Many years ago, a client of mine from San Jose, California purchased an apartment complex in Clovis, California. This client was not a big time investor or real estate mogul. Instead, he was an engineer who acquired the complex as part of his long-term retirement plan. The client had some prior experience managing residential real estate and, although because of the distance between Clovis and San Jose he could not be the actual on-site manager, he was actively involved with the property.
The client hired an on-site manager and prepared his own “Residential Rental Property Management Agreement” (the “Agreement”) without consulting with an attorney or reference to the California Apartment Association (“CAA”) forms. The Agreement generally described the duties the manager was expected to perform, discussed office hours and other issues. The part of the Agreement dealing with the manager’s compensation for services provided as follows:
“4. Manager shall be compensated as follows:
a) Free rent of a 3-bedroom apartment during the term as manager. The initial value of this compensation is $955 per month.
b) $100 per month toward utility expenses.
c) One telephone line costs, less any personal long distance charges.”
A Faulty Agreement was Used for Years Without any Problems
The Agreement was used with on-site managers for years without any problems related to the Agreement. A few years ago, however, that changed.
An on-site manager that had worked for my client for a few years, filed a claim with the Labor Commissioner claiming that she had not been paid for all of the hours she worked and that the lodging credit being taken under the Agreement exceeded the amount authorized by law. This claim was an education for my client in many ways.
Prior to receipt of the claim, my client simply did not know that the law limited how much he could claim against wages for providing a “free” apartment to an on-site manager. Specifically, pursuant to Section 10 of Industrial Welfare Commission Wage Order 5-2001 (“Wage Order 5”), when an employer (i.e., apartment owner) provides an employee (i.e., on-site manager) with lodging (i.e., a “free” apartment) the employer may take a “lodging credit” of up to two-thirds of the ordinary rental value of the apartment, but in no case may the amount charged exceed $451.89 per month[1] against wages owed to the employee if there is a “voluntary written agreement between the employer and the employee.”[2]
As part of the Labor Commissioner proceeding, my client continued to claim the right to take a lodging credit of $451.89 per month but ended up paying the on-site manager some additional compensation for hours she claimed she worked over and above those covered by the lodging credit. The on-site manager insisted that my client was not entitled to claim the lodging credit based on her assertion that the Agreement did not meet the “requirements” set forth in Wage Order No. 5 for a “voluntary written agreement.”
No Court had yet Addressed the Meaning of the Term ‘Voluntary Written Agreement’ Under Wage Order 5
The term “voluntary written agreement” is not defined in Wage Order 5 or the Labor Code and at that time no court had addressed the issue of what was required to qualify as a “voluntary written agreement” under Wage Order 5.
Fortunately, when the on-site manager pressed the matter to a hearing before the Labor Commissioner, it resulted in a ruling which held that the Agreement did in fact satisfy the requirements for a “voluntary written agreement” under Wage Order 5. As a result of this ruling, my client was allowed to offset wages that would have otherwise been payable in money against the $451.89 monthly lodging credit.
The on-site manager disagreed with this ruling and filed an appeal with the Fresno County Superior Court. Further settlement discussions were unsuccessful and ultimately, following a court trial, the trial court ruled (as did the Labor Commissioner) “that the signed agreement does meet the definition of the Wage Order and, therefore, Defendant is entitled to the allowed [lodging] credit . . ..”
Again, the on-site manager disagreed and filed another appeal, this time to the California Fifth District Court of Appeals. On appeal, the resident manager argued that the compensation provision quoted above[3] did not satisfy the legal requirements of a “voluntary written agreement” requirement in Wage Order No. 5. Specifically, she argued that because the Agreement did not mention minimum wages, did not require the recording of the hours worked and purported to value the lodgings in an amount in excess of the maximum allowable credit, the Agreement did not constitute a “voluntary written agreement.” The Court of Appeal totally rejected these arguments and refused to read into Wage Order 5 requirements that were not expressly set forth in the wage order.
The Court of Appeal Held That The Parties’ Intent is Key
In its published opinion,[4] the Court of Appeal held that the “voluntary written agreement” requirement of Wage Order 5 “requires only a ‘voluntary written agreement between the employer and the employee’ without qualification. Under its plain terms, no express reference to a credit toward minimum wage, statement that the employee is entitled to minimum wage for every hour worked, or the precise amount to be credited, need be included as long as the parties understand and agree–as they did here by entering into the management agreement–that lodging is to be credited toward the employee’s compensation.”
Thus, the key–as it is in every contract dispute–is the parties’ intent at the time the contract was entered into. The parties clearly understood and agreed that the compensation received by the resident manager included credit for the free use of an on-site apartment. The court found that this understanding was in fact reflected in the Agreement.
Using Proper Forms Would Have Saved Client $$$
While in the end this decision validated my client’s position and he prevailed, there is no dispute that the Agreement at issue in the Steck case was not a model contract and it ended up costing my client a very significant amount in attorneys’ fees to achieve this result. If my client had used the form agreement available through the CAA this entire lawsuit would most likely not have occurred.
Other apartment owners who are using agreements other than the CAA form[5] or one drafted by their own attorney are at significant risk. While they may have an agreement that, like my client’s, will ultimately be approved by a court, the risk that it will not be approved and/or the cost of the attorneys’ fees to defend the agreement could prove very costly.
by Dan Rowley
[1] At the time of the dispute being discussed here the limit was $451.89. The amount was subsequently increased to $508.38 and increases again to $564.81 per month beginning January 1, 2016, when the minimum wage increases to $10 per hour. It should also be noted that the limits are higher where “a couple are both employed by the employer.” (See, Wage Order 5(C).)
[2] If, on the other hand, the employer does not take a “lodging credit” but instead decides to charge the resident manager rent, the agreement must be set forth in a “voluntary written agreement” and the amount charged is limited to two-thirds of the ordinary rental value of the apartment, but in no case may the amount charged exceed $508.38 per month. (See, Section 10(E) of Wage Order 5 and Labor Code Section 1182.8.)
[3] It should be noted that with this on-site manager the compensation section of the written employment agreement quoted above was amended in handwriting to add that the owner would provide the on-site manger with a high speed internet connection free of charge.
[4] Von Nothdurft v. Steck, (2014) 227 Cal.App.4th 524 (hereinafter referred to as “Steck”).
[5] Onsite Employee Agreement–Form 1.2.