Questions
- Q. What is a section 3(m) credit?
- Q. Under what circumstances may an employer claim the Section 3(m) credit for lodging?
- Q. What does it mean for lodging to be “regularly provided by the employer or similar employers”?
- Q. How do you determine if the employee “voluntarily accepted” the lodging?
- Q. What does is mean for lodging to be provided “in compliance with Federal, State, and Local Laws”?
- Q. What does it mean for an employee to receive the “primary benefit of the lodging” in the section 3(m) context?
- Q. When is housing “adequate” for purposes of whether an employer can claim a section 3(m) credit?
- Q. How does an employer comply with the requirement to keep accurate records with regard to section 3(m)?
- Q. How does Section 3(m) apply if a live-in home care worker is a member of a union or subject to a collective bargaining agreement (CBA)?
- Q. How do you determine the amount of a section 3(m) credit?
- Q. What is the “reasonable cost” of the facilities?
- Q. What is the “fair value” of the facilities?
- Q. What portion of the cost or value of lodging can be applied as a section 3(m) credit?
- Q. Once the “reasonable cost” and/or “fair value” is determined, how do you determine if you’re in compliance with minimum wage and/or overtime provisions?
- Q. Please provide an example of how to determine if I have met the minimum wage and overtime provisions for a live-in employee.
- Q. Are employers required to pay a cash wage if they are claiming the 3(m) credit, if the credit covers the federal minimum wage rate?
- Q. If joint employment exists, can section 3(m) be claimed by both employers?
- Q. Where can I find more information on 3(m) and/or Home Care?
Answers
1. Q. What is a section 3(m) credit?
A. Section 3(m) of the FLSA allows an employer to count the value of food, housing, or other facilities provided to employees towards wages under certain circumstances.
2. Q. Under what circumstances may an employer claim the Section 3(m) credit for lodging?
A. An employer who wishes to claim the section 3(m) credit for lodging must ensure that the following five requirements are met:
- Lodging must be regularly provided by the employer or similar employers;
- The employee must voluntarily accept the lodging;
- The lodging must be furnished in compliance with applicable federal, state, or local laws;
- The lodging must primarily benefit the employee, rather than the employer; and
- The employer must maintain accurate records of the costs incurred in the furnishing of the lodging.
3. Q. What does it mean for lodging to be “regularly provided by the employer or similar employers”?
A. Employers may only take advantage of section 3(m) if the lodging is “furnished regularly by the employer to his employees or if the same or similar facilities are customarily furnished by other employers engaged in the same or similar trade, business, or occupation in the same or similar communities.” For example, live-in domestic service employees (such as home care workers and nannies who live at the home where they provide services) often reside at their employers’ private homes without paying rent, so this requirement is met for those workers.1 Similarly, agricultural workers are often provided housing during harvest season by their employers, so this requirement is met for workers under those circumstances as well.
4. Q. How do you determine if the employee “voluntarily accepted” the lodging?
A. Employees must accept lodging voluntarily and without coercion in order for an employer to take advantage of section 3(m). DOL will normally consider the lodging as voluntarily accepted by the employee when living at or near the site of the work is necessary to performing the job. For example, this requirement is typically met when a live-in domestic service employee and the employer have an understanding that the employee will live on the premises as a condition of employment, or when an apartment complex provides a free apartment to the complex manager. In other circumstances, DOL will look for an indication, such as a written agreement, that the employee voluntarily agreed to live in a residence provided by the employer.
5. Q. What does is mean for lodging to be provided “in compliance with Federal, State, and Local Laws”?
A. Employers may not include the cost of lodging as part of employees’ wages if the lodging provided is in violation of any Federal, State, or local laws, ordinance or prohibition. For example, the DOL will not allow a section 3(m) credit if the lodging provided does not have or has been denied a required occupancy permit or is not zoned for residential use. Similarly, courts have disallowed an employer’s use of the section 3(m) credit in circumstances in which lodging was substandard or not compliant with law. DOL will look into any suggestions that employer-provided lodging is substandard such that its condition violates law.
6. Q. What does it mean for an employee to receive the “primary benefit of the lodging” in the section 3(m) context?
A. Lodging is ordinarily presumed to be for the primary benefit and convenience of the employee unless there is an indication that the lodging is of little benefit to employees, such as where an employer requires an employee to live on the employer’s premises to meet some need of the employer. It’s likely that an employer may not claim the section 3(m) credit if the employer requires the employee to leave an existing home and live on the employer’s premises to be ‘on call’ to meet the needs of the employer.
7. Q. When is housing “adequate” for purposes of whether an employer can claim a section 3(m) credit?
A. Whether the employer has provided an employee with adequate lodging is a factor that may help determine who primarily benefits from the living arrangement and the lodging provided—and therefore whether an employer may take the credit. For example, if an employer provides an employee with private living quarters such as a separate bedroom that is furnished (with, for example, a bed, night table, and dresser) where the employee is able to leave her belongings and spend her off-duty time, those facts are indications (to be considered along with other facts about the arrangement) that the primary beneficiary of the lodging is the employee. Similarly, if the employer provides the employee with access to a kitchen and a private bathroom, such facilities support a finding that the lodging is primarily for the benefit of the employee (although such facilities are not a prerequisite for taking the section 3(m) credit). Such private quarters typically ensure that the employee is able to engage in normal private pursuits as she would in her own home.
8. Q. How does an employer comply with the requirement to keep accurate records with regard to section 3(m)?
A. An employer claiming the section 3(m) credit must generally keep two kinds of records: (1) records regarding the cost to the employer of providing the housing and (2) records regarding wage calculations taking lodging into account.
Records regarding the cost to the employer of providing the housing should show how much money the employer spends on the housing, such as proof of mortgage or rental payments and/or utility bills. With respect to live-in domestic service employees only, an employer that does not provide such records may claim a certain amount—up to seven and one-half times the statutory minimum hourly wage for each week lodging is furnished, currently $54.38 (7.5 x $7.25)—toward wages rather than the reasonable cost or fair value of the housing provided.
Records regarding wage calculations must show section 3(m) additions to or deductions from wages if those additions or deductions affect the total cash wages owed. Specifically, if because of a section 3(m) credit, an employee receives less in cash wages than the minimum wage for each hour worked in the workweek, the employer must maintain records showing on a workweek basis those additions to or deductions from wages. An employer must also maintain such records if an employee is owed overtime in a workweek and the employer has taken a section 3(m) credit.
9. Q. How does Section 3(m) apply if a live-in home care worker is a member of a union or subject to a collective bargaining agreement (CBA)?
A. An employer may not include in an employee’s wage the cost of lodging if it is excluded under the terms of a bona fide collective bargaining agreement (CBA) applicable to the particular employee. The determination of whether a CBA contains an exclusion of the cost of lodging that would otherwise qualify for a section 3(m) credit will be based upon the written provisions of the CBA.
10. Q. How do you determine the amount of a section 3(m) credit?
A. The section 3(m) credit may not exceed the “reasonable cost” or “fair value” of the facilities furnished, whichever is less. If the actual cost to the employer exceeds the rental value of the lodging, or the employer otherwise establishes a “reasonable cost” that appears to be excessive in relation to the facilities furnished, the employer may only count the lower, fair value of the lodging toward wages. Similarly, an employer may only use the fair value of housing as the amount credited toward wages if that amount is equal to or lower than the amount the employer actually pays for the housing.
11. Q. What is the “reasonable cost” of the facilities?
A. The “reasonable cost” is not more than the actual cost to the employer of the housing. In other words, “reasonable cost” does not include a profit to the employer. The actual cost to an employer of providing lodging to such a worker could be, for example, a portion of the monthly mortgage or rental payment as well as utility payments.
The source of the funds the employer uses to provide the property is not relevant. The actual cost an employer pays may include private money and/or other funds provided to the employer, such as public assistance provided to certain individuals who employ home care workers. For purposes of calculating a section 3(m) credit, it is significant only that an employer, rather than the employee or another party that is not an employer, pays for the housing, not how the employer obtained the funds for such payments.
12. Q. What is the “fair value” of the facilities?
A. There is no specific formula for determining fair value. DOL may approximate the fair value of lodging by considering average rental prices in the area for similar homes. DOL may estimate these amounts by, for example, using fair market rent data for a particular locality as published by the U.S. Department of Housing and Urban Development, available at http://www.huduser.org/portal/datasets/fmr.html, searching for comparable rental units online, or requesting information from local real estate brokers or other experts. DOL may also consider the reasonable cost of lodging claimed by similarly situated employers if such information is available.
13. Q. What portion of the cost or value of lodging can be applied as a section 3(m) credit?
A. The portion of the cost of the residence in which an employee lives that may be counted as part of wages must be a reasonable approximation of the worker’s share of the housing. There is no formula for determining the appropriate fraction of the mortgage, rental, or other costs of the lodging that applies to a particular employee; instead, the employer or DOL must take into account the specific circumstances.
Example 1: In a large house in which a family of five and a home care worker reside, the amount might most appropriately be determined based on the ratio of the square footage of the employee’s bedroom to the square footage of the entire house.
Example 2: In an apartment shared by a recipient of home care services and a paid roommate, where the two individuals have equal use of the kitchen and common living spaces, the appropriate amount of a section 3(m) credit might be half of the rental cost of the unit.
Example 3: If three agricultural workers are sharing a small cottage provided by the employer, then the appropriate amount of a section 3(m) credit that could properly be counted toward each employee’s wages would likely only be one-third of the cost of the cottage.
14. Q. Once the “reasonable cost” and/or “fair value” is determined, how do you determine if you’re in compliance with minimum wage and/or overtime provisions?
A. To calculate an hourly rate including the section 3(m) credit, the value of the lodging is added to cash wages (excluding overtime compensation) and divided by the hours worked in a given week. The credit goes toward the employer’s minimum wage obligation and therefore is included in the determination of the employee’s regular rate of pay for purposes of calculating any overtime compensation due.
The value of lodging must be calculated on a workweek-by-workweek basis so it can be added to cash wages for purposes of assessing whether the employer’s minimum wage obligation has been met and determining the regular rate of pay upon which any overtime compensation due must be calculated. For example, the weekly reasonable cost can be calculated based on a monthly mortgage or rental amount by multiplying the monthly amount by 12 and dividing by 52. As to costs that vary over time, such as utility bills, DOL will consider the specific costs for the time period covered in an investigation, based on the employer’s records, although DOL may in its discretion use (or accept an employer’s use of) average amounts, if the approximation is reasonable.
15. Q. Please provide an example of how to determine if I have met the minimum wage and overtime provisions for a live-in employee.
Example 1: Assume a live-in domestic service employee (including home care workers) receives $6 per hour as well as room and board, for which the reasonable cost is $100 per week. If the employee works 30 hours in a workweek, the $180 ($6 x 30) cash wages is added to the $100 in section 3(m) credit for a total of $280 received in the week, which amounts to a regular rate of $9.33 ($280 / 30) per hour. Assuming the room and board credit is properly taken, this payment structure complies with the federal minimum wage requirement (that an employer pay at least $7.25 per hour).
Example 2: If during the following week, the same live-in domestic service employee (including home care workers) worked for 50 hours, the employer’s minimum wage obligation would still be met, but the employee may or may not be due additional compensation for the hours worked over 40. Specifically, she would receive $300 ($6 x 50) in cash wages plus $100 in section 3(m) credit for a total of $400, which amounts to a regular rate of $8 ($400 / 50) per hour. If this live-in domestic service employee is employed by an agency or other third party employer, she would be owed an additional $40 ($8 x .5 x 10) in overtime compensation because live-in domestic service employees employed by an agency or other third party employer are entitled to overtime compensation. If the live-in domestic service employee is employed by the consumer (or the consumer’s family or household) and not by any agency or other third party, the consumer (or family or household) could claim the live-in domestic service employee overtime exemption and the $400 in compensation would suffice because she would be paid at least the federal minimum wage for each hour worked.
Note: If it is determined, after applying the fact-specific economic realities test, that joint employment exists, all joint employers are responsible, both individually and jointly, for compliance with all of the applicable provisions of the act, including the overtime provisions, with respect to the entire employment for the particular workweek. However, the live-in exemption from overtime in this situation, can only be claimed by the consumer (or the consumer’s family or household).
Note: An employer may not use the section 3(m) credit for the purpose of evading the overtime compensation requirement.
16. Q. Are employers required to pay a cash wage if they are claiming the 3(m) credit, if the credit covers the federal minimum wage rate?
A. No. The section 3(m) credit may be the sole payment an employee receives, provided it is sufficient to cover the employer’s minimum wage obligation.
For example, a maintenance supervisor at an apartment complex who works for 12 hours per week could be compensated entirely by not being charged rent. If the reasonable cost of his lodging is $500 per month (or $115.38 per week, calculated by multiplying $500 by 12 months and dividing by 52 weeks), and the employer has complied with the requirements for claiming a section 3(m) credit, this arrangement complies with the FLSA because the employee receives a regular rate of $9.62 per hour ($115.38/12).
17. Q. If joint employment exists, can section 3(m) be claimed by both employers?
A. If it is determined, that more than one person or entity employs a worker for purposes of the FLSA (that is, that joint employment exists under the FLSA), all employers may take credit toward their joint wage obligation for the housing costs paid by any of them.
For example, a farm owner and a farm labor contractor may jointly employ agricultural workers who receive housing as part of their employment arrangement; in such circumstances, regardless of which employer pays for the housing, provided the section 3(m) credit is properly claimed, the reasonable cost or fair value of the housing may be credited toward the employers’ joint FLSA wage obligations.
Note: A recipient of home care services (consumer) and a private home care agency, or a consumer and a public entity administering a Medicaid-funded home care program, might jointly employ a home care worker. It is not uncommon for a consumer and home care agency to jointly employ a live-in domestic service employee, and for the employee to receive cash wages from the agency and housing from the consumer (such as if the home care agency pays a set amount per hour of work to that employee and the consumer pays rent on an apartment in which the employee and consumer reside). In such circumstances, the amount properly claimed as a section 3(m) credit and the cash wages are combined, as described above, to determine the total wages received for purposes of determining whether the employee has been paid in compliance with the FLSA and calculating any overtime compensation due.
18. Q. Where can I find more information on 3(m) and/or Home Care?
For more information about claiming the section 3(m) credit for lodging, see Field Assistance Bulletin No. 2015-1, Credit toward Wages under Section 3(m) of the FLSA for Lodging Provided to Employees.
- You can visit our website at www.dol.gov/whd; or,
- Visit our website at www.dol.gov/agencies/whd/direct-care; or,
- See the relevant regulations, available online, at 29 CFR Part 531; or
- Call our toll free number at 1-866-4US-WAGE (866-487-9243).
Footnote
1 Detailed information about the Home Care Final Rule, including the regulatory changes it made and the meaning of several terms referenced in these FAQs such as “domestic service employment,” “third party employer,” and “private home,” is available at http://www.dol.gov/agencies/whd/direct-care. In particular, the preamble to the Final Rule explains that a “live-in domestic service employee” is a domestic service employee, such as a home care worker or nanny, who resides at the worksite on a “permanent basis” or for “extended periods of time.” See 29 C.F.R. § 785.23; FOH § 31b20; 78 Fed. Reg. 60,474.
