Hello everybody. Most everyone hopes that 2021 will bring about an end to the COVID-19 pandemic, landlords will be able to fill their vacancies again, and statewide rent control will be lifted.
As the legal writer for the Apartment Owners Association, my hope and New Year’s Resolution wish for AOA members is more modest, but nonetheless extremely important. In fact, it is the same resolution wish I have proposed to members for the past 20 years: Prepare and sign a written employment contract with each of your resident managers.
Failure to comply with the new 2021 California statewide wage, hour, and rent laws can harm landlords financially as it is commonplace for lawyers representing resident managers to sue for, or at least threaten, damages ranging from $200,000 to $300,000 for unpaid wages, excessive rent charges, penalties, attorneys’ fees, etc., and actually recover $100K to $150K.
In light of claims such as those, not to mention complaints managers themselves may file with the California State Labor Commissioner, it is important that AOA members understand the new 2021 labor laws and sign written contracts with their managers so as to avoid liability.
Overview of the 2021 Laws
Wages: Beginning January 1, 2021, the California statewide minimum wage increases to $13.00/hour for employers with fewer than 26 employees, and it becomes $14.00 per hour for employers with 26 or more employees. Certain cities, (in fact there are 35 of them), such as San Francisco, Oakland, Berkeley, Santa Monica, Santa Clara, San Diego, Malibu and Cupertino, have even higher minimum wages that employers must pay to employees.
The minimum wage for resident managers in the City of Los Angeles is $14.25/hour through June 2021 if the employer employs less than 26 individuals. It then increases to $15.00/hour on July 1, 2021.
The city of Emeryville will have the highest minimum wage in the state at $16.84/hour as of January 1, 2021.
If a city has a wage requirement higher than California’s minimum wage, employers must comply with the city’s higher amount.
Rent Reduction Credit Toward Wages: Throughout 2021 under California state law, the maximum allowable reduction in rent that can be credited toward the minimum wages owed is $734.21 per month for a single manager and $1,086.07 per month where a couple is employed if the employer has fewer than 26 employees.
Maximum Rent: The maximum rent in 2021 which can be charged to a manager who must reside in the apartment complex as a condition of employment is $734.21 per month for a single manager and $1,086.07 per month for a couple (living in the same unit) if the employer has less than 26 employees. Employers with 26 or more employees may charge rent up to $790.67 (single manager) and $1,169.59 (couple).
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 and more onerous.
Employee, Not Independent Contractor: Bear in mind that a resident manager is an employee, not an independent contractor, of the owner or management company who hired the manager. As such, the manager must be paid in accordance with applicable minimum wage laws.
Decades ago, the California Industrial Welfare Commission (IWC) promulgated wage, hour and rent laws for resident managers. The IWC provided that substantial sanctions could be imposed on an employer who did not pay a manager the proper minimum wage. Of those, one of the most oppressive sanctions (which still applies) is that if the owner or management company does not obtain the manager’s signature on a properly drafted agreement, the free rent the owner or management company gives the manager in lieu of wages cannot be legally credited (i.e., offset) against the wages the manager otherwise earns. That means that the employer will have to write a check to the manager for what may amount to tens of thousands of dollars for back wages, plus penalties if a written employment contract does not properly provide that the free rent will be credited against the minimum wage. Insurance will not cover that indebtedness.
Although the IWC is no longer in existence, the courts and the California Division of Labor Standards Enforcement (i.e., the Labor Commissioner) now enforce the IWC’s wage orders against employers of resident managers.
THE 2021 GENERAL RULES
Here are the two general California statewide rules for 2021:
Rule No. 1: Payment of Minimum Wage: Virtually all resident managers are governed by California’s minimum wage and hour laws which require that they be paid at least $13.00 per hour for each hour they work. Managers who work more than 8 hours per day, 40 hours per week, or more than 6 consecutive days in a row, are entitled to receive “time and one-half” overtime pay at $19.50 for each excess hour. Double time payment may also be required in some circumstances. As noted previously, certain cities impose a higher minimum wage than $13.00/hour.
Rule No. 2: Maximum Rent that May Be Charged: During 2021, if one or more managers are required to live at the property as a condition of employment, their rent may not exceed $734.21 or $1,086.07 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 under California law. However, bear in mind that the exceptions and qualifications may not apply unless a legally sufficient employment contract is voluntarily signed by both the manager and the employer.
Also, preprinted form agreements are not recommended because usually they will not comport with all of California’s 2021 applicable laws, let alone the fact that they typically will not comply with the applicable local city ordinances.
Additionally, because there are so many variations in the terms and conditions of employment of any individual manager, preprinted forms will almost never adequately cover them. That means that years later the manager may sue to recover unpaid wages plus monetary penalties against employers who use deficient preprinted forms.
Exception to Having to Pay Minimum Wage: There is an exception under California law to the general rule that a manager must actually be paid wages for the hours he or she works. The exception involves a credit against the wages due in exchange for the employer providing the employee with free rent for the manager’s on-site apartment.
An employer may reduce the payment of the monthly wages owed by the lesser of (1) two-thirds the ordinary rental value of the unit, and (2) $734.21 per month if one manager is employed, and $1,086.07 per month if a couple is employed, such as a husband and wife management team.
Stated in a slightly different manner, the credit to the payment of wages is capped at $734.21 per month for one manager and $1,086.07 per month for a couple even though the rent reduction of the apartment unit might be substantially more than either of those amounts.
Here is an example: If the rental value of a unit is $1,800 per month but the manager is not charged any rent and the manager works 60 hours each month, under California law he is entitled to receive $45.79 per month from the employer. This is computed as follows: 60 hours at $13.00 per hour = $780.00, which is the minimum wage due. A rent reduction credit of $734.21 is proper as the lesser of $734.21 and two-thirds the ordinary rental value of the unit (which would be $1,200). Crediting $734.21 to the $780.00 leaves a balance due of $45.79 per month.
California law is similar where a couple (living together in one unit) is employed to manage the building. In that case, the maximum wage offset is the lesser of $1,086.07 per month and two-thirds the rental value of the unit. Thus, if the ordinary rental value is $1,800 per month but the managers are not charged any rent and the couple collectively work 60 hours a month, the employer need not pay them any wages. This is determined as follows: 60 hours at $13.00 per hour = $780.00, which is the minimum wage due. A wage reduction therefrom of up to $1,086.07 is proper as the lesser of $1,086.07 and two-thirds the value of the unit.
Bear in mind that the above rent reduction credit to payment of the minimum wage does not apply unless a legally sound contract is signed by the parties.
No Compensation For “On-Call” Hours, Waiting Time or Stand-By Time: After being terminated, disgruntled managers sometimes seek compensation from their former employer under a contention that because 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 constantly performing services throughout the day. However, thankfully the California Court of Appeal rejected managers’ “on-call” contention in Von Nothdurft v. Steck (227 C.A.4th 524). The appellate court ruled that the owner or management company need only pay the manager for the “time spent carrying out assigned duties.” That means that employer must only pay for the time the manager is actually working when present at the apartment building.
Thus, hours spent sewing, cooking, eating, sleeping, socializing, reading, watching television, playing computer games, lounging around, sunbathing outside, and engaging in other personal activities at the property are not compensable even though during that time the manager may be “waiting” for a repairman to arrive or “waiting” all day during “open house” hours to show a vacant units to prospective tenants but no one shows up.
Accordingly, the employer does not need to pay a resident manager for “on call,” “stand by” or “waiting” time if the manager is not actively working while present on site. 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 assigned duties.
MAXIMUM RENT QUALIFICATIONS
16 Units or More: If an apartment building consists of 16 rental units or more, California law requires the complex to have a “responsible person” reside on the premises who has “charge of the apartment house.” Having “charge of the apartment house” is the only duty imposed on such person by California state law. Failure to have a responsible person live on site is a misdemeanor punishable by a $1,000.00 fine and/or 6 months imprisonment. (H&S Section 17995)
Usually the “responsible person” is a manager, but he or she could also be a school teacher, hair stylist, nurse, tailor, tennis pro, newspaper delivery man, caretaker, janitor, professional ping pong player or any other responsible individual who is 18 years or older. Regardless of the occupation of that person, that person benefits from the same wage, hour and rent laws applicable to an actual “manager.” (For simplicity in this article and unless the context indicates otherwise, I refer to all types of “responsible persons” as “managers.”)
State law notwithstanding, some cities require that an actual “manager,” not merely a responsible person, live on site. For example, West Hollywood requires that an on-site resident manager be physically present on the property 4 hours per day every Monday through Friday if the building is rent controlled and has 16 or more units in it.
Under California law, the maximum rent a landlord may charge to a manager who is required to live on site in a 16 or more-unit building is capped. That is, no matter what amount of wages the owner pays the manager, the monthly rent may not exceed $734.21 (1 manager) or $1,086.07 (a couple) for the manager’s unit. (It is my opinion that there is a legal, but highly technical way to avoid those two rent limitations in a 16 or more-unit building. While I am uncomfortable publishing them, I will discuss them privately with AOA members, management companies and attorneys.)
The reason for the rent caps is that if the manager were free to select an apartment of his/her choice, the manager might have selected a different unit. Thus, the designated unit may not have the full value to the manager than it would to a tenant who could select a different unit.
There is one recognized exception to the maximum rent cap for a manager who must live on site. I call it the “Check Exchange” exception.
Check Exchange Exception: Under the California Labor Code an employer may charge up to two-thirds of the fair market rental value (FMRV) of the unit without regard to the $734.21 or $1,086.07 caps 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 employer must pay the manager the full minimum wage due ($13.00 per hour under California law) by one check and the manager must pay the landlord rent in an amount up to but not exceeding two-thirds the FMRV by a separate check. The theory underlying the law that requires separate checks is that payments for labor are absolutely required regardless of whether the manager pays the rent.
I call this arrangement a “check exchange” for this reason: Managers who are charged rent typically pay it on the first day of the month. Then mid-month and following the end of the month the employer is required to pay the manager the minimum wage earned for that month. (By law, wages are required to be paid semi-monthly although many owners pay them in a single payment at the end of each month.) Because the manager pays rent by one check at the beginning of the month and the employer later pays the manager the wages by another check—even though the payments are not concurrent—it is something like an exchange of checks. For simplicity, I call it a “check exchange.”
Under 16 Units: If the apartment building has fewer than 16 units and the manager’s employment agreement is properly drafted so that the manager is not required to live on the premises as a condition of his employment, then the $734.21 or $1,086.07 maximum rent caps discussed previously are not applicable. In such event, the employer may charge the manager any rent up to (end even more than) the full market rental value for the unit.
For example, if the value of the unit is $1,800 and the manager (who happens to live on site but may move away and still retain his job) works 50 hours a month, the owner may charge the full $1,800 as rent provided that he also pays the manager $650.00 for services rendered during the month (i.e., 50 hrs. x $13/hr. = $650.00).
On the other hand, if the employment contract requires the manager to live on site in the “under 16 unit” building as a condition of employment, then the $734.21 or $1,086.07 rent caps 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 rent increases of apartment managers residing in rent-controlled units. Owners having rent-controlled buildings in Los Angeles and who wish specific information on that topic may review the City’s “Resident Managers as Tenants” bulletin. That bulletin appears at the following website: http://hcidladev.lacity.org/resident-managers-tenants. If that web address will not load on your computer, try Googling: “Los Angeles Resident Managers as Tenants Bulletin”. Attorneys reading this article will find a further discussion of raising a manager’s rent in 1300 N. Curson Investors v. Drumea. AOA members who are not lawyers should confer with legal counsel about the Curson case.
Penalties for Not Complying with Wage Laws
The Labor Code provides that an employer (including an apartment owner and management company) who does not pay the wages owed may be liable for “liquidated damages” to the resident manager in an amount equal to the unpaid minimum wages. The effect of the liquidated damages assessment is that the employer will be penalized by having to pay the manager double the unpaid wages. (Labor Code Section 1194.2.) That means that if the unpaid wages during the preceding 3 years totaled, say, $60,000, the employer would then then have to pay the manager $120,000.
Numerous other penalties may apply to unpaid wages. Suffice it to say that AOA members do not want to have to defend against them.
Class Action Lawsuits by Resident Managers?
Not only may a resident manager sue his employer on his own behalf to recover unpaid wages and penalties, he may also sue to recover civil penalties on behalf of all the other managers who his employer has hired for other buildings. Although that is not technically a class action, it is similar in nature.
Thus, if an investor owns five apartment buildings in which each has a resident manager, or a management company employs twenty managers in differently owned buildings, a resident manager in any one of the tenements who claims unpaid wages against the employer can expand the scope of his lawsuit against his employer so as to include civil penalties on behalf of all the managers residing in all of the employer’s other properties.
Once such a lawsuit is filed (commonly known as “PAGA”), the resident manager who filed the lawsuit cannot thereafter settle on his own behalf with the employer and then simply dismiss the claims that he filed on behalf of the other managers. Such a dismissal is disallowed absent the court’s approval. That is because the court, as well as the California Attorney General, want to ensure that the rights of all the other resident managers are not compromised by the plaintiff resident manager’s selfish desire to abandon the case once he alone is paid what is owed.
Cell Phone Usage
Owners and management companies who require the resident manager to use his or her personal cell phone in the performance of the manager’s 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 February 2020 issue of AOA’s monthly magazine.
California’s sick leave law applies to every employee in the State of California who works more than 30 hours per year (repeat: 30 hours per year, not 30 hours per month). In general, such sick leave time accrues at the rate of one hour for every 30 hours the employee works.
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. With proper verbiage, the unused sick leave can be prevented from rolling over to the next year. The legalese is technical and should be drafted by seasoned counsel.
Some cities have enacted their own sick leave laws which are more onerous than the California statewide law. For example, in Los Angeles a resident manager is 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, those 96 hours can be reduced to and capped at 72 hours for each year after the first year of employment.
Santa Monica allows 40 hours of sick leave per year which, if not used, roll over to the next year and automatically get capped at 40 hours for that second year.
The manager’s employment contract should specifically address the applicable sick leave law for the specific city in which the manager’s apartment building is located. Preprinted forms do not cover the variations among cities.
Additionally, bear in mind that California and local jurisdictions may have expanded sick leave time due to COVID-19 issues.
California’s labor laws are exacting. The failure of owners and management companies to comply may expose those employers to actual damages of $100,000 to $150,000 or more for back pay to their managers, including substantial civil penalties, liquidated damages, statutory interest, attorney’s fees and court costs. Of course, the claims managers initially assert through counsel will likely be much higher. Also, violations of certain state labor laws and local ordinances might be criminal in nature and might expose the employer to fines and incarceration.
So here is what I recommend:
- Sign an Employment Contract: 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 employee and employer. The legalese to include in the contract is technical, but the general requirements concerning the wage, hour, and rent laws of California are contained in this article.
Although just about any written contract is better than no written contract, preprinted form
agreements usually will not satisfy all the applicable California statutes, the statewide Wage
Orders, and local City ordinances. It is best that each employer has their agreement drafted
by an experienced attorney practicing in this field of law.
- Review Your Existing Agreement: If you already have an employment agreement, review it for consistency with the wage, hour and rent laws for 2021 as I have discussed them. Many existing agreements will need to be modified. Also, be certain they address cell phone usage and the requirement for paid sick leave. If you decide to engage an attorney to revise your existing agreement (or draft a new one for you), be sure that lawyer is very experienced in resident manager law as it is significantly different than general employment law. One question you might ask to determine counsel’s expertise in the field is “What was the principal holding of the 1993 case of Brewer vs. Patel?” If the lawyer cannot answer that question off the top of his/her head, consider selecting alternate counsel.
- Keep Time Sheets: Keep time records signed by the manager documenting the days and hours he or she works. Remember, resident managers are employees, not independent contractors, so time logs are both essential and required by law.
- Management Certification: Require the manager to add up the total 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 those total hours worked during the preceding month. That is the key to deterring disgruntled managers from later claiming that they worked more time than they actually did.
As I discussed I detail in my December 2019 article in AOA’s monthly magazine (available
on AOA’s website), California law requires the employer (not the employee) to maintain
daily time records for his manager. It is important to do so. But it is also important to the
employer’s defense to have the manager certify the total number of hours he/she worked each
month of employment in the event that the manager ever sues the employer.
- Obtain and Read Wage Order No. #5-2001: The 2021 wage and hour regulations for apartment managers is IWC Order #5-2001 and can be downloaded at “https://www.dir.ca.gov/IWC/IWCArticle05.pdf”, or Google “IWC Wage Order #5-2001 for 2021”. A short, but incomplete, one-page version of Order #5-2001 can be downloaded at https://www.dir.ca.gov/IWC/MW-2021.pdf or Google “California Minimum Wage MW-2021”.
Contest Challenge for Attorneys!
As discussed above, California requires a responsible person to live on site in a 16 or more-unit apartment building. For attorneys, it is easy to find the code section for that law. Just Google it.
Contest Challenge for Lawyers: The City of Los Angeles has its own similar stand-alone law, but it is extraordinarily difficult to find. It does not appear in any obvious place. If you are an attorney and can research it yourself without communicating with anyone at the City, please telephone me with the exact regulation or code section. If you are correct, I will publish your name as a “winner” of this challenge in my column appearing in the March 2021 issue of this magazine.
The keys to complying with the 2021 wage and hour laws when employing a manager are (1) for the owner or management company to have the manager voluntarily sign a (properly drafted) written employment contract, and (2) thereafter have the manager deliver to the employer monthly certifications setting forth the total number of hours that he/she worked.
By doing so, the employer may avoid tens of thousands of dollars of liability to the manager. Better still, the contract and certifications may dissuade the manager from filing litigation altogether. The manager’s attorney is not likely to sue if he or she does not expect to win the case in any substantial way.
A succinct “Tear Out Summary” of California’s 2021 resident manager laws immediately follows this article.
Have a healthy, virus-free, vacancy-free, and prosperous New Year!
Dale Alberstone is a prominent real estate attorney who has specialized in real property and resident manager law for the past 40+ years. He is also a former arbitrator for the American Arbitration Association.
Mr. Alberstone has been awarded a 5-Star AV rating from Martindale-Hubbell, the 125-year-old national rating service of attorneys. A 5-Star AV rating is the highest possible rating bestowed and reflects an attorney who has reached the heights of professional excellence and who is recognized for the highest levels of skill and ethical standards.
The foregoing article was authored on December 1, 2020. It is intended as a general overview of California law only and may not apply to the reader’s particular case. Readers are cautioned to consult a lawyer of their own selection with respect to any particular situation.
Questions of a general nature are warmly invited. Address correspondence to Dale S. Alberstone, Esq., ALBERSTONE & ALBERSTONE, 269 S. Beverly Drive, Suite 1670; Beverly Hills, California 90212, or phone: (310) 277-7300.