Primer on Labor & Employment Aspects of Hotel Conversions

By Jonathan Greenbaum Partner, Nixon Peabody | October 28, 2008

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.

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