This is a mostly true story – (of course, the names have been changed). But do not expect a “happily ever after” ending, which would defeat the point I hope to bring across. 

Once upon a time, Mrs. Smith (I know – so original!) bought a 36-unit apartment building and hired a woman, Laila, to be its on-site manager. Mrs. Smith and Laila became good friends, and Mrs. Smith treated Laila very well – or so she believed.

Laila managed Mrs. Smith’s building for many years under a written agreement in which she agreed to work 40 hours per week, and Mrs. Smith paid her well. Specifically, Mrs. Smith paid Laila a generous “salary” of $3,000 per month, provided her with a $1,800/mo. apartment free of charge, and gave her a bonus each time she brought in a tenant. Laila regularly provided time records reflecting she had worked eight hours per day, five days per week.

One day, COVID-19 happened. Because several tenants stopped paying full rent, Mrs. Smith felt she no longer could afford to pay Laila so generously and suggested to Laila that she would need to work fewer hours and accept less money. That’s what Mrs. Smith said, but Laila heard an end to a long-standing friendship and a threat to her livelihood. 

If we stop right here – and I have seen similar fact patterns play out on multiple occasions – Mrs. Smith may have problems if Laila consults a lawyer. It is important that you recognize why so you don’t make similar mistakes. Certainly, it is not because they underpaid her. In fact, demonstrating one of the great ironies in wage and hour law, Mrs. Smith has problems for the opposite reason – her generosity, (without proper documentation), lies at the heart of her problems.

By way of explanation, let’s start with some basics. Non-lawyers (and some lawyers) often think in terms of “salaried” and “hourly” employees. The law, however, does not use those terms. The law defines employees in terms of “exempt” and “non-exempt,” and while people equate “exempt” with salaried, they are not synonymous. Notwithstanding that, Mrs. Smith paid Laila a set, monthly salary, Laila is not an “exempt” employee. Rather, Laila is “non-exempt,” which has several important legal ramifications. Most importantly for present purposes, Laila’s being “non-exempt” means she must be paid for all hours worked, is entitled to overtime and – often overlooked – that her wage statement (pay stub) must reflect the hourly rate at which she is paid each pay period. You will in a moment see the importance of this last factor. 

But first, let me digress for a moment. When I prepare resident manager agreements for clients, I stress the importance of making sure the manager provides, and the owner/management company maintains, accurate time records. I explain – in my most lawyerly voice – that “the law demands that employers maintain time records for all hourly employees.” I describe the potentially draconian consequences of not obtaining and maintaining time records, and I often provide a time-sheet template. 

Now, back to Mrs. Smith and Laila. It is true that Laila submitted time records – eight hours every day. But collecting resident manager time records that reflect identical hours worked every day, day after day – while probably better than collecting no time records at all – is, shall we say, less than ideal. Why? Because those time records, if challenged, do not seem – and, indeed, likely are not – believable. Onsite managers simply do not work identical amounts of time each day. Almost any resident manager will easily be able to provide texts or emails they received from a tenant at some odd hour as proof of odd hours worked.

Therefore, when Laila suddenly claims she has been working unrecorded overtime the last four years (the statutory limit), guess what? A trier of fact – meaning a judge or jury – likely will be inclined to believe her, at least in part. Yes, this is true despite her time records and her contractual agreement to work only 40 hours per week. Experience tells me Laila likely also will claim that her employer knew Laila’s time records were inaccurate and either looked the other way or, worse, actually encouraged Laila to submit inaccurate records that reflected no overtime being worked.

So now let’s start to pull this all together. When Laila’s attorney starts to run the numbers to put together a pre-litigation demand to Mrs. Smith, the lawyer is going to take the number of overtime Laila now claims she worked and apply the overtime rate of one-and-a-half times Laila’s regular hourly rate. Except that Laila did not get paid hourly, remember?  She was on a $3,000 per month “salary.” So how will the law compute Laila’s regular rate?

When an employee is paid a salary, California law determines the regular hourly rate by multiplying the monthly salary by 12 (to get a yearly salary), dividing that total by 52 weeks (to get a weekly salary), and then dividing the weekly salary by the number of non-overtime hours worked in a given week. So, in Laila’s case, her weekly salary was $692.30. Divided by 40 hours per week yields a “regular rate” of $17.30 per hour. But we’re not done, because Laila also receive a free apartment. 

The maximum free rent that could have been applied to Laila’s wages is $677.75 per month in 2020 (trust me on the number). Although this number, which comes from Industrial Welfare Commission Wage Order No. 5, tends to change periodically, we will use it for the sake of simplicity. So using the same formula mentioned in the previous paragraph to translate this free rent into an hourly amount (multiply by 12, divide by 52 and then again by 40), we add another $3.91 to the $17.30, such that Laila’s regularly hourly rate jumps to $21.21. 

Again for the sake of simplicity, we will ignore the bonus Laila received for rent renewals but, really, that would further increase her regular hourly rate, which already lies well over $21 per hour. At time-and-a-half, Laila’s overtime rate would be $31.50 per hour.  

Notably, Laila’s bi-weekly pay stubs do not reflect her hourly rate; indeed, that hourly rate likely would change each pay period based on how many lease renewal bonuses Laila received (and, of course, how many hours Laila actually worked each week). Providing inaccurate pay stubs in and of itself violates the Labor Code.

So the unintended consequences of having paid Laila a handsome “salary” without ensuring reliable time records is that Mrs. Smith: (1) made herself vulnerable to an overtime claim – one that will be based on a high regular rate of pay, making the settlement demand significant, and (2) guaranteed she violated the Labor Code by failing to provide accurate wage statements (even had they identified an hourly rate of pay, as required, they like would not have adjusted the hourly rate on each wage statement based on actual hours worked and bonuses earned during that pay period – no one does). This wage statement violation brings penalties but, more significantly, would entitle Laila’s lawyer to attorneys’ fees – which will make Laila’s claim harder to settle.

As I noted at the very start – no storybook ending here. Mrs. Smith paid a bunch of money to Laila and her attorney to resolve Laila’s claims, despite having been generous to Laila for many years and believing her claims to be meritless.  Let Mrs. Smith’s experience serve as a lesson for us all.

 

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 gganchrow@pmcos.com. This article is for informational purposes only, and should not be considered legal advice or establishing an attorney-client relationship.