Hotel association challenges New York City’s new pandemic severance law

By Pamela Wolf, J.D.

The Hotel Association of New York City has filed a lawsuit in federal court against the city challenging an October 5, 2021, law requiring hotel owners to pay $500 in weekly severance to hotel employees who were laid off due to hotel closures or “mass layoffs,” for up to 30 weeks, unless the hotels meet certain criteria. The severance law, prompted by COVID-19 pandemic layoffs, requires severance payments to begin as of October 11, 2021. The Hotel Association, alleging that the New York City Council has “dramatically overstepped its bounds,” seeks a declaration that the severance law is preempted by ERISA and New York State’s Municipal Home Rule Law, and an injunction halting future enforcement.

The challenged law was introduced in the City Council less than a week after the Pandemic Unemployment Assistance program in the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act, which provided $300 a week to unemployed workers, came to an end on September 5, according to the complaint. The extension of New York State insurance benefits for workers laid off because of the pandemic also ended at the same time.

About the new law. According to a legislative summary, the severance law, Int. No. 2397-2021, requires severance pay for hotel service employees in the event of:

• The closure of a hotel to the public, provided the hotel has not, by October 11, 2021, recalled at least 25 percent of employees and reopened to the public by November 1, 2021; or
• A mass layoff of at least 75 percent of employees.

The severance pay requirement will not apply to a hotel that has closed permanently and has or is in the process of converting to an alternate use, provided employees are offered severance of at least 20 days’ pay per year of service and the severance is specifically tied to the conversion. The obligation to provide severance ends when an employee is recalled, or, for a closed hotel, when the hotel reopens to the public and recalls 25 percent of its employees.

The severance law expires and is deemed repealed on June 1, 2022.

Costly post-employment benefit. With the severance law, the city has created a mandatory post-employment benefit plan for union and nonunion hotel workers, according to the complaint. While the law may be intended to compel hotels to reopen their doors to the public, it will likely cause many hotels to close permanently, the Hotel Association contends. Those that stay open will allegedly “need to set aside millions of dollars of reserves, and create large infrastructures, many out of whole cloth, to manage the financial assets in the reserves, determine the eligibility of employees for these additional severance benefits, and to assess what is owed to each individual employee.”

The Hotel Association says that the severance law will cost its members more than $150 million in potential payments, given that the industry has been forced to lay off thousands of employees due to the pandemic. When disputes arise over eligibility for severance payments, the new law directs employees to sue in state court, with the prospect of double damages and attorneys’ fees, the plaintiff explained. Hotels, even those that are permanently closed, must establish infrastructures to manage the litigations and face “exorbitant legal costs,” after the industry has suffered its worst year on record, and the American Hotel & Lodging Association declared in July 2021 that the New York City hotel industry was still in a “depression,” the Hotel Association alleges.

Preempted by ERISA. The plaintiff also contends that the severance law is preempted by ERISA because it requires hotel employers to establish and administer new employee benefit plans. The severance law is a “[plan] to pay employees severance benefits, which are payable only upon termination of employment, [and thus is an] employee welfare benefit [plan] within the meaning of the Act,” the complaint states, citing the U.S. Supreme Court’s 1989 decision in Massachusetts v. Morash. Further, ERISA’s preemption provision in 29 U.S.C. § 1144 provides that the federal law “supersede[s] any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.” This provision, “conspicuousness for its breadth,” clearly invalidates the severance law, the Hotel Association asserts, citing the U.S. Supreme Court’s 1990 decision in FMC Corp. v. Holliday.

Runs afoul of state law. The severance law in addition is contrary to the prohibitions espoused by New York State’s Municipal Home Rule Law, according to the complaint. First, the city purportedly lacks authority to enact the challenged law because it falls outside the expressly enumerated categories of law in which municipalities are sanctioned to legislate.

Second, the severance law is allegedly preempted by New York State’s comprehensive regulation in the sphere of labor law, particularly as it relates to governance of unemployment insurance benefits and interacts with employee severance pay. Purportedly, because the severance law is intended to supplement the benefits that unemployed workers received under the state system, the city has disrupted the decision-making process that the state engaged in to craft the unemployment laws and has impermissibly intruded on New York State’s jurisdiction.

Declaratory and injunctive relief sought. The four-count complaint seeks a declaration that ERISA and New York State’s Municipal Home Rule Law preempt the severance law and that it is unenforceable, as well as injunctive relief to halt future enforcement of the new law.

Attorneys: Steven Cooper (Reed Smith) for Hotel Association of New York City.