In a decision of great import to the New York City hospitality industry, a federal court has held that a New York City statute mandating payment of severance benefits to certain covered hotel service employees was not preempted by ERISA. RHC Operating, LLC v. City of New York, 1:21-cv-09322-JPO (S.D.N.Y. Mar. 30, 2022).

Background

Like other major centers of tourism, the hotel industry in New York City was decimated by the COVID-19 pandemic, resulting in many closed hotels and thousands of laid-off workers.  To date, some 60% of New York City hotel workers remain unemployed.

In response to the pandemic, the federal government’s Coronavirus Aid, Relief and Economic Security Act (CARES Act ), provided funding for enhanced and extended unemployment benefits until September 2021.

Shortly after the federally subsidized unemployment benefits ended, New York City’s Severance Law  (codified as Int. No. 2397-2021) was enacted on October 9, 2021.  Under the law, hotels with at least 100 rooms must pay weekly severance of $500 per employee per week to laid-off employees for up to 30 weeks if the hotel either (1) experienced a mass layoff of 75% or more of their workforce employed as of March 1, 2020, during any 30 day period or (2) closed to the public on or after March 1, 2020, and have not yet (a) as of October 11, 2021, recalled 25% or more of its employees employed as of March 1, 2020, and (b) reopened to the public by November 1, 2021.

The obligation to pay severance ceases at the later of when the employee is recalled, or, if the hotel that experienced a closure reopens, on the date when the hotel is reopened to the public and has recalled at least 25% of its employees employed as of March 1, 2020. (For details on the Severance Law, see What You Need to Know About New York City’s Law on Severance Pay for Hotel Service Employees.)

Here, the owner of a closed hotel with significant obligations under the Severance Law sued, challenging the Severance Law on a variety of state and federal theories. Relevant here is the claim that the Severance Law is preempted by ERISA.

ERISA Preempts Laws Requiring an Employer to Establish an “Employee Benefit Plan”

ERISA supersedes any state law that relates to an employee benefit plan, including any statute that requires an employer to establish an employee benefit plan. Here, the courts have traditionally differentiated between laws that require an employer to provide employee benefits (which are generally found not preempted) and those that require an employer to establish an employee benefit plan (which are generally found to be preempted by ERISA).

The U.S. Supreme Court has held that a statute requires an employer to establish an employee benefit plan (and is therefore preempted) where an ongoing administrative program is necessary to meet the employer’s statutory obligations. Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 11 (1987). Courts have identified these factors as evidencing an administrative program (and therefore an employee benefit plan):

• Whether the program requires individualized eligibility and benefit determinations;

• Whether the program requires the exercise of managerial discretion; and

• Whether the program shows an ongoing commitment to provide employee benefits.

Severance Law Was Not Preempted by ERISA

Applying these factors, the court had little problem finding the Severance Law did not require the establishment of an ongoing administrative scheme. Compliance with the Severance Law did not require an employer to make individualized benefit assessments. On the contrary, the court found that an employer need determine only whether a class of former employees were “laid off after March 1, 2020, due to a closure or a mass layoff.” The court characterized these as “clerical determinations” that require neither an administrative program nor the exercise of managerial discretion sufficient to turn a severance benefit into a plan. The court easily rejected plaintiff’s argument that a program is necessary to navigate eligibility decisions about an employee’s eligibility for benefits under the Severance Law, noting that the criteria (whether the employee was employed on March 1, 2020, had been employed for at least one year to perform hotel service, and was not a manager or a supervisor) could be resolved through “a basic review of the employer’s payroll system.”

In what the court described as “most significant,” the court found the Severance Law does not require an employer to make “an ongoing commitment … to provide employee benefits.” Schonholz v. Long Island Jewish Medical Center, 87 F.3d 72, 76 (2d Cir. 1996). The court found the Severance Law did just the opposite. The court described the Severance Law as envisioning a “one-time” project to address the lingering effects of a historically unique event (a global pandemic) by mandating certain severance payments for “a short span of time.” Tischmann v. ITT/Sheraton Corp., 145 F.3d 561, 566 (2d Cir. 1998). Concluding that “whatever scheme the Severance Law requires, it is not one that reflects an ongoing plan,” the court held that the Severance Law is not preempted by ERISA.

National Labor Relations Act Does Not Preempt the Severance Law

Many hotel workers covered by the Severance Law are represented by labor unions. All hotel employees (whether unionized or not) are covered by the federal National Labor Relations Act (NLRA), which protects employee participation in “concerted activity” for mutual aid and protection in the workplace. Further, the NLRA regulates the process of collective bargaining for unionized employees. Employers must bargain with the employees’ union over terms and conditions of employment, resulting in a collective bargaining agreement. The generous benefit required by the Severance Law certainly would be a subject of mandatory bargaining under the NLRA.

The plaintiff here argued the severance mandate should be deemed preempted by the NLRA. There are two theories for NLRA preemption, both rejected by the court.

Under a Garmon preemption (San Diego Bldg. Trades Council v. Garmon, 359 U.S. 236 (1959)), a state statute that regulates activity the NLRA protects, prohibits, or arguably protects or prohibits may be preempted. The court held “the Severance Law does not regulate workers’ rights” to engage in protected concerted activity within the meaning of the NLRA. Further, although the NLRA prohibits a unionized employer from unilaterally amending terms and conditions (such as severance pay), it does not foreclose the state’s authority to regulate working terms. Here, the Severance Law obligations “merely supplement” any obligations employers would have under their collective bargaining agreements.

The plaintiff also argued the Severance Law interferes with the mechanism of collective bargaining created by the NLRA. Referred to as Machinists preemption (Lodge 76 Int’l Ass’n of Machinists & Aerospace Workers, AFL-CIO v. Wis. Emp’t Relations Comm’n, 427 U.S. 132 (1976)), state regulation that may interfere with the “open space” intended by Congress “for the free play of economic forces” in collective bargaining may be preempted. The “crucial inquiry” applied by the court here is whether the Severance Law frustrates the effective implementation of NLRA processes. The court found no interference as the statute does not encourage or discourage economic action by the parties (strikes or lockouts) and the mandated benefits are the same for union and non-union employees. Further, the court held the severance mandate does not differ from other labor standards such as minimum wage requirements, which are not subject to preemption.

Ramifications 

Many New York City hotels have already satisfied their Severance Law obligations, either by payment or by reopening. It remains to be seen what will happen to those who have not done so. And the decision likely will be appealed