New York’s Threat to the Hotel Industry

New York politics, both state and local, is famous for progressive politicians who launch gratuitous assaults on the city’s economic base. Their implicit premise is that their endless meddling will be devoid of negative economic consequences, notwithstanding the chronic population losses at both the state and city levels, driven chiefly by high taxes and extensive regulation. That tendency for self-destruction is again on display in the New York City council, where a consumer advocate turned legislator, Councilwoman Julie Menin, has introduced a bill that threatens to upend the fragile hotel economy in New York City. “This is like a nuclear bomb. It will destroy a major segment of the industry. This is a bazooka to kill a gnat,” Vijay Dandapani, president and CEO of the Hotel Association of New York City, is quoted as telling the New York Post. Sadly, it looks as if he is right.

Two basic facts define the hotel market in New York City, where a shortage of units has raised already-high rates. The first is that about 150 of the city’s 700 hotels have been converted to house migrants, reducing available rooms. The second is that of the 700 hotels in the city, some 400 are now nonunion. Menin’s proposal is supported by the Hotel Trades Council because the effect—and indeed, the purpose—of the regulation in question is to increase the costs of being a nonunion hotel. Under its official summary, the bill would require:

hotels to obtain a license in order to operate their business in the city. The application term would be one year, and there would be an annual fee of $200. Large hotels [defined as those with more than 100 guest rooms] would be required to maintain continuous front desk coverage and have at least one security guard. All hotels would be required to maintain the cleanliness of each guest room. The licensee would be required to directly employ all core and critical employees, who would be subject to safety trainings. The department of consumer and worker protection could refuse to issue or renew a license or suspend or revoke a license if the hotel violates the conditions of the license. Hotels that violate the license conditions would be subject to civil penalties.

Licensing renewal is under the purview of the New York City Department of Consumer and Worker Protection; as the agency’s title suggests, it is hardly likely to take a sympathetic stance toward the regulated hotels. However, the bill provides little guidance that hotels can rely on in the renewal process. In § 20-656.2(f), the commissioner has the power to “investigate any matter related to the issuance, denial, renewal, or revocation of a license.” But the bill provides no clarity on how the commissioner raises any “matter,” or what private individuals or organized groups may, or may not bring, such challenges, or whether the department may, or must, investigate any such complaints. It is most troublesome that the bill contains no set time limits at to when these challenges have to be reviewed; and, of course, there is no compensation or financial relief for the hotels for responding potentially multiple charges affecting their license application. It therefore should be taken as a given that the challenges will not be random and isolated. They will be coordinated and funded by various progressive organizations that are intent on weakening the position of nonunion organizations.

Hotels book reservations, conferences, and events far in advance, and it would be a form of economic suicide to be forced to cancel these operations at the last moment if the license renewals were not rapidly granted. Yet the basic pattern of enforcement appears to be left to agency discretion so that no one knows whether some particular violation is sufficient to block license renewal or lead to a license suspension, revocation of a license, or a slap on the wrist. There is no obvious appeals process, and none could be devised to give immediate relief to any hotel that has to stay open every day to survive.

Given this legal setting, hotels should consider challenging the bill as void for vagueness and thus vulnerable for violating constitutional guarantees, both state and federal, of due process. But how well these challenges will fare in the New York state or federal system is anyone’s guess.

The clear object lesson here comes from the utter inability of landlords to challenge New York City’s 2019 rent stabilization law. This challenge went down to defeat in 74 Pinehurst LLC v. New York, resulting in major destabilization of the New York mortgage market. Against this background, even the most innocuous provisions hold a hidden peril.

The provision to require twenty-four-hour front desk coverage and a full-time security guard will be cost-prohibitive for some hotels. But even for hotels that routinely retain these services, nothing stops an official investigation into charges that the coverage in question broke down on one or another occasion; sanctions on the hotel could depend on whether a worker who failed to show up gave notice to the hotel in time to correct the situation.

Yet the truly draconian nature of this legislation comes in the form of a command that requires the hotel “to directly employ all core and critical employees.” This command appears to prohibit the hotel from contracting out any of its critical services, including security guards. While independent contractors in crucial hospitality fields like accounting, advertising, and repairs are not specifically deemed core or critical by the bill, the definition is explicitly not limited to named types of employees. This kind of command might force every hotel to revisit the make-or-buy decisions that are common for all complex organizations.

The standard view is that firms should develop their core competences as they (not some regulator) see them and contract out the rest to others. If a firm needs the services of one-third an accountant, or one-quarter of a pastry chef, it is better to buy those services from an independent contractor that can more efficiently serve an entire sector by hiring its specialist employees. Any direct-employment requirement could easily drive-up costs and reduce efficiencies. At the very least, the bill’s vague definition would engender costly confusion as hotels attempt to make these decisions. Yet by the same token, it is unclear who could correct the situation. Are those core and critical employees entitled to waive their protection if some concessions are necessary to keep the enterprise afloat? This is yet another huge gap in the legislation.

So, given its obvious inefficiencies, how could this scheme be justified? Menin and the Hotel Trades Union appeal to traditional notions of the police power that have always empowered the government to act, reasonably, to protect health and safety. But it is just here that their argument falls apart. There are far narrower ways to improve protection against crime. The city council could install more call boxes in critical locations, require camera installation, organize local community volunteers, or hire additional public safety workers. These conventional options could provide higher levels of protection at a lower cost than a system of expansive regulation that deals with trades and activities that do not have even a remote relationship with health and safety.

It is worth remembering that all too often during the New Deal, eager regulators said that to justify the 1938 Civil Aeronautics Act order to ensure airplane safety, it was necessary to regulate airline rates across the board. But the Federal Aviation Administration can handle that function in a more direct fashion without running the risk of cartelizing an industry as the CAA did. It was only the leadership of Alfred Kahn, who spearheaded the passage of the 1978 Airline Deregulation Act, that ended most of the circus.

That lesson should not be forgotten. In effect, it appears as if the proposed New York law seeks to give these core workers a veto power that is normally associated with unions, but to do so without any union election within some recognized bargaining unit. There are provisions under Section 7 of the National Labor Relations Act that, wholly apart from the formation of unions, give employees the right “to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” But the effort here goes beyond collective organization. And the regulatory power that is wielded by the commissioner is far more effective than any strike when it comes to the disruption of the business: there are no countermeasures that can keep the hotel open in the face of a departmental order.

It seems all too apparent that this bill is meant to persuade nonunion hotels to recognize a union as the lesser evil to Menin’s ordinance. It seems therefore that wholly apart from its own shortcomings, the ordinance is pre-empted by federal law on the ground that it short-circuits all the protections against unionization that were built into the act for employers as well as employees. Fights of this sort are likely to become even stronger if a new Harris administration continues to follow the pro-labor policies of the Biden administration, which could easily tip the balance when the hotels seek to protect their positions in court or before a welter of administrative agencies. But, as I have long argued, this is a fight worth having. Unions are cartelists at heart and their success comes at the expense of consumers, employers, and nonunion workers. The rigid operation of progressive markets, if implemented, could easily run many hotels into the ground.

© 2023 by the Board of Trustees of Leland Stanford Junior University