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Lodging Credit Against Minimum Wage for Apartment or Hotel/Motel Employees

If you own an apartment or hotel/motel and provide free lodging to your employee(s), pay attention. Otherwise, the rest of you California employers can take a breather.

A common practice in the apartment/hotel/motel industry is to allow the manager to live in one of your apartments or hotel/motel room rent free. Also common is the belief this “free rent” is part of the employee’s wages. This is true if done properly. Failure to do this properly, can result in all kinds of wage and hour headaches.

The scenario goes like this:

Apartment or Motel manager lives on the property. Employer pays apartment/motel manager a salary and provides free rent. Motel manager is responsible 24/7 for the property. Employer treats apartment/motel manager as exempt and does not pay for overtime. Employer maintains no detailed time records on manager because employer treats manager as exempt.

At least the following pitfalls exist with this scenario:

  1. If the “manager” either is not paid enough salary (the equivalent of at least twice the minimum wage) or does not meet the “duties” test or other tests to meet an overtime “exemption,” the manager is non-exempt, and you must pay overtime.
  2. If the manager is non-exempt and you don’t have detailed time records for every hour worked, then it’s difficult to determine whether the manager performed any overtime work.
  3. Although the law permits a lodging credit, an employer may not use the lodging credit to meet the salary basis test. In other words, a California employer may not add the value of the lodging to the salary in order to meet the salary basis test (i.e. the equivalent of twice the minimum wage mentioned above). If you don’t meet the salary basis test, your manager is non-exempt.
  4. If you have a non-exempt employee, an apartment/hotel/motel employer may use lodging as a credit against minimum wage using certain rules. Under federal wage and hour law (the FLSA) an employer may use the “cost” of the lodging as an offset against the federal minimum wage obligation. Under California wage and hour law, the credit depends on whether it’s a room or an apartment and whether the lodging is shared (though an employer cannot required an employee share a room) and whether it is used on a daily, weekly or monthly basis. Further, the California wage orders put a maximum on the credit an employer can take against California minimum wage.

There is currently a disagreement among federal courts interpreting California lodging credit law and at least one California court of appeal. Federal courts have ruled the agreement to use a lodging credit against California minimum wage must be in writing and must be very explicit. The written agreement must expressly state the parties’ intent to apply the value of the lodging (up the maximum permitted by California law) against the minimum wage. Those federal courts say if the agreement is not explicit, it is invalid and the free lodging cannot be used as a credit against California minimum wage.

A recent California case (Von Nothdurft v. Steck) takes a more employer friendly approach. The Von Northdurft case says the agreement between employer and employee must be in writing, but the agreement need not be perfect. So long as the written agreement can be said to capture the employer’s and employee’s intent that the “free rent” was to be included as part of the non-exempt employee’s wages, then the value of the free rent (up to the California maximums) can be used as a credit against minimum wage. The agreement need not use the express words that the free rent will be used as a credit against minimum wage.

As the court stated in Von Nothdurft, the employee who got the free rent “can’t have it both ways.” We, at Vision Law®, like it. And we happen to agree with the Von Nothdurft Court. But it remains to be seen whether other California courts or other federal courts interpreting the California lodging credit will follow suit.

It’s not every day we see a court putting the clamps down on employee’s filing suit against employers in the California. Usually is the other way around.