FLSA Section 3(m) Lodging: Reasonable Cost & No-Profit Rule

The FLSA Section 3(m) lodging credit lets an employer count the reasonable cost of housing it provides toward an employee’s wages, reducing the cash needed to meet the federal minimum wage of $7.25 per hour.¹ The credit is capped at what the housing actually costs the employer to provide, no one on the employer’s side can profit from it, and four threshold conditions must be met before any dollar amount goes on the books. Get any part of it wrong and the credit disappears, leaving the employer on the hook for the full cash minimum wage plus liquidated damages.

The Four Conditions That Must Be Met First

Before an employer calculates a single dollar of credit, four conditions have to be satisfied. Miss one and the whole credit is disqualified.

The lodging must be customarily furnished. Either the employer regularly provides this type of housing to its workers, or other employers in the same industry and area do the same. A one-off arrangement with no industry parallel will not qualify.²

The employee must accept it voluntarily. If living on-site is a condition of the job, or if refusing would trigger retaliation, the acceptance is coerced and the credit fails.³

The housing cannot be primarily for the employer’s convenience. Facilities that mainly serve the employer’s business interests, rather than genuinely benefiting the worker, are excluded from the credit. Requiring on-site living to cover round-the-clock security, for example, serves the employer’s operational needs, not the worker’s.⁴

Wages must be paid free and clear. The employee cannot be required to kick back any portion of pay, in cash or through forced purchases, to the employer or anyone acting for the employer. If the housing effectively forces the worker to return part of their wages, the credit is invalid.⁵

Federal regulations don’t explicitly require a written agreement, but documenting voluntary acceptance in writing is the single best way to defend the arrangement if it’s ever challenged.

Calculating the Reasonable Cost

The credit is capped at the employer’s actual cost of providing the housing, not what the unit would rent for on the open market. The regulation breaks the calculation into three components.⁶

Operation and maintenance. Day-to-day costs of keeping the unit livable: electricity, water, routine repairs like plumbing and roofing work, and similar upkeep tied directly to the employee’s unit.

Depreciation. The building loses value over time. Employers use standard accounting methods, the same ones accepted by the IRS for tax purposes. The regulation specifies that depreciation includes obsolescence.

Interest on capital invested. This is where employers most often get tripped up. The allowance is not the actual mortgage payment. It is capped at 5½ percent of the depreciated amount of capital invested in the property. If the building was purchased for $200,000 and accumulated depreciation is $50,000, the interest allowance is 5.5% of $150,000. Not 5.5% of the purchase price, and not whatever the lender charges.⁶

All figures must follow “good accounting practices,” which the regulation defines partly by exclusion: any method rejected by the IRS for tax purposes does not qualify.

The Fair Rental Value Cap

Even after totaling every legitimate cost, a second ceiling applies. If the computed cost exceeds the fair rental value of comparable housing in the area, the employer must use the lower figure.⁶ If actual costs work out to $1,100 per month but comparable units nearby rent for $900, the credit is limited to $900. The regulation doesn’t mandate a specific method for setting fair rental value; the Wage and Hour Division’s Administrator may look at average costs, average value to employees, or other reasonable measures.

Leased Property

When an employer rents housing from a third party rather than owning it, the reasonable cost is generally what the employer pays the third party. The fair-rental-value cap still applies. If the lease payment exceeds what comparable units cost in the area, the lower number controls.

Shared Units

When multiple employees share a single unit, the total cost is divided among them. There is no single required allocation method. The Department of Labor has indicated the reasonable approach depends on the circumstances, such as allocating by the ratio of each worker’s bedroom square footage to the total unit, or splitting costs equally when all occupants have equal access to the space.⁷

The No-Profit Rule

The reasonable cost cannot include profit to the employer or to any affiliated person.⁶ A dollar of markup over actual costs turns the credit into a wage violation.

The regulation defines “affiliated persons” broadly. The prohibition covers a spouse, child, parent, or other close relative of the employer; any partner, officer, or employee of the company; any parent corporation, subsidiary, or closely connected business entity; and any agent acting on the employer’s behalf.⁸ Routing housing through a family member’s LLC to charge a higher rate doesn’t work. The no-profit rule follows the money.

Practically, if a comparable apartment rents for $1,200 but actual costs total $800, the credit is $800. Administrative fees, service charges, and convenience surcharges added on top of actual operating costs are all prohibited profit. Capital improvements can only be recovered through the depreciation and interest formula, never as a lump-sum charge to the employee.

In workweeks without overtime, a lodging charge that includes profit violates the FLSA only to the extent the profit pushes the effective wage below the minimum. In overtime workweeks the scrutiny tightens, and the Department of Labor examines whether inflated housing charges were used to manipulate the regular rate and shrink overtime obligations.

Costs That Cannot Be Included

The regulations flatly exclude costs for facilities that primarily benefit the employer.⁴ Off the table:

Tools of the trade, raw materials, and other supplies incidental to running the business.
Construction expenses that benefit the employer’s operations rather than the employee’s living conditions.
Uniforms and their laundering when the job requires them.
Company security and guard services, which protect the employer’s property.
Insurance and taxes on non-residential buildings. Only insurance and taxes on the actual housing unit the employee occupies count.

How the Credit Affects Overtime Pay

The reasonable cost of housing must be added to cash wages before the regular hourly rate is calculated for overtime purposes.⁹ Overtime pay is 1.5 times the regular rate, so leaving the lodging value out of that calculation underpays overtime.

Take an employee earning $400 in cash for a 50-hour workweek who also receives housing worth $100 per week in reasonable cost. Total compensation is $500. Divide by 50 hours and the regular rate is $10. The overtime premium for the 10 hours beyond 40 is half of $10, or $5 per hour, so $50 in additional overtime pay is owed. A common error is computing the regular rate from cash wages alone, which produces a lower overtime rate and creates a violation.

H-2A Agricultural Workers Are Different

The lodging credit isn’t available for H-2A workers. Employers who bring in temporary agricultural workers under the H-2A visa program must provide housing at no cost to those workers and to any domestic workers in corresponding employment who cannot reasonably commute home the same day.¹⁰ The employer absorbs the full housing cost whether it owns the property, leases it, or puts workers in hotels.

Recordkeeping

The documentation burden is heavier than for straight cash wages. Employers must maintain itemized records of every expense that goes into the reasonable cost calculation: acquisition date, original purchase price, depreciation rate, accumulated depreciation, and all operating costs like utilities and repairs.¹¹

When the lodging credit drops an employee’s cash wages below the minimum wage in any workweek, records must be kept on a workweek-by-workweek basis, not just pay-period totals. The same workweek-level tracking applies in any week the employee works overtime and the employer has taken a lodging credit.¹¹

All payroll records, including lodging credit documentation, must be preserved for at least three years from the last date of entry.¹² If a Department of Labor investigator asks for these records and they don’t exist, the credit is disqualified for the entire period in question, and the employer owes the full cash minimum wage for every affected workweek, retroactively.

What Getting It Wrong Costs

The Department of Labor can impose civil money penalties of up to $1,409 per violation for Section 3(m)(2)(B) infractions. Repeated or willful minimum wage or overtime violations carry penalties of up to $2,515 per violation.¹³ These amounts are adjusted periodically for inflation.

Back-wage liability is usually the bigger number. An employer who violates the minimum wage or overtime provisions owes affected employees the full unpaid wages plus an equal amount in liquidated damages, effectively doubling the bill.¹⁴ Courts can waive liquidated damages only if the employer proves good faith and reasonable grounds to believe the arrangement was lawful. Given how specific the regulatory formula is, that defense is hard to sustain when an employer guessed at the numbers or ignored the 5½ percent interest cap. A single miscalculated credit affecting 20 employees over two years can produce a six-figure liability before attorneys’ fees.

1
Office of the Law Revision Counsel. 29 USC 203 – Definitions
2
eCFR. 29 CFR 531.31 – Customarily Furnished
3
eCFR. 29 CFR 531.30 – Furnished to the Employee
4
eCFR. 29 CFR 531.32 – Other Facilities
5
eCFR. 29 CFR 531.35 – Payments Free and Clear
6
eCFR. 29 CFR 531.3 – General Determinations of Reasonable Cost
7
U.S. Department of Labor. Credit Towards Wages Under Section 3(m) Questions and Answers
8
eCFR. 29 CFR Part 531 – Wage Payments Under the Fair Labor Standards Act of 1938
9
eCFR. 29 CFR Part 778 – Overtime Compensation
10
U.S. Department of Labor. Fact Sheet 26G – H-2A Housing Standards for Rental and Public Accommodations
11
eCFR. 29 CFR 516.27 – Board, Lodging, or Other Facilities
12
eCFR. 29 CFR 516.5 – Records to Be Preserved 3 Years
13
eCFR. 29 CFR Part 578 – Minimum Wage and Overtime Violations Civil Money Penalties
14
Office of the Law Revision Counsel. 29 USC 216 – Penalties