Pandemic ignites battle over unpaid wages at Manhattan hotel

As hotels across New York were emptying out last month, workers at one in Manhattan had their paychecks withheld. The city’s largest hotel manager and a multibillion-dollar private equity investor were quarreling over who should cut the check.

The three-way labor dispute might be the tip of the iceberg. Experts say such conflicts are becoming more common as the coronavirus has slammed an industry that was already under pressure.

“Owners and operators right now are somewhat at odds,” said David Sherwyn, a professor of human resources at the Cornell School of Hotel Administration. “The biggest issue right now is negotiations about whom to lay off.”

Roughly 30 employees at the 132-room Gregory Hotel near Herald Square missed two weeks’ worth of pay for late March, right before the hotel closed its doors and furloughed staffers.

Timothy Yantz and Jeff Kaplan of Meadow Partners

The hotel’s manager, Highgate Hotels, said in a lawsuit that it withheld wages because hotel owner Meadow Partners refused to top off the property’s operating account used to fund payroll.

“While Highgate takes precautions to ensure that we are managing for like-minded, well-capitalized owners, some owners such as Meadow Partners have chosen to disregard their obligations to our employees,” a spokesperson for Highgate told The Real Deal.

A representative for Meadow Partners declined to comment.

The workers finally received their pay after their union, the New York Hotel Trades Council, stepped in. The union’s top attorney said it was a case where blue-collar bellhops and room attendants suffered as two powerful interests battled for leverage over one another.

“It’s one millionaire trying to get a better litigation strategy against another millionaire at the expense of the workers,” said Hotel Trades general counsel Rich Maroko. “The union is gratified that the arbitrator saw through their strategy and issued a hefty monetary award that sends an unequivocal message that workers’ salaries can’t be held hostage.”

When the Gregory refused to pay its workers, the union took Highgate and Meadow to arbitration. Earlier this month an arbitrator awarded the workers more than $80,000 in wages, penalties and other costs.

But the rift between the three parties stretches back further than the coronavirus outbreak. For more than four months the hotel failed to pay hundreds of thousands of dollars owed to the union for health and pension benefits.

Last Monday the arbitrator ordered the hotel to fork over nearly $400,000 in unpaid benefits to the union and the Hotel Association of New York City that has accrued since late last year.

On the same day the arbitrator’s decision came down, Highgate filed a lawsuit in Delaware state court against Meadow Partners, claiming the owner breached their management agreement by withholding funds to operate the hotel.

“Meadow Partners chose obstinacy over humanity, refusing to fund paychecks and benefits for employees during these difficult and unprecedented times,” Highgate’s lawsuit reads. “Even more galling, for many of these employees, this presented their final paychecks before being furloughed as a result of [the] owner’s decision to close the hotel during the pandemic.”

Highgate’s lawsuit claims the company was forced to pay the $80,000 to comply with the arbitrator’s decision, and that Meadow has yet to pay the remaining $400,000 that was awarded.

The hotel manager said it served Meadow on March 30 with a notice saying the private equity owner was in default of their operating agreement, and is asking the court to order the owner to put $1.5 million into the hotel’s operating account.

Hotels work under a complex structure where the owner, manager and brand are often three different companies. The idea behind the setup is that each can more efficiently do its part: Real estate investors are better at owning real estate, while hotel management firms have expertise in running a hotel’s operations.

Cornell’s Sherwyn said the system has its benefits when everything is working well. But when conflicts arise, each party focuses on its own interests.

“In the hotel world, employees are vital to your success. The last thing the management companies want is to enter this furlough period and leave employees with a horrible taste in their mouth,” he said. “The owners are not getting revenue and they’re facing pressures from debt service and what they owe investors.”

Hotel experts said disputes between managers and owners are likely to become more frequent as the coronavirus hits an industry that was already struggling from years of increased competition — a hotel development boom and home-sharing startups such as Airbnb — and rising taxes and labor costs.

Highgate Hotels, founded by brothers Mahmood and Mehdi Khimji in 1988, owns a massive portfolio of hotels and also manages properties for other owners.

Meadow Partners was founded in 2009 by Jeffrey Kaplan and has acquired more than $5 billion worth of real estate in New York City, Washington, D.C., London and Paris.

The Midtown-based company bought up hotels including the Bedford Hotel at 118 East 40th Street and the Comfort Inn on 35th Street.

In 2014 it bought the Gregory Hotel, then known as Hotel 35 Herald Square, for nearly $50 million and invested about $10 million updating the establishment, which dates back to 1903. In later years it has moved into Brooklyn.

And while Meadow Partners has largely operated under the radar, it has sparked some controversy. In 2014 it bought the stadium where the 125-year-old Dulwich Hamlet Football Club plays. Meadow’s London arm made plans to tear down the stadium and build apartments, prompting protests from soccer fans.

Contact Rich Bockmann at rb@therealdeal.com or 908-415-5229