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Real Estate Economics • December 1, 2006

Compensating The On-Site Manager

COMPENSATING THE ON-SITE MANAGER

By Lucinda Garland, Director of Management, Small Property Division, Sunrise Management Company

 

The article below was submitted as a follow-up to a recent presentation at a BPOA monthly meeting.  It deals with the situation where an apartment manager is (a) deemed to be an employee under California law,  (b) is required to live on the premises, and (c) agrees to free or reduced rent as part of his/her compensation.

 

All owners, and Berkeley owners especially, should be aware of two factors, which may change the equation.  One is where the manager is considered an independent contractor rather than an employee.  Under California the difference between an employee and an independent contractor is decided on a case-by-case basis.  A key question is whether the person is required to work a fixed number of hours at specified times and at a specified location.  If the person has substantial freedom to determine his/her own hours and the times at which he/she performs the job, he/she may be considered an independent contractor, in which case many of the concerns described below do not apply.

 

The second point relates to jurisdictions with rent control and/or “just cause” eviction laws.  In these places, many recommend keeping rental questions strictly separate from compensation issues.  In other words, the manager should sign an ordinary lease at market rates and should pay the specified rent each month in the same way as an ordinary tenant.  The lease should not be tied to the person’s performance as a Manager, which should be the subject of an entirely different agreement.   This arrangement leaves the owner and employee free to sever the employment relationship without necessarily terminating the lease.  Money questions also become separate, with the tenant’s obligation to pay rent being independent of the owner’s obligation to pay for services rendered.

 

Finding someone with just the right mix of industry knowledge, willingness to work, and customer service ability is hard enough.  Making the sure the arrangements you make to pay your on site manager will meet all the established legal requirements can put you over the edge!!!

 

Whether you choose someone already living in your apartment community to “just keep an eye on the place and clean up” or you hire a full-time On-site Manager, the legalities of compensation must apply.  Where the manager is deemed an “employee” you MUST meet minimum wage requirements and (in the event the apartment community is sixteen units or more), you are limited to the amount of the rent you can offset against your cash obligations.

 

Many owners and managers of apartment communities ranging in size from two to fifteen units choose to have someone designated as “eyes and ears” that live at the site.  The responsibilities may include just watching over things and reporting if something comes up.  Duties could include picking up trash and cleaning the laundry room or go so far as to require this person to open the door to a vacancy to allow a prospective resident to view the available rental.  Regardless of the level of responsibility, this person may become an employee under state law as soon as you ask them to help you.

 

One would think that a $50-$100 rent credit each month would probably take care of the compensation issue, right?

 

Maybe so.  Maybe not.  Here are a few rules to help you decide:

 

How many hours per week is this person working?  Believe it or not, $100 per month buys you less than four hours per week of this person’s time (the current minimum wage is $6.25 per hour, but prevailing hourly rates are much higher).

 

How do you prove the number of hours per week your employee is working? Have them give you a written log of time worked each month – nothing fancy, a log of what they did and how long it took to do it will suffice.  You should make sure that the employee dates and signs each log you receive.

 

Won’t this give them the idea that they should be paid more? That is a chance that you may need to take.  The alternative is that if you do not meet minimum wage requirements, you may be subject to action against you by the Employment Development Department.

 

What about taxes?  The compensation of every employee is subject to employment taxes.  In this case, if the compensation is purely rent credit, you are required to pay only California state disability taxes and California state unemployment taxes on the compensation.  In the event you do pay cash or a check for compensation, you are required to withhold just as any employer would.  Please see your accountant for details.

 

If this person is an employee, do I need worker’s compensation insurance? Yes.  Please contact your insurance agent to determine the level of coverage you need.  The alternative may be that your employee becomes injured on the job and you may be required to pay all their medical expenses and all lost wages for an extensive period of time.

 

In the event the apartment community consists of sixteen apartment homes or more, the water becomes muddier.  Not only do the minimum wage requirements continue to apply, but also a number of other rules and laws come into play.  Apartment owners are REQUIRED (in Title 25 of the California Code of Regulations) to have an employee reside on-site for apartment communities of sixteen units or more.  Further, at this level, the California Industrial Welfare Commission tells you how much rent that employee is allowed to pay.  And in the event we offer free rent as compensation, they also tell us how much of that free rent we can use to meet minimum wage requirements.

 

When an employee or employees reside in an apartment community as a conditions of their employment, the employee(s) may not pay as rent more than 2/3 the market value (that amount of rent that other residents pay) of the apartment home.  For example, should Manager Mary occupy a two-bedroom apartment home for which you would normally receive $600 per month rent, Manager Mary could be charged only $396 per month for that same apartment home.  The “loss” of $204 experienced in this example is a cost of doing business and cannot be credited toward the manager’s compensation or used to meet minimum wage requirements.  Other wage arrangements (a salary or hourly wage) would need to be made to compensation Manager Mary for her time.

 

When an employee or employees reside in an apartment community as a condition of their employment and are receiving free rent to meet minimum wage requirements or as a credit against wages, the amount of the rent that can be attributed to meeting wage requirements cannot exceed the following:

 

ð             For an individual employee occupying the apartment - $352.95 per month.

ð             For two employees occupying the same apartment - $522.10 per month.

 

An example:  Marvin, your manager, occupies a one-bedroom apartment home for which you would normally receive $900 per month rent. As part of his compensation, Marvin receives this apartment for free.  But under the law, Manager Marvin would be deemed to get just $352.95 per month as a result of the free rent. You would have to make up the rest of his compensation in cash. The “loss” of $547.05 experienced in this example is a cost of doing business and cannot be credited toward the manager’s compensation or used to meet minimum wage requirements.

 

In another example, should Manager Mary and Manager Marvin both be employed by the apartment community and both occupy the same one-bedroom apartment home for which you would normally receive $900 per month rent, AND as part (or all) of their combined compensation receive the apartment for free, Managers Mary and Marvin would be deemed to earn $522.10 per month as a result of the free rent.  The “loss” of $377.90 can’t be recouped.

 

In both examples above, it is helpful to remember to calculate the number of hours the employee(s) can work for the compensation while meeting the minimum wage requirements.  For $352.95 per month, the number of hours allowed while meeting this requirement would be an average 13.1 hours per week.  For $522.10, the number of hours for the employees combined is approximately 19.4 hours per week.  In the event the employees exceed these hours per week, it is necessary to compensate them otherwise at a rate of at least $6.25 per hour.

 

There is no right way to compensate on-site employees. Understanding the numerous laws and regulations that govern this industry is necessary to make the right decisions for your community and assure that you are operating your investment in accordance with the laws of our industry.

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