SCOTUS weighs in on a case that is relevant to disputes that arise between landlords and resident managers

Last Updated: November 3, 2022By

By Daniel Bornstein, Esq.

U.S. Supreme Court deals a blow to PAGA, ruling that arbitration agreements governed by federal law may require arbitration of PAGA claims on an individual basis only. 

Bornstein Law has said many times and in many ways that if landlords do not take care of their tenants or do not follow the law, a six-figure lawsuit can follow. Most of the time, the defendants are not bad landlords or bad people, but simply have an ignorance of the law. But what about taking care of resident managers?

There is no quicker way to destroy a rental business than having a dispute arise with a resident manager and you are not in compliance with a myriad of laws related to employment.

During the heart of the pandemic, we said that landlords wore many hats. More than housing providers, landlords became de facto credit counselors and social workers by educating tenants on their rights and seeking rental assistance funds. Make no mistake that when a resident manager is hired, the landlord wears the hat of an employer and must act as such.

As a refresher,

“A manager, janitor, housekeeper, or other responsible person shall reside upon the premises and shall have charge of every apartment house in which there are 16 or more apartments, and of every hotel in which there are 12 or more guest rooms, in the event that the owner of an apartment house or hotel does not reside upon said premises. Only one caretaker would be required for all structures under one ownership and on one contiguous parcel of land.”

Cal. Code Regs. tit. 25 § 42

Under California’s employment laws, a resident manager is an employee who must be compensated for their services. Keep in mind that as an employer, landlords must comply with rules related to minimum wage, the maximum rent that may be charged, and the amount of rent that can be credited toward the minimum wages owed. Further complications arise when resident managers are subsequently asked to do handyman work and in this capacity, the resident manager is working outside their scope of duties and works more hours than is offset by the rent reduction.

Resident managers asked to do handyman work and not being compensated properly may have a wage and hour claim against their landlord for minimum wages, overtime, meal and rest break premiums, itemized wage statements, and sick leave.

Other issues abound.

Introducing the Private Attorneys General Act (PAGA)

Enacted in 2004, PAGA authorizes aggrieved employees to file lawsuits to recover civil penalties for Labor Code violations not only for themselves but on behalf of other employees and the State of California. That’s right – workers can pursue civil penalties as if they were a state agency. The law was written because the besieged Labor Workforce Development Agency(LWDA) did not have enough resources to enforce many labor law violations. PAGA empowers individual employees, such as resident managers, to act as an agent or proxies for the state’s labor law enforcement.

Let’s say an aggrieved resident manager sues his or her employer in order to recover unpaid wages and penalties. It doesn’t stop there. They can also sue to recover civil penalties on behalf of all the other similarly situated resident managers who were hired in other buildings.

Enterprising attorneys are all-too-willing to file these lawsuits.

The litigation does not have to meet class action lawsuit requirements, which means they are much easier to proceed with, and monetary awards that can be levied against the employer can be a staggering amount. Many attorneys salivate over PAGA actions because a lucrative paycheck awaits them.

Even if the employer has Employment Practices Liability Insurance (EPLI), these types of policies may not cover the defense costs associated with disputes over wages and hours, forcing the employer to pay legal fees and any award or settlement out-of-pocket. These threatened penalties often compel employers to choose between settling the case or risking six or even seven figures to litigate the case.

U.S. Supreme Court deals a blow to PAGA, ruling that arbitration agreements governed by federal law may require arbitration of PAGA claims on an individual basis only. 

When a divided nation set its sites on Roe v. Wade, Bornstein Law was anticipating a decision in Viking River Cruises, Inc. v. Moriana, a case that seemingly resolves some issues that have vexed landlords throughout California.

The law is always cleaner on the page than it is in real life, and for nearly two decades, there have been many questions surrounding PAGA that had to be aired in court.

One question that made it all of the way to the U.S Supreme Court: Does the Federal Arbitration Act (FAA) require enforcement of a bilateral arbitration agreement with respect to an individual claim under PAGA? The high court’s answer was yes.

This is a victory for California employers that will likely lead to the enforcement of arbitration agreements, compelling individual PAGA claims to arbitration. The court reasoned in Iskanian v. CLS Transportation Los Angeles that the FAA preempts California state law, which mandated the joinder of non-individual PAGA claims with individual PAGA claims, resulting in incompatibility with the FAA.

The court’s analysis, however, suggests that whether courts will compel arbitration of individual PAGA claims may turn on the specific language of the arbitration agreement at issue. There can be no wholesale waiver of PAGA claims.

If the landlord provides a sweeping arbitration clause that waives the right of the resident manager to bring representative PAGA claims on behalf of the state and all other similarly situated aggrieved employees, this provision is invalid if it is construed to be a wholesale waiver of PAGA claims.

We hasten to say that if there is a severability clause in the agreement that provides that if the waiver provision is invalid in some respect, any “portion” of the waiver that remains valid must still be enforceable in arbitration – the employer is entitled to enforce the agreement insofar as it manded arbitration of the employee’s individual PAGA claim. This is because the U.S. Supreme Court held that federal law preempts the state rule that PAGA actions cannot be divided into individual and non-individual claims.

It would follow that the landlord can enforce the arbitration agreement insofar as it mandates arbitration of a resident manager’s individual PAGA claim, yet the employee would lack statutory standing to continue his or her non-individual PAGA claims in court. Why? Because their individual PAGA claims would have already been adjudicated in a separate proceeding.

Put differently by the court in Moriana, ” When an employee’s own dispute is pared away from the PAGA action, the employee is no different from a member of the general public, and PAGA does not allow such persons to maintain suit.”

Our recommendations for landlords with resident managers

First and foremost, you must take care of your resident managers and familiarize yourself with the obligations of being an employer. We want to avoid any disputes down the road, but if they occur, we want to rely on ironclad, written agreements with all of your resident managers.

In light of recent case law, take a hard look at your arbitration clause with careful attention to a severability clause.

A recurring theme of our practice is landlords using stale or templated documents from the Internet that do not take into account changing laws. Please review any existing agreements you have entered into with your resident managers with competent counsel.

Keep a meticulous accounting of the hours worked by the manager, and it is prudent to have the employee add up the total hours he or she worked in the course of a month and submit a written certification to the landlord. This will prevent disgruntled resident managers from claiming they worked more hours than they actually did.

Finally, reach out to Bornstein Law, a firm that handles landlord-tenant disputes on a daily basis. If the matter is a bit more convoluted, we can refer you to a qualified attorney who specializes in the nuances of employment law.

ABOUT DANIEL BORNSTEIN

More than a practitioner in landlord-tenant law, Daniel Bornstein is the Broker of Record for Bay Property Group, a property management company that protects and optimizes the investments of landlords. He is also renowned for his educational seminars and is called upon as an expert witness in complex real estate litigation matters. To avoid or resolve friction within rental units and cauterize risk, Daniel is happy to dispense informed advice to owners, property managers, and other real estate professionals looking to survive and thrive in today’s challenging and litigious rental housing market. Call 415-409-7611 or email daniel@bornstein.law.

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