Apartment Specialists

By: Brian Gordon & Vincent M. Medina Owners of Lotus Property Services22SEPT

Will An Onsite Management Lawsuit Cost You The Building?

Few owners understand the legal risks associated with onsite management. Recent litigation has plagued the apartment industry in California, and owners are realizing they are liable for far more than they expected. In recent years, lawmakers have made attempts to define fair and equitable compensation for onsite managers through legislation. These recent changes have prompted record numbers of manager-owner lawsuits for wage and residency setting precedent. However, the interpretation of what exactly an owner should do to be in compliance can still seem vague. The good news is, if you implement a few preventative measures, you can avoid a lawsuit before it’s filed.

First, you must realize your onsite manager is your employee. If you are still operating under the 1990’s mentality when independent contract agreements were somewhat valid, you are living under a rock. Over and over, owners find out that courts have consistently ruled a manager is an employee. You must heed the courts’ decisions. Additionally, you need to have a comprehensive and updated contract that spells out the law. It should include the expectations for employment; compensation; how hours are calculated; how overtime is paid; how payroll taxes are paid; and the list goes on. After all, we each know the very first rule of real estate: PUT IT IN WRITING! If you are not willing to follow these simple rules, your chances of getting sued will skyrocket.

Second, don’t expect your insurance to cover the lawsuit. Despite popular belief, insurance carriers are not in the business of writing out claim checks. Long ago, the insurance industry adjusted their policies to generally exclude employee-related claims. You may have property and building coverage, but it probably doesn’t cover the employees on your property. Check with your carrier, but you’ll likely realize you’re not covered if you are sued. It’s like asking your auto insurance carrier to copay for your cardiologist visit. It’s not happening. To compound this matter, savvy attorneys use creative tactics in filing lawsuits to pierce your personal liability. These include fraud, coercion, and various other claims that will not be covered by your insurance carrier in the unlikely event you have a comprehensive insurance policy. Through these tactics, your personal liability is jeopardized until you can prove your side of the story. You must also realize you’ll probably never see your “day in court,” as the long, exasperating process of hearings, depositions and discovery results in legal costs that far outweigh any claim for alleged damages. As most cases find settlement immanent, it’s the costly battle of settlement negotiations that causes permanent, irreversible brain and pocket damage. There are available insurance providers out there that can somewhat mitigate potential exposure, but it’s best to consult an insurance broker that specializes in employment coverage as well as your employment attorney in order to choose policies that truly benefit your situation.

As I mentioned earlier, the first step in a positive direction is to have a solid and up-to-date contract. It baffles me every time I run across an owner with a property manager that doesn’t have a contract. Real estate is a contract-based industry. You bought the property with a contract; you expect each resident of your building to adhere to a contract; and as a good owner you even periodically update your contract to meet your building or management needs. Why wouldn’t you secure a contract with your onsite manager? Contracts are essential, but if you’re doing this yourself or checking to ensure your management company is in compliance, you must consult with an employment law attorney who specializes in onsite manager cases and is familiar with Department of Industrial Relations, Minimum Wage Order MW-2007. This is a specialized industry, so find an expert.

The next ingredient in your recipe for success is to always get timecards. After you secure a solid contract, timecards become fundamental to your peace of mind. Our office, for instance, requires mandatory, weekly timecards for all onsite staff. The timecard is a snapshot of the allotted hours worked based on the agreed compensation. It ensures that both you and your onsite manager are tracking these hours. It’s best to have the manager fill out the timecard in their own handwriting, stating what work was done, the time that he/she checked in and out, as well as the time taken for required breaks and any overtime. Unpaid overtime is often the strongest claim within a lawsuit. The manager often feels that being onsite means they are really working 24 hours a day, 7 days a week. Implementing a weekly timecard gives you the opportunity to address these types of claims as they surface, rather than after the fact through attorneys and lawsuits. I recommend a timecard that requires an employee to obtain a supervisor’s written authorization prior to performing any overtime, unless it’s an emergency situation. Monitor the timecards and keep them indefinitely, as you never know when a claim may surface.

Finally, use payroll. Basically, you’ll need to pay the manager for each hour worked. Do yourself a big favor and simply use a payroll service to do this. Many managers and owners get into trouble by skating around an unenforceable 1099 contractor agreement or verbal “free rent” arrangement in attempts to avoid payroll taxes. In the eyes of the law, you and your onsite manager are both liable for payroll taxes. As an employer, you will quickly realize your liability exposure is large and expensive.

If you self-manage, then it’s probably time to review your existing polices to ensure you are in compliance with the latest regulations and case law affecting our industry. If you already have professional management, it is worth your time to ensure they are in compliance. In many management contracts, owners will indemnify the property management company against various claims. Although you may feel the onsite manager is the property management company’s employee, it is possible the liability may fall back to the property and yourself. The time to be in compliance is now. Educating yourself and taking action today is the best way to avoid a lawsuit before it even happens.

Brain Gordon

Brain Gordon

Vincent Medina

Vincent Medina

Brian and Vincent are “The Apartment Specialists”, owners of Lotus Property Services, Inc. and are active leaders and Real Estate Brokers in the apartment industry. Since introducing Lotus Property Services, Inc., the company now oversees a real estate portfolio of over $300+ million dollars in value which in part has been accomplished by Brian & Vincent’s commitment to quality and service. Together Brian & Vincent have sold and managed over one billion dollars in real estate assets. As former Presidents and Board members of apartment associations, frequent writers for numerous industry magazines, key note speakers for seminars and investment groups such as the Value Hound Academy, Brian and Vincent have earned the title as the undisputed “Apartment Specialists”.