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Employee Housing Assistance – Legal Considerations for California Public Agencies
In light of California’s housing shortage and high housing costs, public employees and candidates struggle to find affordable housing options. In turn, public agencies may be considering measures to help employees find viable housing options near the workplace, and may even consider investing in employee housing. Local affordable housing for employees and candidates can improve employee recruitment and retention, strengthen the connection between employees and the community they serve, increase employee availability for overtime shifts, reduce traffic congestion, and keep tired shift workers off the road.
There are, however, a myriad of legal considerations and compensation issues that public agencies should evaluate before offering employee housing as a fringe benefit, including the following:
Is the Value of Employee Housing Taxable?
Most likely. Under IRS regulations, employees are generally required to report the fair market value of employer-provided lodging in gross income. However, employees may exclude the value of such lodging if it is located on the employer’s business premises, provided for the convenience of the employer, and if the employee is required to accept lodging as a condition of employment. (26 U.S.C. § 119.) In California, even lodging that complies with these requirements is subject to State Unemployment Insurance, Employment Training Tax and State Disability Insurance. (22 C.C.R. § 926-3.) Employers should be aware that California has special rules pertaining to the calculation of the estimated cash value of lodging to an employee. (Ibid.)
Does the Value of Employee Housing Affect Regular Rate of Pay Calculations?
There are potential impacts. Fair Labor Standards Act (FLSA) regulations require that the reasonable cost or fair market value of employee lodging be included in the regular rate of pay for the purpose of overtime calculation. (29 U.S.C. § 203(m); 29 C.F.R. § 778.116; 29 C.F.R. § 531.37(b); 29 C.F.R. § 778.217(d); Walling v. Alaska Pac. Consol. Min. Co. (9th Cir. 1945) 152 F.2d 812, 815; McLaughlin v. Quan (D.Colo. June 17, 1988) 1988 WL 62595.) Possible exceptions exist where a collective bargaining agreement excludes the cost of lodging from wages, and where the arrangement primarily benefits the employer. (Jiao v. Shi Ya Chen (S.D.N.Y., Mar. 30, 2007) 2007 WL 4944767, at *13.) Whether an arrangement primarily benefits the employer is determined by balancing the relative benefits to an employer and employee. (Roces v. Reno Housing Authority (D.Nev. 2018) 300 F.Supp.3d 1172.) Because this is somewhat unchartered territory, agencies are advised to seek legal counsel to assess regular rate calculations related to employee housing.
Is the Value of Employee Housing Pensionable Compensation?
Probably not. For “new members” under Public Employees’ Pension Reform Act (PEPRA), any employer-provided allowance, reimbursement, or payment for housing is excludable from pensionable compensation. (Gov. Code, § 7522.34(c).) This is also true for “legacy” members in a 1937 Retirement Act (“’37 Act”) system, which expressly excludes the value of lodging from pensionable compensation. (Gov. Code, § 31460.) With the exception of State employees, the CalPERS retirement system does not consider employee housing costs to be compensation earnable for “classic” employees. (Gov. Code § 20636(g)(3).)
Do Public Agencies Have to Negotiate with Labor Unions Over Employee Housing As a Fringe Benefit?
Most likely. Under federal labor law, employee housing as a fringe benefit falls within the scope of bargaining and is considered integral to the employee-employer relationship. (Lehigh Portland Cement Co. (1952) 101 NLRB 1010 [31 LRRM 1097], enf’d (4th Cir. 1953) Los F.2d 821 [32 LRRM 2463]; American Smelting & Refining Co. (1967) 167 NLRB 204, enfd. (9th Cir. 1969) 406 F.2d 562, cert. denied, (1969) 89 S.Ct. 1998.) These cases involved rental units owned by the employer and made available to employees to rent at a reduced cost. The NLRB has consistently held that where ownership and management of the units materially affect the conditions of employment, rental of employer-furnished housing is within the scope of bargaining. The Public Employment Relations Board (PERB) has recognized such private sector cases, but only to opine that housing is a matter of employer-employee relations for the purpose of Government Code section 3515, entitling a State employee to representation. (California Department of Developmental Services (1982) PERB No. 228-S.)
Where employees are required to live on employer premises for the convenience of the employer, the impacts and effects of such a requirement may also be subject to bargaining. However, legal guidance on this question is limited.
Where housing is a fringe benefit, negotiable issues may include a host of topics affecting terms and conditions of employment. Examples of subjects that could be raised during collective bargaining include: employee eligibility for housing (e.g., are part time employees eligible? Is there a service requirement?), method of allocation (e.g., seniority vs. first come, first served), rental costs for the employee, security deposits, utilities and upkeep costs.
Does Providing Employee Housing Create a New Type of Relationship?
Yes. Depending on the nature of employee housing, an agency may be establishing a landlord-tenant relationship with the employee. Agencies should obtain a signed employee housing agreement from each individual employee, prepared by legal counsel.
An employee housing agreement should address issues such as the following: What happens if an employee separates from employment? Is the employee’s work for the employer partial or even full consideration for the lodging? Can employees be evicted, and under what circumstances? How much time will employees have to vacate? Can an employee’s family members/roommates/pets live there? Who is liable for damage caused by the employee or their family members, roommates, or pets? Can employees sublet the unit or part of the unit? What rules apply while they live there? What happens if the employee or a family member/roommate violates the housing rules?
For represented employees, while agencies should provide a labor organization with the opportunity to bargain over housing as a fringe benefit, they should also enter into an employee housing agreement with each affected, individual employee. Some issues addressed in an employee housing agreement, which govern the landlord-tenant relationship between the employer and employee, could be subject to bargaining between an agency and labor union as part of the labor relationship. Because agencies must take care to avoid direct dealing with individual employees over matters within the scope of bargaining, and because there is a lack of legal guidance distinguishing between these two types of agreements, agencies should seek legal counsel to navigate these arrangements.
Be aware that under the California Constitution, local public agencies cannot require their employees to reside within their jurisdiction. (Cal. Const., art. XI, § 10, subd. (b).) However, agencies may require employees to reside within a reasonable distance of a designated location. In some cases, as a recruitment tool where there is a legitimate public purpose, agencies can offer interest-bearing housing loans contingent on the property being within the city limits. (77 Ops Cal Atty Gen 170 (1994).)
While the California Constitution also prohibits gifts of public funds, loans or gifts may be valid if they are for a reasonable public purpose as recognized by the governing body, even if there is an incidental private benefit. (Cal.Const., art XVI, § 6; 77 Ops Cal Atty Gen 170 (1994).) In a 1994 opinion letter, the California Attorney General recognized a reasonable public purpose justifying a public agency’s home loan to a police chief to enable purchase of a home within its jurisdiction. The reasonable public purpose included public employee recruitment and retention, encouraging a community partnership between an agency’s police department and community members, giving the police chief a personal stake in the well-being of the community, and ensuring the chief’s availability during the critical hours immediately following catastrophic events. (Ibid.) Employee housing as a fringe benefit may further these same goals for public agencies. However, agencies should clearly articulate the public purpose of employee housing benefits when approving expenditures via governing body resolutions.
Besides Providing Housing, What Else Can A Public Agency Do To Ease The Housing Crisis for Its Employees?
Other options may help public employees live closer to their workplace. Agencies can look to these potential strategies:
- Offer housing assistance grants for rent, security deposits, down payments, closing costs, and moving expenses. Potential funding sources include an agency’s general fund, fee revenue, federal, state or private grant money, and even employee contributions;
- Work with developers and local housing authorities to attain public employee access to affordable “workforce housing;”
- Partner with lending institutions to establish revolving loan programs for employees;
- Solicit third parties, such as educational institutions and non-profits, to offer affordable housing and access to sleeping quarters for employees, especially shift workers; and
- Offer home ownership education and counseling for employees.
Finally, transportation subsidies, telework options, and flexible shifts can alleviate the impact of draining commutes on employees. Such options are generally simpler to navigate, and thus may be more appealing to agencies.
Be sure to work with legal counsel to evaluate housing assistance strategies and corresponding legal considerations. While employee housing can be an effective recruitment and retention tool, be prepared to address legal issues ahead of time to avoid potential liability.
This article was originally published in the California Lawyers Association Public Law Journal on April 14, 2020.