Small co-ops and condos face a special set of challenges relative to controlling expenses. The building has to be heated, the real estate taxes paid, and the halls cleaned. Unlike in larger buildings, the cost isn’t shared by dozens or perhaps hundreds of cooperators. Rather the cost may be borne by five or seven or ten individuals, and the proportional cost may be way higher than that shared in larger shareholder communities for the same services.

Take labor costs. According to managing agents interviewed by The Cooperator, an eight or ten-unit building won’t have a live-in super. Unlike rental buildings of similar size and owned by the same landlord, a part-time super may not be “shareable.” Managing agents don’t keep maintenance people on payroll and the base cost of a part-time person is higher per unit to begin with than a full-time person would be in a larger building. On top of payroll are the additional costs of payroll taxes, unemployment insurance, and workers' compensation.

Getting By on the Cheap

So perhaps a solution is hiring someone off-the-books. That’s a really bad idea for lots of reasons but especially if you get caught. For starters there are substantial penalties for failure to collect payroll taxes, and failure to provide workers' compensation and unemployment insurance. A representative from the New York State Department of Labor's Unemployment Insurance Benefits Fraud hotline says the department  will assess all back contributions and up to a 50 percent penalty for evasion of unemployment insurance premiums. And according to Joe Cavalcante of the NYS Workers' Compensation Board of New York, workers' compensation assesses a fine of up to $2,000 for every 10 days without insurance and will charge penalties for misrepresenting payroll and record-keeping failures, according to their online fact sheets, and it’s a misdemeanor.

Putting Your Managing Agent in a Bind

This type of approach can cause tremendous problems with and for your managing agent as well. Stuart Halper, a principal of Impact Real Estate Management, which has offices in Queens, Manhattan, Westchester and Long Island, maintains that this type of mistake on the part of a co-op board or condo association is grounds for the managing agent to summarily abrogate his or her contract.

“We don’t want to be in business with people who are breaking the law and putting us in a position of liability,” he says. “You must do things legally. A managing agent's liability is joint and several. It’s just too much aggravation despite an indemnification clause.”

Be Aware of the Consequences

‘Off-the-books’ may seem more cost effective to small buildings strapped for cash, but Halper suggests, “that at a minimum a co-op corporation or HOA must carry a disability policy and a workmen’s compensation policy in the event any worker gets injured.” He says he has seen this situation sadly, more than once.

“We managed a small building in the 130s in central Harlem, a 14-unit co-op,” Halper recalls. “The co-op board hired a guy off the street to sweep the halls and do some other minor things a couple times a week. When they let him go, he filed a complaint with unemployment Insurance. This situation ultimately led to a $20,000 fine.” Halper had warned them repeatedly what would ultimately happen.

So don’t be penny wise and dollar foolish. Protect your investment and yourself and play by the rules.

A.J. Sidransky is a novelist and a staff writer for The Cooperator and other publications.