Perhaps no other area has caused more confusion than the area of employment law. This is due largely to the various federal and state laws and regulations a property owner has to contend with. And to make matters worse, these laws keep changing. It is important to note not only the various federal and state laws, but the various agencies that oversee these laws. The federal laws include the Internal Revenue Code as administered by the Internal Revenue Service (IRS), and the Fair Labor Standards Act as administered by the U.S. Department of Labor (DOL). The State of California has multiple laws, regulations and agencies, as follows:
|Area||Law or Regulation||Responsible Agency|
|Income tax||Revenue & Taxation Code||Franchise Tax Board|
|Employment tax||Revenue & Taxation Code||Employment Dev Dept|
|Working conditions||Labor Code & Code of Regulations||Industrial Welfare Comm|
|Minimum wage||Labor Code & Code of Regulations||Industrial Welfare Comm|
In order to sort out the complexities of various laws a worksheet has been provided.
Employee or Independent Contractor?
The first issue is to determine if the property manager is an employee or an independent contractor. Why is this important? If the property manager is an independent contractor, then none of the other laws or regulations apply. The owner simply “contracts” with the independent contractor and pays the contractor the agreed upon price. For federal tax purposes, the Internal Revenue Code does not define an employee or independent contractor. Rather, the IRS has issued regulations 31.3121(d)-1(c) that identify the factors to consider in determining if an employer and employee relationship exists. Generally, such a relationship exists when the person to whom the services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. It is not necessary that the employer actually direct or control the manner in which the services are performed, rather it is sufficient if he has the right to do so. The courts have further tried to clarify this issue by saying there are other factors to consider. In fact, through various court decisions and laws the IRS has developed 20 such factors.
For California purposes, the Labor Code under section 350 defines an employer to mean any person who directly or indirectly, exercises control over wages, hours or working conditions of any person. An employee means any person employed by an employer. To be “employed” means to suffer, engage or permit to work. Under Labor Code section 3353 an independent contractor means any person who renders service for a specified result for a specified amount. That person is under the control of a principal as to the result of work only, and not as to the means by which such result is accomplished. Finally, the California Supreme Court ruled in Empire Star Mines v. California.
Employment Commission that the most important factor is the right to control the manner and means of accomplishing the result desired.
Most property managers do not exercise sufficient independence and judgment or discretion to qualify as independent contractors. They are then considered employees.
Type of Employee
Once a determination has been made that the manager is an employee, a second determination must be made as to the type of employee. Type refers to the type of work performed. For instance, is the employee a resident manager, janitor, maintenance worker, housekeeper or just a responsible person, or is the employee an executive, professional or administrator? The classification of the type of work performed matters because that will determine whether the employee is exempt from minimum wage and maximum hours worked of various employment laws and regulations.
Most employers are subject to the Fair Labor Standards Act of 1938 (FLSA), the federal wage and hour law. Sections 206 and 207 of the act sets the minimum wage, currently at $7.25 per hour, and overtime pay, currently at not less than 1.5 times the regular rate of pay for hours worked in a week over 40. However, if a state has higher minimum rates and standards, then the states rates and standards must be used. California is one of those states that have higher minimum wage rates and standards.
The state of California, under Title 8 section 11050 of the California Code of Regulations provides definitions as to an executive, administrative and professional. Each of these exemptions must regularly exercise discretion and judgment in their work. Specifically, an executive is an employee who has management as their primary duty, who direct the work of two or more full-time employees, who hire and fire, who regularly exercise a high degree of independent judgment in their work. An administrative employee performs office or non-manual work which is directly related to management policies or general business operations, who assist the owner or executive, or perform specialized or technical work. A professional is an employee who performs work requiring advanced knowledge and education. These exemptions are applied on an individual workweek basis. Employees performing exempt and non-exempt duties in the same workweek are normally not exempt in that workweek. In addition, it says that no person shall be considered an executive, administrative or professional employee unless either 1) the employee is engaged in work which is primarily intellectual, managerial, or creative and requires exercise of discretion and independent judgment, and for which compensation is not less than 2 times the minimum wage rate of $9.00 per hour (or $720 per week or $3,120 per month); or 2) the employee is licensed or certified by the State of California and is engaged in certain professions. The Industrial Welfare Commission (IWC) has issued commission orders 4-2001 for professional, technical, clerical, mechanical and similar occupations, and order 5-2001 for the public housekeeping industry.
Most property managers do not exercise sufficient independence and judgment or discretion to qualify as executive, administrative or professional employees. They would then be considered employees who are non-exempt, subject to California minimum wage, and would come under IWC order 5-2001.
Minimum Wage & Hour for Non-Exempt Employees
California law currently requires $9.00 per hour for all non-exempt employees. As of July 1, 2016 minimum wage increases to $10.00 per hour. California also requires that overtime be calculated on hours worked beyond 8 hours in one day and beyond 40 hours in one week at the rate of 1.5 times the regular rate of pay.
Payroll Taxes for All Employees
When an employee receives cash gross wages, payroll taxes are required to be withheld and paid by the employer. Payroll taxes withheld from the employee for 2015 include the following:
|Federal income||progressive rates from 0% to 39.6%|
|Social security||6.2% on wages up to $118,500|
|State income||progressive rates from 0% to 12.3%|
|State disability insurance||0.9% on wages up to $104,378|
The employer is also required to pay payroll taxes on the gross wages, as follows:
|Social security||6.2% on wages up to $118,500|
|Federal unemployment insurance||1.8% on wages up to $7,000|
|state unemployment insurance||from .7% to 6.2% on wages up to $7,000|
The tax rates and wage base change from year to year.
Giving Free Rent to Resident Managers
A resident manager is a manager who resides on the property. California Code of Regulations Title 25 Section 42 requires that a manager, janitor, housekeeper, or other responsible person reside on the premises if the property has 16 or more apartment units. There is no such requirement if under 16 units. A common practice for landlords is to give resident managers so called “free rent”. The idea is to compensate managers with free rent who perform services or work. The services or work may include as little as providing emergency services and a link to the owner to as much as locating tenants for vacancies, collecting rents, maintaining and improving the property, solving tenant problems, keeping records, purchasing supplies, hiring staff, paying bills, handling property insurance, etc. In allowing the resident manager free rent the landlord is not only receiving the work or services in exchange, but also may use the free rent toward meeting the minimum wage requirement. In California there are two acceptable methods for compensating resident managers when free rent is involved, as follows.
- Rent Credit Program
The rent credit program is found in California Code of Regulation Title 8 Section 11050. It says that a landlord may use or apply the free rent towards meeting the minimum wage obligation, but only if 1) there is a written voluntary agreement between the landlord and resident manager, and 2) the amount of free rent that may be applied is limited to two thirds of the fair rental value of the unit up to a maximum of $451.89 for a single manager and $668.46 for a couple (these amounts increase to $508.38 for a single manager and $752.02 for a couple on July 1, 2014). Under the rent credit program the following rules would apply:
- Payroll Taxes
If as a condition of employment the resident manager is required to live on the premises, then there is no federal income tax, social security tax, medicare tax, federal unemployment insurance, or state income tax on the free rent. However, there is state disability insurance and state unemployment insurance on the full fair rental value.
B. Amount of Rent Landlord May Collect
The landlord may charge the resident manager rent. However, if the resident manager is required to live on the premises, then the landlord may only charge the manager only two thirds of the fair rental value of the unit up to a maximum of $508.38 for a single manager and $752.02 for a couple ($564.81 and $835.49 respectively as of January 1, 2016). Under California Code of Regulations Title 8 Section 11050-(10)(D) and Labor Code Section 1182.80 a landlord may charge a resident manager up to two thirds the fair rental value if no rent credit is used to meet the landlord’s minimum wage obligation. In this case there is no maximum ceiling.
- Swap Checks Program
Only properties under 16 units can use this approach. Under Labor Code Section 1182.80 if a manager is not required to live on the premises, but chooses to, then the landlord is free to charge the manager either two thirds the fair rental value or the full fair rental value, depending on if the landlord uses the free rent portion to meet the minimum wage. In effect, the landlord “swaps checks” with the manager. The landlord pays cash wages to the manager, and the manager pays rent to the landlord. Under the swap checks program the following rules would apply:
- Payroll Taxes
Because the manager is not required to live on the premises, then there is federal income tax, social security tax, medicare tax, federal unemployment insurance, or state income tax on any amount of free rent, using full fair rental value. In addition, there is state disability insurance and state unemployment insurance on the free rent.
B. Amount of Rent Landlord May Collect
The landlord may charge the resident manager rent. If the landlord does not use any free rent portion to meet the minimum wage requirements, then the landlord is free to charge the manager the full fair rental value for the unit. If the landlord does allow a portion, or all of the unit, to be free rent, then the landlord is limited in charging only two thirds of the fair rental value of the unit.
It is important to note that without a written agreement, a landlord must still pay for all hours worked, in cash, and cannot charge for rent.