The following article is published in response to an abundance of questions generated by the author's March 2002 article, "Contending With a Lawsuit," which addressed employment-law issues and, specifically, salary vs. hourly-wage requirements for facility managers. It is also in response to a recent lawsuit filed by a group of self-storage managers and former managers who have sued for a violation of the Fair Labor Standards Act. They claim their employer failed to pay overtime, alleging they were not exempt employees, and were required to work more than 40 hours per week without appropriate compensation. The suit seeks class certification for approximately 60 parties (John Whithouse, et. al. v. Ash Properties, d.b.a., Atlantic Self Storage).
Thank you all for the e-mails and phone calls regarding my March 2002 article. I cannot recall a topic that has generated even close to the same response as this one. While I am not an employment-law expert, I want to use this month's column to revisit the issue, and reprint and answer the questions some of you have asked.
First, let's review. The issue of exempt and nonexempt employees, and the requirements of paying overtime to nonexempt employees, is governed by the Fair Labor Standards Act. This act, in part, sets a minimum wage and a maximum number of hours that can be worked in a week by a nonexempt employee before overtime has to be paid. In theory, depending on how you operate your facility, your manager may be exempt from the requirement to pay him an hourly wage and overtime for any work performed over 40 hours a week or, in certain circumstances, eight hours a day.
Recently, I have been seeing many cases involving the issue of manager wages. In certain industries, such as apartment-management, some managers are filing claims for overtime when ownership treated them as salaried-exempt employees. Courts are finding the managers were not actually exempt and entitled to compensation in the form of overtime for all additional hours of work. From the response to my recent article, I gather this is also a hot issue in the self-storage industry.
Generally speaking, for a manager to be exempt from the requirements of the Fair Labor and Standards Act, he must be an executive, professional or administrative employee. He must receive a fixed salary, even if he does not work a 40-hour work week. An executive must manage at least two other employees and exercise a significant amount of discretion and independent judgement in doing his job. The administrative exemption is more like a project manager rather than a manager of employees. Still, an administrative employee must exercise a substantial amount of independent discretion in his position, be included in decisions that directly relate to the company's management policies, and operate with only general supervision.
In either position, the exempt employee's work must significantly relate to the success or failure of the business. If a self-storage manager is managing two other people and exercising a significant amount of independent judgment and discretion in doing his job, and his decision-making truly has an effect on the success or the failure of the facility, he may be exempt. If you want to be certain about this classification, seek advice from an employment- or labor-law attorney.
For most of you, however, your manager will not be exempt from the act and, among other things, must be paid overtime if he works more than 40 hours in a given week. The particular complication in this industry is managers often live on site in an adjacent home or apartment, and part of their compensation package is free or reduced rent. This benefit complicates the overtime question. Listed below is a smattering of the questions I have received from several readers since publication of the March issue.
Q: What if I have a manager who works a 40-hour week but also closes the gate and walks the premises at night, and/or fields phone calls forwarded from the office at night?
A: In this general description, those services provided after hours would have to be compensated at an overtime rate of pay--assuming the manager is a nonexempt employee and works a 40-hour week in the office.
Q: Suppose the same manager does some work around the premises of his own volition--for example, tending to the front landscaping and walking the premises at night for his own comfort and security. We have a time clock. What if he clocks out before performing these duties or does not clock back in when he does them?
A: Obviously, the best defense to a wage-and-hour claim is a time sheet or card, verified by the employee, showing a 40-hour work week and 40 hours of pay requested. However, a time card is not indisputable. The employee could come back later and say you told him he had to do this extra work off the clock by threat of losing his job or having his hours cut. In the end, the time records should carry the day; but please understand I am not recommending you allow nonexempt employees to work more than 40 hours a week while filling in a time card for only 40 to avoid potential liability.
Q: We have heard some owners in the industry have instituted a policy that the employee may only work in the office 36 hours a week so the extras of night phone calls, gate shutdowns and other emergencies will not cause the employee to exceed 40 hours. Is this an acceptable alternative?
A: This is a perfectly legitimate policy and will avoid the requirement to pay overtime--so long as the "extras" do not allow the total hours to exceed more than 40 hours of work in any given week. Keep in mind you are required to keep records of all hours worked by your nonexempt employees.
Q: Does vacation pay count as hours in the calculation of a 40-hour work week?
A: The answer is no. Let's say a manager takes a vacation day on Monday and then works eight hours a day Tuesday through Friday. If you ask the manager to work on Saturday, up to eight hours of weekend work can be performed at the straight hourly wage, even though you are technically paying for 48 hours that week.
Q: I provide an apartment for my manager to live in on site, as a result of which, the hourly rate I pay him is significantly reduced. I know for the purpose of taxation the employee does not count the residence as income, but does it count in the calculation for overtime hours and, if so, how?
A: The Department of Labor is very clear on this issue. The answer is that the fair market value of rent for the apartment is calculated in the formula to determine the overtime rate of pay. The department assesses a fair market value to the apartment if you have not already done so. You take the rate of rent and divide it by the 173 hours on average that would be worked in a month. Then add that amount to the wage to determine the "real hourly wage." The amount of overtime would be one-and-a-half times the amount of the real hourly wage, not the actual paid wage.
This is an interesting and complicated issue from our industry's perspective because self-storage is unique in providing this benefit. It gives you two alternatives. First, you can have an agreed fair market value (as low as possible) stated in your employment contract or lease agreement. If you end up having to pay overtime, it will be based on as low an hourly rate as possible, as opposed to allowing the Department of Labor to assign its version of a fair market value. Alternatively, it may be cleaner to simply pay the employee the normal hourly wage and deduct fair rent from his earnings to pay the rent back to you. This option may have a negative tax implication to your employee; however, it certainly makes the issue of the calculation of overtime much simpler.
The Department of Labor actually has very helpful people in its Wage and Hour Division. You can call them in Washington at 866.487.9243 or 877.889.5627. Unlike in many government agencies, the people at this particular department really do seem to know what they are doing and wish to help employers obtain proper answers to be protected. I am also happy to field questions as best I can via phone or e-mail.
If you are not properly paying overtime, the issue may very likely be raised by a former disgruntled or dissatisfied employee. Once that type of investigation or litigation is commenced, the Department of Labor can look back two and three years in the event of a willful violation. Not only could you be facing a large legal bill but a large penalty to the Department of Labor and money due to the former employee.
If, after reading this article and speaking with your attorney, you realize you have not been properly paying a nonexempt employee, the worst thing to do is ignore it and hope your employee never catches on. The first thing you should do is switch that employee to an hourly system with appropriate pay for overtime. If he remains employed with you for at least two years after you have corrected the problem, it would be hard for he or the Department of Labor to sustain any charge against you.
You can also get a release from the employee for appropriate and adequate consideration. If you have an employee you have been paying incorrectly, but you don't think he is going to last another two years and are afraid of facing charges, you can settle the claim with him directly. This type of arrangement must be negotiated through your attorney. Proper and enforceable releases need to be executed to protect you from being sued after you have paid money.
Finally, remember exemption status is a sticky and fact-specific issue. The determination of an exempt or nonexempt employee is not an exact science, but you should try and make that determination as honestly and appropriately as you can. If you have nonexempt managers, you should be paying them overtime if they are working more than 40 hours a week. The cost of not doing so and getting caught can be severe.
Jeffrey Greenberger practices with the law firm of Katz Greenberger & Norton LLP in Cincinnati, which primarily represents owners and operators of commercial real estate, including self-storage. Mr. Greenberger is licensed to practice in the states of Ohio and Kentucky, and is the legal counsel for the Ohio Self Storage Owners Society and the Kentucky Self Storage Association. He is a regular contributor to Inside Self-Storage magazine and the tradeshows it sponsors. For more information, Mr. Greenberger can be contacted at Katz Greenberger & Norton LLP, 105 E. Fourth St., Suite 400, Cincinnati, OH 45202, or by calling 513.721.5151.