Mr. Greenbaum

Hospitality Law

Primer on Labor & Employment Aspects of Hotel Conversions

By Jonathan Greenbaum, Partner, Nixon Peabody

Developers are increasingly finding alternative uses for their hotel properties, including condominium conversions, fractional, condo-hotels, extended stay and other alternative uses to the traditional hotel. Whether to convert a hotel to another use depends largely on market factors. In the past few years, we have seen many hotels being converted to residential condominiums. We are now starting to see conversions of commercial office space to hotels. Conversions raise a myriad of property, regulatory and zoning issues. Developers often overlook the labor and employment aspects of such transactions and conversions. Conversions of hotel properties are far more complex transactions than a traditional real estate transaction. Hotels are the most labor intensive of all commercial real estate uses. If not handled properly and in a timely fashion, labor and employment issues related to a hotel conversion can derail or significantly delay any contemplated change in the use of the hotel property.

Hotel owners and managers cannot simply switch off the lights and change the use of their hotel property. Conversion of a hotel to another use implicates many sensitive labor and employment issues, including contractual issues, statutory notice issues, job loss and operational issues. In many instances, employees must be given advance notice of the change in use, which could ultimately result in a closing - either temporary or permanent. Additionally, with the contemplated conversion of a hotel property, it is likely that it will not be necessary to retain the same complement of employees or employee mix. Such employee notice provisions may be contractual or arise under federal state and local laws.

Statutory Notice Requirements

If the hotel company has one-hundred or more employees and the conversion or alteration could result in a job loss or mass layoff of 50 or more employees, at the affected hotel property, the Federal Worker Adjustment and Retraining Notification Act ("WARN") may be implicated. Generally, WARN applies to permanent or temporary (at least 6 months) plant closings or mass layoffs. If the law applies, employees are to be provided 60 days advance notice of the closing or mass layoff. Notice must be provided to employees, their union (if applicable), the state dislocated worker department and the highest ranking elected local official (i.e., the Mayor). Many states and municipalities have similar WARN laws and some have a lower employee threshold for the law to apply. It should be noted that third party management companies have the same notice obligations as property owners, even if the management company does not have a say in the decision to convert the hotel, and in effect its management contract most likely would be terminated once the hotel closes for the conversion. Indeed, in one of the first cases decided under WARN, a hotel management company was held liable for the failure to provide employees with the requisite sixty day advance notice of hotel closing even though the hotel ownership group did not provide the management company itself sufficient notice of the closing to comply with the law. Such responsibilities should be addressed in management or operational agreements with owners.

Contractual Notice/Retention Issues

In addition to potential statutory notice obligations, hotels must also consider whether they have any contractual obligations to provide advance notice to employees of a closure or termination. If your hotel has a collective bargaining relationship with a union it will have to bargain over the "effects" of its decision to convert the hotel. "Effects" bargaining may consist of severance issues, recall rights, if applicable, and matters such as health insurance continuation. There is no duty to bargain over the actual decision to change the use of the hotel or to close the hotel. There may be contractual obligations to unionized hotel employees, such as severance obligations due to permanent or temporary job loss. For example, many unionized hotels in New York City which recently converted to residential condominiums not only provided contractual severance payments to employees affected by the conversions, but also an "enhanced" severance payment so that the employees would sign a waiver and release of claims. Also, in return for the enhanced severance, the union signed a release that it would not challenge the conversion through the contractual grievance procedures. Hotels with union contracts which provide for contributions to multi-employer pension plans (such as those found in New York, San Francisco, Washington, DC, Chicago, Los Angeles, and Philadelphia) must also consider that the conversion from a hotel may trigger a withdrawal liability payment in the event the multi-employer fund is underfunded. Recent withdrawal liability payments by unionized hotels in New York City and Washington, DC have been substantial, for example. Depending on the size of the hotel and the number of employees involved, these financial considerations should be determined well in advance of the closing as they may impact the overall decision to undertake the transaction or the timing of the conversion.

Certain hotel employees may also have contractual clauses in their employment agreements entitling them to severance pay. Should a hotel owner request that an employee or manager execute a release and waiver of claims, such release must be supported by consideration, in addition to any contractual severance amounts.

Because of regulatory and construction issues affecting the actual closure and conversion of a hotel property, there is usually a significant period of time between the planning stages and the actual closure. This pre-closing period poses significant employment related issues once employees learn of the conversion. The employee's first reaction, of course, will be to review their own employment options. It is necessary for the hotel to retain staff during this period in order to continue operations. Many employers offer "retention" bonuses to induce management employees to remain with the property through the closure. Retention bonuses are conditioned on the employee remaining with the hotel up to a certain period of time to ensure a smooth transition. Hotel employers may also offer employees limited continued employment after the hotel closing to inventory hotel furniture, fixtures and equipment and to prepare the hotel for construction. Hotels may contract out these post-closure tasks, but that may be limited if any applicable union contract has a no-subcontracting clause. Hotels may also require a skeleton staff throughout the construction period for security, engineering and human resources. If there is no on-site HR human resource function during the period after the closure, the hotel will need a contact person for employees to contact for their benefit, tax and other personnel related matters. Many construction contractors require the retention of hotel engineers, because of their knowledge and experience with the existing mechanical systems in the hotel property.

A hotel owner must also consider whether it has any contractual obligation to employ former hotel employees once the building re-opens, albeit with a different use. Such contractual obligations may even survive the hiring of a new managing agent to operate a residential condominium. For example, many former New York City hotel workers are now working in converted hotels in apartment type positions, such as doormen, concierge services and security. The hotel unions have claimed continued jurisdiction over such positions even though they are not hotel positions by virtue of their prior contract with the hotel. A hotel operator and owner may wish to have the hotel employees waive any entitlement to future employment with a release supported by adequate consideration.

Local Ordinances

When converting a hotel property, developers face many regulatory and zoning issues. In addition to the typical land use and contractor issues, employee groups have successfully lobbied local legislators to pass or propose regulations limiting the scope of some conversions. While such ordinances have not been challenged in court, such proposed regulations have threatened to derail many conversions. For example, through lobbying by the New York City hotel union, the New York City Council considered legislation to limit the scope of hotel to condominium conversions. The union used the threat of legislation to ensure additional jobs after such conversions and to maintain its jurisdiction over the building.

The City Council ultimately shelved the legislation as the union received concessions from developers in light of the threat of the proposed legislation. In San Francisco, the city implemented a six month moratorium on such conversions during contractual negotiations between the union and San Francisco hotels. These examples demonstrate how employee groups can insert themselves into the process to create roadblocks in order to extract concessions or derail the hotel project.

Shutdown/Conversion Plans

Shutdown and conversion plans are necessary to ensure an effective closure of the hotel operations as well as the continued operation of the hotel during the period prior to the closures. Such plans should include the required staffing levels during all phases of the process through closing. If there will be a gradual scaling down of staff, a determination as to which employees by position who will be terminated at each point should be made. Careful attention should be made to devise objective criteria for the selection of employees for termination in this instance. Use of objective criteria such as seniority by job classification, specific expertise or experience will minimize the risk of employment-related claims by terminated employees. Shutdown plans should also include the retention of employment-related records as employment-related claims for benefits or wages can reach back several years. Such information is required to be maintained by federal and state law, even though the hotel may be closed.

Different jurisdictions have different time requirements on the payment of an employees final pay check and whether benefits such as unused and accrued vacation pay must be paid at termination. In shutdown situations, the best practice is to have employees sign an acknowledgment that they have received their final paycheck, have reviewed the amounts and that nothing further is owed. Terminated employees should be given a contact in the event they have any post-employment questions regarding benefits after the hotel is closed. In most instances, terminated employees would be provided with COBRA rights to continue such benefits at their own expense.

Lastly, if the hotel is contemplating an exit incentive plan or severance plan in exchange for a release from employees over 40 years of age, the provisions of Older Workers Benefit Protection Act must be followed. For severance plans offered as part of a group plan, employees over 40 years of age waiving age discrimination claims must be given 45 days to consider to offer (as opposed to 21 days for a single age release with no group exit incentive plan). In addition, such employees must be provided writing the manner calculated to determine who would be laid off as well as the employee units covered and the job titles and ages of those selected for termination as well as those not selected.

Advance consideration of the labor and employment aspects of a hotel conversion will ensure a smooth transition and closure of the hotel property. If such factors are not considered, hotel owners and developers may face undue delays and increased (and unplanned) costs associated with the conversion.

Jonathan W. Greenbaum is a partner of Nixon Peabody LLP's Labor and Employee Benefits Practice Group. He focuses on labor-management relations on behalf of management in state and federal courts. Mr. Greenbaum has an active practice in alternative dispute resolution. He frequently represents employers an in collective bargaining negotiations and before the National Labor Relations Boards. Mr. Greenbaum advises employers on preventive employment policies and represents employers in investigations conducted by federal, state, and local administrative agencies. Mr. Greenbaum can be contacted at 202-585-8326 or jgreenbaum@nixonpeabody.com Extended Bio...

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