This is the third episode in our new weekly video series covering property management principles. This episode examines the duties of a resident manager at an apartment complex with 16 or more units.
The prior episode distinguishes the property management activities that may be performed by a licensed or unlicensed employee.
Employees: not independent contractors, not tenants
A broker, retained to manage a residential income property, enters into an employment agreement with a resident manager to oversee the daily management of the property. This employment agreement is called a resident manager agreement. [See RPI Form 591]
Under the resident manager agreement, the resident manager:
- acknowledges employment by the property manager;
- accepts the occupancy and use of an apartment unit rent-free as compensation for the employment; and
- agrees to vacate the property on termination of employment.
The resident manager’s job is to show vacant units, run credit checks, negotiate and sign leases, collect rents, supervise repairs and maintenance, serve notices and perform other non-discretionary administrative activities.
Later, the property manager terminates the resident manager’s employment.
The property manager demands the resident manager immediately vacate the premises and relinquish possession of the unit.
However, the resident manager claims to be a tenant, entitled to a notice and time to vacate, not just a notice terminating employment and their right of possession of the unit.
Is the resident manager entitled to a notice and time to vacate on termination of employment?
No! A resident manager who continues to occupy a unit after their employment is terminated becomes a holdover tenant. They unlawfully detain the unit and have no right to a notice other than the notice terminating their employment. A resident manager’s occupancy is fixed, not periodic. It is established in the resident manager agreement that the resident manager’s tenancy ends on the date their employment is terminated. [Karz v. Mecham (1981) 120 CA3d Supp. 1; See RPI Form 591 §§4.2 and 4.9]
Also, the resident manager’s eviction by an unlawful detainer (UD) action is not protected by rent control ordinances. Further, they may not defend their continued possession by demanding the property manager or landlord show good cause for terminating their employment. [Tappe v. Lieberman (1983) 145 CA3d Supp. 19]
If the resident manager does not relinquish possession on termination of the resident manager’s employment, the property manager may immediately file a UD action, without further notice, to have the resident manager evicted.
However, a resident manager agreement may provide for the creation of a tenancy following the termination of a resident manager’s employment. When a tenancy is agreed to, the resident manager’s right of possession is not terminated on termination of the resident manager employment, but under landlord-tenant rules of notice before eviction. [Calif. Code of Civil Procedure §1161(1)]
Resident manager activities
A resident manager is an individual employed by the property manager or landlord to live on-site at the managed complex and see to its daily operations. A resident manager’s duties may include:
- screening tenants and negotiating leases;
- cleaning vacated units;
- supervising landscaping, maintenance and repairs;
- serving notices; or
- attending to tenant inquiries.
Both residential income property and commercial property may have resident managers. However, apartment buildings with 16 or more units are required to have a landlord, resident manager or responsible caretaker living on the premises to manage the property. [25 Calif. Code of Regulations §42]
Resident managers do not need to be licensed as a real estate broker or agent to negotiate leases or collect rents. However, when a nonresident property manager is not the landlord, the nonresident property manager needs to be licensed by the Department of Real Estate (DRE) as a real estate broker. [Calif. Business and Professions Code §10131.01]
Hiring a resident manager
A property manager who employs a resident manager is responsible for the following brokerage activities:
- selecting and hiring the resident manager;
- maintaining worker’s compensation, liability insurance and any bonding requirements of the landlord or property manager;
- keeping payroll records, including information about withholding and employer contributions;
- supervising the resident manager; and
- terminating the resident manager’s employment.
The resident manager’s status as an employee is established in an employment agreement called the resident manager agreement. [See RPI Form 591]
Family members who live with the resident manager are listed in the resident manager agreement. Further, a statement noting these family members are not tenants is to be included. Thus, the family members’ right to occupy the property terminates with the resident manager’s right to occupy the property (e.g., the termination of the resident manager’s employment).
References to the participants in the resident manager agreement need to identify the property manager/landlord as “employer” and the resident manager as “employee.” [See RPI Form 591 §4.9]
Payment for services, withholding, benefits
Depending on the size of the complex, the resident manager may receive occupancy of a unit in the complex as compensation for their services based on:
- a rent reduction given in exchange for the dollar value of the resident manager’s services;
- no rent charge, the rental value given in exchange for services; or
- no rent charge, plus an additional monthly salary paid in further exchange for services.
The resident manager agreement states the salary paid to the resident manager is a monthly amount. The fair rental value of the resident manager’s unit is deducted from their salary. After the rent deduction, the resident manager is paid any balance of their salary. Utilities may also be included as part payment for the resident manager’s services or treated separately from the agreed-to salary. [See RPI Form 591 §4]
As an employer, the property manager or landlord is responsible for withholding and forwarding federal and state income taxes. The property manager also makes all required payments for social security, unemployment insurance and disability insurance. [Calif. Unemployment Insurance Code §13020]
The property manager or landlord is required to carry workers’ compensation insurance to cover resident manager injuries on the job. Providing workers’ compensation coverage is imperative for any persons who employ individuals other than for casual labor.
The degree of control the property manager or landlord retains over a resident manager classifies the resident manager as an employee. A resident manager simply will not qualify as an independent contractor. Thus, the landlord or property manager who hires a resident manager may not avoid tax withholding, employer contributions or workers’ compensation premiums.
Rental value is not taxable income
Consider a property manager who hires a resident manager to run a large apartment complex. As part of their salary, the resident manager receives a unit rent-free plus a fixed monthly salary.
Is the value of the unit occupied by the resident manager considered income for state or federal tax reporting?
No! Taxwise, the value of the apartment is not reportable income for the resident manager. The reduction or elimination of rent is not declared as income when the unit occupied by the resident manager is:
- located on the premises managed;
- a convenience for the property manager or landlord; and
- occupied by the resident manager as a condition of employment. [26 CFR §1.119-1(b)]
Minimum wage requirements apply
A resident manager’s employment is subject to minimum wage laws even though the portion of the wages paid by a reduction or elimination of rent is not taxable as personal income. [Calif. Labor Code §1182.8]
Minimum wage requirements apply to resident managers. Resident managers carry out the instructions of the property manager or landlord. They do not have the authority to independently make their decisions on their own management policies. They are functionaries who carry out the decisions made at the discretion of the landlord or property manager. [8 CCR §11050(1)(B)(1)]
Even though the rent-free compensation is not taxed as income, the rent credit is included and considered when determining the resident manager’s pay for minimum wage requirements. The rent credit is used as all or part of the wages received per hour of work performed by a resident manager, limited by caps on the rent credit.
Two “caps” limit minimum wage calculations to control the amount of the rent credit. [8 CCR §11050(10)(C); Labor C §1182.13]
To keep wages per hour from dropping below the minimum dollar amount capped by the government, the property manager requires the resident manager to:
- prepare time cards;
- limit the number of hours per week the resident manager may work so wages per hour do not drop below the minimum dollar amount; and
- make provisions for the payment of any overtime permitted.
By requiring and reviewing these weekly work reports, the property manager may confirm the hours worked by the resident manager and that pay is in line with minimum wage requirements.
These reports will shield the property manager from a resident manager’s claim that they worked excessive hours in relation to their salary and the maximum rent credit allowed. [See RPI Form 591 §4]
Thus, all work requiring additional hours, except emergency work, is to be approved by the property manager as a matter of management policy.
For example, consider a resident manager who is provided with a unit and a base salary. The resident manager is required to remain on the premises at all times. However, they are only authorized to perform required work for a limited number of hours per day. The number of hours is set by the resident manager agreement. [See RPI Form 591 §4.4]
The resident manager claims to be entitled to overtime pay for the hours they are required to remain on the premises even though they are not working.
However, the resident manager is only entitled to receive compensation for the time they actually performed work agreed to in the resident manager agreement. No compensation is due for the time they were required to remain on call, but were not working. [Brewer v. Patel (1993) 20 CA4th 1017; Isner v. Falkenberg (March 18, 2008) 160 CA4th 1393]
Mismanaged, negligent resident managers
A resident manager is an employee of the property manager or the landlord who hires them. As an employer, the property manager or landlord is liable to others injured due to the resident manager’s negligence. [Calif. Civil Code §2338]
To avoid liability for negligent violations of law or personal injuries to others, the conduct of resident managers needs to be closely supervised by the property manager or landlord. Business liability insurance is a necessity for the landlord and the property manager. This insurance covers the landlord and the property manager for the liability exposure created by their own conduct or by the resident manager’s actions.
Termination of the resident manager
A resident manager agreement creates an at-will employment between the resident manager and the employing property manager or landlord. Thus, the resident manager’s employment may be terminated at any time and without prior notice.
While a landlord or property manager does not need to have a good reason to terminate a resident manager, they may not have an improper reason for terminating the resident manager. A property manager or landlord may not terminate the resident manager or otherwise harass them based on:
- disability;
- race;
- creed;
- color;
- gender;
- age; or
- other protected status.
An improper termination exposes the employing property manager or landlord to liability. [Stephens v. Coldwell Banker Commercial Group, Inc. (1988) 199 CA3d 1394]
Terminating a resident manager’s occupancy
Recall from the opening scenario that the resident manager agreement controls the resident manager’s right to occupy their unit as an employee. No separate lease or rental agreement is entered into or required (unless the property manager or landlord specifically intend to create a tenancy).
The resident manager agreement also controls when that right to occupy the unit is terminated. When a resident manager agreement requires the resident manager to surrender their unit upon termination of employment, the resident manager is not entitled to any notice to quit. The termination of employment is sufficient to terminate the resident manager’s occupancy.
If the terminated resident manager remains in possession of the property after their employment is terminated, they are unlawfully detaining the property and may be evicted.
To avoid creating a tenancy that continues on termination of the resident manager’s employment, the resident manager agreement will state:
- possession is incidental to employment;
- possession automatically ends concurrent with termination of employment; and
- failure to perform managerial duties constitutes a breach of the resident manager agreement and is grounds for immediate termination and eviction.
However, a caution: a property manager or landlord’s conduct can change the resident manager’s right of occupancy.
Conduct changes manager’s occupancy rights
Consider the landlord of an apartment complex who hires a resident manager to run the complex. In exchange for their services, the resident manager receives a monthly salary and an apartment, rent-free.
Under the resident manager agreement, the resident manager is to vacate the apartment unit on termination of their employment. Thus, the right of possession is extinguished when employment is terminated.
The landlord terminates the resident manager’s employment. The landlord then decides to serve the resident manager with notice to:
- immediately vacate and relinquish possession of the unit; or
- stay and pay monthly rent.
The resident manager remains in possession of the apartment, but fails to also pay the monthly rent called for in the notice to quit. Without further notice, the landlord begins UD proceedings to regain possession of the apartment from the terminated resident manager.
The resident manager claims that due to the notice they are now a tenant and the landlord needs to serve them with a notice to quit before the landlord may evict the resident manager in a UD action.
The landlord claims the resident manager is a holdover tenant unlawfully detaining the premises since the termination of their employment.
Is the resident manager entitled to a notice to vacate?
Yes! By serving the resident manager with a notice to quit which included an offer to remain in possession, the property manager converted the resident manager’s occupancy as an employee to a month-to-month tenancy.
Here, the resident manager’s continued occupancy of the apartment constituted acceptance of the new tenancy offered by the landlord. The failure to pay rent is merely a breach of the new tenancy agreement noted in the notice to stay and pay.
Thus, the landlord’s UD action may not be filed until proper notice to vacate is given to terminate the resident manager’s new tenancy. [Karz supra; CC §1946]
