the legal mechanics by which small mistakes in the realm of paying resident managers can turn into an unthinkably costly legal headache. I figure if people choose to cut corners in their business dealings with a resident manager, or elect to not dot their ‘i’s and cross their ‘t’s, they should at least understand the potential legal repercussions. What I describe below, or some variation of it, happens more frequently than you might guess.
Let’s start with a hypothetical resident manager of an 18-unit apartment. We’ll call her Linda. According to the owner, Linda is not asked to do very much. Her job consists of living on-site, fielding tenant complaints, arranging access for service people and occasionally showing a vacant apartment. In the owner’s view, Linda can perform these tasks in fifteen hours per week, tops.
Linda has been performing these services for years in exchange for a free apartment. The fair rental value of Linda’s apartment is $1200 per month, which far exceeds the wages Linda ordinarily would receive for the hours she works, and she is perfectly satisfied receiving a free apartment in exchange for the work she does. The owner also pays Linda $200 per month because he wants to make sure she gets some additional money. The owner and Linda do not have a written agreement and Linda does not track her hours or submit time records.
Although you probably recognize numerous legal problems with this arrangement, the owner feels Linda is getting a sweet deal for her 15 hours of weekly work. Parenthetically, if you cannot spot any problems with Linda’s arrangement – and you employ a resident manager – I urge you to consult a lawyer who can explain them to you. Based on my experience, the arrangement I have just described – or some variation of it – is commonplace.
One day Linda wakes up concerned about her financial security. She remembers having read something online about how property managers are supposed to have written agreements. She decides to call her ex-husband’s friend, Bob, because she remembers that Bob seemed to know a lot of lawyers, and maybe he can direct her to a lawyer she can consult with. It turns about Bob does refer Linda to a lawyer, who informs Linda that her employer has been taking advantage of her for many years and she is entitled to a lot of back pay. The lawyer assures Linda he will fight to enforce her rights.
Now let’s compare what the law says about Linda’s situation versus the owner’s view that Linda has been getting a “sweet deal.” Because Linda and the owner had no written agreement in place, the owner was not allowed to apply a rent credit towards Linda’s wages. At 15 hours per week and an average minimum wage over that time period of $10.50 per hour (I am approximating here), the owner should have paid Linda $8,190 per year. He actually paid her $2,400, so he shorted her $5,790. Multiply that by four years (the longest amount permitted under the statute of limitations), and the owner owes Linda $23,160.
We’re just getting started, though, because guess what? Linda now claims she was working at least 30 hours per week – which the owner is quite certain is untrue, but he has no records to prove it. Unfortunately for the owner, the law obligates him, as an employer, to generate and maintain time records, absent which a presumption will exist in favor of Linda’s estimate of hours worked. So double the number Linda claims she is owed, which now is $46,320.
Now penalties start coming into play. Under Labor Code section 1194.2, Linda likely is entitled to “liquidated damages” equaling the difference between what she actually received in wages and the amount she needed to receive to be paid the minimum wage. Therefore, double the $46,320 to $92,640. Linda also is entitled to a $4,000 penalty because the owner failed to provide her wage statements, bringing the total to $96,640.
So one day out of the blue the owner gets served with a lawsuit claiming he owes Linda close to $100,000. The owner is deeply disappointed that Linda – with whom he thought he enjoyed an excellent relationship and to whom, after all, he has been providing a free apartment and cash for doing next to nothing – did not first speak with him before seeing a lawyer. But when the owner approaches Linda to discuss this, she tells him she is sorry, but he will need to deal with her lawyer. The owner therefore has little choice but to hire his own lawyer, who charges $400 per hour.
The owner’s lawyer manages to arrange an early mediation before a retired judge, at which the owner learns that not only will he need to pay $96,000 to Linda if a jury believes her thirty-hours-per-week claim (and something less if it does not), but the Labor Code also requires him to pay Linda’s lawyers’ fees if she prevails – which, his lawyer and the mediator tell him, is a near certainty. And oh, by the way, Linda’s lawyer claims he already has run up a legal tab of $30,000. So the owner’s choice is to accede to Linda’s demand that he settle for a “bargain” price of $110,000 or continue to pay his own lawyer to defend a claim that he will lose, while at the same time driving up the amount of Linda’s attorneys’ fees – which he will need to pay.
Those are the legal mechanics through which mistakes in the realm of paying resident managers can turn into a financial disaster. I know this sounds like make-believe, or that I have embellished these facts or amounts. But I can assure you from first-hand experience that these situations occur regularly – sometimes even to people who previously assumed lawsuits only happened to other people.
Gary Ganchrow is a shareholder at Parker Milliken Clark O’Hara and Samuelian. He regularly advises on, litigates and writes about a variety of employment, property management, and business matters. He 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.