By: Bob Machado, President and owner of HomePointe Property Management
If you have an apartment building with 16 or more units in California you must have a paid employee on site living at the building. This responsible person must be paid in accordance with State and Federal rules and regulations. You cannot consider this person as an independent contractor.
Employees in California are currently entitled to minimum wages in the amount of $9.00 per hour, with some municipalities having an even higher minimum. Many owners trade off the value of the apartment in exchange for compensation. If you do this, you must have your agreement in writing. In addition, the value of the lodging credit cannot exceed 2/3 of the market value of the unit or $508.38 per month for a single person, whichever is less. If a couple is employed, the maximum value of the unit is still 2/3 the market value with a maximum of $752.02, whichever is less. Take note that in January 2016 the minimum wage will be increasing to $10.00 per hour and the lodging credit maximum will rise to $564.81 for a single person and $835.49 for a couple. If the hours worked translate into compensation to the on site manager in excess of the 2/3 value, then the excess should be paid in the form of a paycheck.
As an alternative, the owner could charge the tenant 2/3 of the market value and have on site manager pay that amount in rent. Then the owner would pay the on site manager at least $9.00 per hour.
You should keep ongoing records of the hours worked each two week pay period. This means the on site employee should submit time cards twice per month showing the daily details of the hours they worked. As a part of processing the wages for payments, the owner should make the proper deductions for social security, medicare, state disability insurance, federal and state income tax, federal unemployment tax (FUTA), state unemployment insurance, and employer training tax (ETT). Some of these are paid by the employer or employee only, others by both employer and employee.
As previously stated, if you are using the apartment as part of wages, you are required to have a written employment contract with the employee. Do not skip this step as you could lose the amount of the apartment rent in a wage settlement if the agreement is not in writing.
As an owner of a 16 more unit apartment building you are expected to know how to compensate the people you employ. I have seen many cases of owners and even property managers giving “free rent” in exchange for being the on site presence. While this may work in the short run, it is playing with fire. If you terminate your onsite person and they file for unemployment, the Employment Development Department (EDD) will be looking for the wages and taxes paid to show up on their database. If they do not find anything, it may well trigger an audit. This could entail EDD going back up to four years for back taxes and penalties. Beware if you own a property management company as such an audit will not be restricted to just the property that triggers it. It may well expand to cover all properties you manage and have managed over the past as well.
As the owner you are also responsible for having workers compensation insurance in place to protect your employee in case they get injured on the job. This policy is based on wages earned and includes 100% of the apartment market value no matter what you actually calculate it at per the above restrictions.
With employment agreements in place, time cards completed and collected every two weeks, and pay based on at least the prevailing minimum wage, you should be well on your way to successfully managing a larger apartment building. Short cuts do not work and should not be considered. A nice feature of hiring a reputable management company is that they take care of all these details and the on site manager is considered the employee of the property management firm, not the owner. This can further reduce the owner’s risk.
Bob Machado is President and owner of HomePointe Property Management which is located in Sacramento, CA serving the greater Sacramento Region from three offices. He graduated from UC Berkeley “With Distinction” (1977) and has a degree in Economics. He is both a Certified Property Manager (CPM) and Master Property Manager (MPM) and HomePointe is a Certified Residential Management Company (CRMC). Bob holds a California Brokers License (00691121).
Bob is a founding member of the local chapter of the National Association of Residential Property Managers (NARPM), as was its’ first president (1992). In addition to local leadership, Bob is past national president of NARPM (1996-97) and served on the national board from 1992-1998. Bob is a nationally qualified and recognized speaker for the association and teaches various property management topics and has authored several property management courses.