Resident Manager Agreements: What AOA Members Need to Know
By Dale S. Alberstone, Esq.
In this column each month, I try to address legal topics which are timely and important to AOA’s members as owners of apartment buildings. For example, recently I addressed pitfalls of many laundry leases (and in particular, that owners should just about never sign a laundry lease which automatically renews) and what not to do if an owner’s building is going into judicial foreclosure (and in particular, that owners not provide their financial information to the lender).
Of all the subjects I have covered, the one which most frequently causes great problems for owners (as well as management companies), are the laws which regulate the employment of on‘site resident managers. There is almost nothing more infuriating, as well as financially painful, to an owner than a manager who seeks to recover tens of thousands, if not hundreds of thousands, of dollars for unpaid wages and penalties after the owner had provided the manager with a rent reduction or rent‘free apartment unit as compensation for the manager’s services.
A real life illustration of this involves a dispute I resolved in mediation for my clients on April 25, 2012. In that matter, my clients provided their resident manager with a $400.00 per month reduction during the latter half of 2009 through the middle of 2011. After the manager of the 10‘unit complex was terminated in June 2011, she hired an aggressive labor law lawyer who demanded $115,000.00 for her client. That demand included amounts allegedly owed for unpaid wages, failure of the owners to keep accurate time records, failure of the owners to provide proper wage statements, numerous penalties for unpaid wages, damages for wrongful termination, and reimbursement of her attorneys’ fees, to name a few.
After six hours of intense mediation, we were fortunately able to settle the dispute for a relatively modest sum. Nevertheless, that payment could have been avoided altogether had the manager signed a properly drafted employment agreement at the time she was first engaged.
The following is what AOA members need to know about the laws pertaining to resident managers:
Resident Manager Wage and Hour Laws
1. General Rule. A resident manager is an employee, not an independent contractor. An owner cannot convert the employee status of a manager to that of an independent contractor no matter what the parties may agree to verbally or in a written employment contract.
As an employee, the manager is entitled to be compensated in an amount no less than the California minimum wage, which is presently $8.00 per hour for each hour the manager worked. Some municipalities, such as San Francisco, have imposed a higher minimum wage.
2. Credit Against the Minimum Wage. If the manager agreement is properly drafted, an owner may credit the amount the minimum wage he/she owes for the resident manager’s services based in part upon any rent reduction the owner allows. That offset may be equal to the reduced rent up to, but in an amount not exceeding, $451.89 per month for a single manager, and not exceeding the $668.46 per month if two managers living in the same unit are employed by the owner. (In no event, however, can the amount of the credit exceed 2/3 the ordinary rental value of the unit.)
For example, if the value of the manager’s unit is $900.00 per month, but the manager only pays $200.00 per month, then the maximum credit against wages would be $451.89 each month.
Most importantly, the rent reduction credit against the minimum wage owed is only applicable if the owner and manager voluntarily signed a written agreement which permits such an offset. In other words, if the manager has not agreed in writing that the rent reduction will be applied as a credit against the minimum wage owed to him, then no offset is allowed. In that event, not only would the owner have to pay the manager back wages (which may amount to tens of thousands of dollars), he would not be allowed to recover from the manager for the monthly reduction in rent that the manager received as intended consideration for the work performed.
It is for that reason that for years I have counseled AOA members who hire a resident manager to enter into a written employment agreement at the time of the manager’s engagement.
The statute of limitations for the manager to recover unpaid wages is either three or four years, depending on which law the resident manager asserts when his attorney files a lawsuit. That means that the manager may seek recovery of three or four years of unpaid wages, plus interest, costs, attorneys’ fees and other damages with a high degree of probability that he will prevail at trial or before the California Labor Commissioner.
In addition, Labor Code Section 1194.2 empowers the judge hearing the case to assess a penalty against the employer equal to the amount of the unpaid wages. Worse still, if Assembly Bill 197 becomes law in California (we will know by August 31, 2012), then the judge has the power to assess a penalty equal to twice the unpaid wage.
1. General Rule. A concept which is completely independent of the amount of the credit that an owner may take against the minimum wage owed is the amount of rent that the owner may charge the manager for the manager’s unit.
If the manager is required to live on the premises as a condition of employment, the maximum rent that an owner may charge for the unit is $451.89 if just one manager resides in the apartment, and $668.46 if the owner employs a couple in the same unit.
On the other hand, if the manager is not required to live on the premises as a condition of employment, then the owner may charge the manager any amount of rent, without regard to the foregoing limitations. (Local rent control laws may restrict the rent that can be charged, but that is beyond the scope of this article.)
Under California law, all properties having 16 or more residential units are required to have a resident manager, janitor, caretaker or other responsible person live on the premises. If the complex has less than 16 units, then no such person is required to reside at the property.
2. Check Exchange Exception. The one exception to the maximum rents of $451.89 and $668.46 discussed in the preceding section is what I denominate as the check exchange exception.
Under the Labor Code, an owner may disregard those dollar amounts limitations and instead charge up to 2/3 of the ordinary rental value of the unit provided that separate checks for the minimum wage payment and the rent are exchanged between the owner and the manager. In order to avail oneself of this exception, the owner must pay the manager the full minimum wage ($8.00 per hour for all hours worked) by one check, and the manager must pay the owner an amount not exceeding 2/3 the rental value by a separate check.
Under this arrangement, the owner 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.
The most important message I can impart to AOA members is to always and without exception sign a written employment agreement with the manager at the time of the initial engagement. If an owner neglects to do so, at least have the manager sign one as soon thereafter as possible. Just about any signed agreement with the manager is better than not having any written agreement.
By signing such a document, an owner can avoid tens of thousands of dollars of potential liability to the manager under statewide wage and hour regulations. Better still, such an agreement contract 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.
Dale Alberstone is a prominent litigation and transactional real estate attorney who has specialized in real property law for the past 36 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, which is a registered certification of Reed Elsevier Properties, Inc. 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. His firm is rated A+ by the Better Business Bureau.
The foregoing article was authored on May 1, 2012, and 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, 1801 Avenue of the Stars, Suite 600, Los Angeles, California 90067. Phone: (310) 277-7300.