15 March 2006
Closing hotels and hotel closings
Hotel closings are hitting record levels, but now it is for all the right reasons! Unlike closings caused by the “great real estate depression” of the early 1990s, hotels are closing today for positive reasons: major rehab and construction projects, conversions to condo hotel or residential condos and expansion. Hotel developers and owners are finding that construction is often so extensive that it is advisable to close the hotel while the work is being performed. But, you should not make the decision to close without first consulting with your labor counsel to consider the labor and employment implications, and determining the optimal strategies for your situation.
[By the way, hotels also close because of financial difficulties, but that is a different problem for another article. Those issues are also very important. For example, see Closing that hotel may be the worst money-saving idea you ever had! Lenders, here’s why mothballing a hotel can be a very bad idea.]
Full or Partial Closing
Will you have to partially or fully close the property? While there may be some advantages to keeping the hotel partially open during construction, the downside from the labor perspective may be great. For a union hotel, you will have to follow the seniority provisions of the labor contracts when reducing employee hours or engaging in partial lay-offs. This may not leave you with your optimal workforce.
For non-union hotels, you will have to develop objective criteria for reduction decisions in order to avoid discrimination or disparate treatment claims. The cost of complying with OSHA rules during construction may cancel out the benefit of keeping some workers on the payroll. Finally, you may miss an opportunity to start with a “clean slate” of employees upon reopening.
Bargaining with the Union
How will you terminate your existing workforce and how will you rehire existing personnel when you open? With a union hotel, you face unique challenges. By law, you are obligated to notify the union or unions and negotiate with each of them over the effects before the closure occurs. This “effects bargaining” obligation can be an opportunity if you plan ahead.
While the terms of the collective bargaining agreement will likely govern some of the conditions of lay-off and recall of employees–such as severance, vacation pay-outs, continuation of medical benefits during lay-off, pension plan contributions during closure and recall notification and timing issues–all these issues are subject to bargaining.
The union’s biggest concern will be that its members are rehired–and that will be your best leverage when negotiating the economic issues that are on the table. At this point, an effective, creative negotiator can significantly decrease your out-of-pocket labor costs at closure and during the non-operating period.
On the other hand, failure to deal with the union appropriately may result in huge unforeseen obstacles. The union may try to sabotage your construction by setting up picket lines. The union may attempt to wield its influence with the city to deny or delay necessary building permits and easements. On the other hand, soliciting the union’s support as part of a well-strategized negotiation process may go a long way in achieving the goals desired with City Hall.
Rehiring Decisions with hotel closings
The decision to rehire or not to rehire the existing labor force needs to be made before closing the property. In a unionized environment, the employer may have to rehire the same workforce if the current company continues to be the employer after the hotel reopens. However, if a new entity serves as the employer after reopening, an opportunity exists to choose a new workforce and avoid the union.
The legal analysis in this case involves complex federal labor law implications, but ultimately, the question turns on whether the new employing entity will be deemed a “successor.” (A new employing entity will be a successor either because the law dictates it or because the existing labor contract imposes the obligation.) If an employer is deemed a successor, it may have no choice but to reopen the hotel as a unionized property and deal with the union in the rehiring process.
If there is no legal successorship obligation, a new employer has the right to hire its own union-free workforce upon reopening, even if it was a union property when it closed. There are a number of factors that will be relevant here, such as: Who were the employing entities before closure and upon reopening? How were rehire decisions made? What kind of property is it upon reopening (e.g. did the hotel convert to pure condos)? How far are you are willing to go to fight the union that will inevitably lay a claim to your operation after reopening?
WARN Act Issues for closing hotels
An employer may need to examine WARN Act implications if it has more than 100 full-time employees and is anticipating a full or partial hotel shutdown where more than 50 employees will be terminated or laid off for more than 6 months. In some states, such as California, you may be covered by a state WARN Act that kicks in for companies with an even smaller number of employees.
Under the federal law, if you are shutting down or laying off at least 50 employees, you must provide employees with at least 60-days notice or face penalties including payment of 60-days wages, benefits and fines. If applicable, notices must be also sent to unions representing the employees and to certain state agencies. How you execute this notification process is vitally important.
How the closure and reopening plans are communicated to employees and their participation in the process is crucial to laying the groundwork for workforce retention and loyalty during the pre-and-post-closing period. Receiving a WARN Act notice should not be the first time employees learn about the closure. Remember, your employees are your best public relations resource, so keeping them informed and content is important.
Wage and Hour, Benefits and Rehire Issues
When employees are notified of a closure, their first concern is about their wages and benefits and whether they will get their jobs back. At the time of closure, you will, of course, have to pay out all wages owed to employees and, in most cases all accrued and unused vacation or paid time off. Depending on length of closure and your plans to rehire the existing workforce, you may find ways of structuring vacation plans to avoid cashing out all employees. During lengthy closures, medical benefits may cease or might continue for a short timeframe.
Be prepared to answer questions about medical insurance continuation and COBRA coverage. Employees will also want to know how to go about applying for state unemployment benefits. If retaining your workforce is a goal, you may want to have information and forms available to employees. You may also consider setting up and announcing the rehire notification process prior to closure so that employees know what to expect and are more likely to return.
In a unionized setting, the exact recall procedure will be negotiated with the union through effects bargaining. However, in a non-union setting, you have much more flexibility in establishing priority and timing of rehiring, announcing job openings and establishing procedures for job acceptance, new probationary periods, and communications with your workforce.
Hotel closings can be great opportunities for hotels for many reasons. But without a thoughtful plan for handling workforce issues, a terrific opportunity can turn into a terrific headache.
Marta Fernandez is a senior member of the Global Hospitality Group® and a partner in the Firm’s Labor & Employment Group. A management labor lawyer with more than 20 years’ experience, Marta specializes in representing hospitality industry clients in all aspects of labor and employment, including labor-management relations such as union prevention, collective bargaining for single as well as multi-employer bargaining units, neutrality agreements and defense of unfair labor practice charges before the NLRB; implementation of preventative management strategies, such as executive training, arbitration enforcement and policies and procedures; defense of administrative and litigation claims, such as employee claims of sexual harassment and discrimination. For more information please contact Marta Fernandez at 310.201.3534 or MFernandez@JMBM.com.
This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We’ve done more than $87 billion of hotel transactions and have developed innovative solutions to unlock value from troubled hotel transactions. Who’s your hotel lawyer?
Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $87 billion of hotel transactions, involving more than 3,900 properties all over the world. For more information, please contact Jim Butler at firstname.lastname@example.org or 310.201.3526.
Jim Butler is a founding partner of JMBM and Chairman of its Global Hospitality Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE “hotel lawyer” and you will see why.
JMBM’s troubled asset team has handled more than 1,000 receiverships and many complex insolvency issues. But Jim and his team are more than “just” great hotel lawyers. They are also hospitality consultants and business advisors. For example, they have developed some unique proprietary approaches to unlock value in underwater hotels that can benefit lenders, borrowers and investors. (GOOGLE “JMBM SAVE program”.)
Whether it is a troubled investment or new transaction, JMBM’s Global Hospitality Group® creates legal and business solutions for hotel owners and lenders. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.