On October 10, 2014, the Los Angeles City Council passed the “Citywide Hotel Worker Minimum Wage Ordinance” (“Ordinance”). Much of the press attention has been devoted to the increase in minimum wage, but that is only the tip of the iceberg. This alert summarizes some key elements of the Ordinance, as well as the steps that Los Angeles area hotels should consider to comply.

Who Must Comply?

The Ordinance applies to hotels with 150+ guest rooms within Los Angeles city limits. Hotels within the Airport Enterprise Hospitality Zone (AEHZ) are included. However, separate cities, such as Beverly Hills, Santa Monica, West Hollywood, Glendale, Pasadena and Long Beach are not included.

There is a “Hardship Exemption,” but it is very limited and requires financial disclosure to the city. Hotels need to submit “compelling evidence” that compliance would force the hotel to reduce its workforce by more than 20 percent or cut hours by more than 30 percent “to avoid bankruptcy or a shutdown of the hotel.” And even if a Hardship Exemption is granted, it only lasts for one year.

There is also a “Collective Bargaining Exemption,” but this exemption is not as broad as many think. First, it only applies to the employees at a hotel who are covered by a Collective Bargaining Agreement (CBA); it does not apply to the hotel’s non-union employees. Second, the CBA must include a waiver that is “explicit” and written in “clear and unambiguous terms.” Hotels should check their CBAs carefully before assuming the exemption applies.

Minimum Wage Increase

The dates for minimum wage increases are triggered by the number of guest rooms at the hotel. Hotels with 300+ guest rooms must pay all employees $15.37 per hour as of July 1, 2015. Hotels with 150+ guest rooms must pay all employees $15.37 as of July 1, 2016.

There is no tip credit, so these minimum wage increases also apply to tipped employees.

Hotels cannot close rooms to get under the limit. The Ordinance specifies it is the number of rooms when the hotel opened or on December 31, 2012, whichever is greater. Moreover, adjoining rooms (such as suites) are counted individually.

Other Businesses at the Hotel May be Covered

The definition of “hotel employer” is so broad, it may include restaurants, shops and other third party businesses that lease space in a covered hotel. The Ordinance defines “Hotel Employer” to include “any contracted, leased or sublet premises connected to or operated in conjunction with the hotel’s purpose” or a “person” (defined to include an individual, corporation, etc.) who “provides services at the hotel.” How this ambiguous language is interpreted will be hotly contested.

The Ordinance Requires Paid Time Off

California has a new Paid Sick Leave law (AB 1522), which requires many California employers to provide paid sick leave as of July 1, 2015.

The Ordinance requires much more than AB 1522. Instead of an accrual of up to 48 hours (six days) of paid sick leave, the Ordinance requires an accrual of up to 96 hours (12 days) of paid time off for all full-time employees, with proportional accruals for part-time employees. The time can be used for sick leave, family sick leave, vacation or personal time. There is a required carryover and cap of at least 192 hours (24 days).

Notably, paid sick leave does not need to be paid out upon separation of employment, but paid time off does.

Plus, as a new twist, the excess of accrued time off after hitting the cap must be paid out every 30 days at the employee’s current rate of pay. Notably, the payout will be at the increased minimum wage.

The Ordinance Requires Unpaid Time Off

The Ordinance also contains a requirement for “Additional Unpaid Sick Leave” (AUSL) of an additional 80 hours (10 days) for full-time employees, with proportional accruals for part-time employees. AUSL time can be used for employee sick leave or “immediate family member” sick leave. Of note, “immediate family member” is not defined. AUSL can only be used when the employees exhaust PTO. AUSL can be capped at no less than 80 hours (10 days).

Use of PTO and AUSL

Both PTO and AUSL may be used after six months on the job. Time off for both cannot be “unreasonably denied” and employees do not need to provide advance notice. Employers cannot count these days off for disciplinary purposes, therefore it will be very challenging to hold employees to established absenteeism and call-out policies.

Service Charge (Effective November 10, 2014)

There is also a service charge requirement in the Ordinance. Labels don’t matter. The requirement applies to any separately designated charge collected for the service of workers, whether it is called a “service charge,” “delivery charge” or “porterage.” 100 percent of any of these fees must go to the employees who provide the service; none can go to management or the hotel. The amount must be paid in the next payroll following the collection of the amount from the customers.

The Ordinance gets very particular for banquets or catered meetings and indicates that amounts collected shall be paid equally to the employees who actually worked the banquet or catered meeting. In addition, the amounts collected for room service must be paid to the employees who actually delivered the food and beverage associated with the charge. Finally, amounts collected for porterage must be paid to the employees who actually carry the baggage associated with the charge.

Significantly, unlike the minimum wage and time off provisions of the Ordinance, this provision goes into effect on November 10, 2014 (30 days after the Ordinance was signed).

Earned Income Credit Notice

Hotel employers must provide employees with notice of their possible right to federal Earned Income Credit. A copy from the EDD is available here. We recommend that covered employers distribute the notice to employees now and include it in new hire packets moving forward.

Legal Challenges?

The question on everyone’s mind is whether the Ordinance will be challenged and perhaps overturned or amended before next July. It appears that various hotel associations are considering such challenges, however, they need hotels to fund them.

Some legal arguments the associations may make include: (1) the Ordinance violates Equal Protection principles because it is unduly focused on one industry; (2) the Ordinance violates Due Process principles based on the way it was enacted by the City Council, and the purported failure to properly consider the commissioned report on the Ordinance’s potential economic impact; and (3) the Ordinance is preempted by federal labor law (the NLRA).

Notably, many similar arguments were made in 2007-2008 with regard to the AEHZ Ordinance, and ultimately failed.

There is also the possibility of an Ordinance Initiative Petition, whereby an alternate ordinance is proposed. This could force the City Council to adopt the alternate ordinance, call a special election, or renegotiate and modify terms of current Ordinance.

In addition, Mayor Garcetti has proposed a citywide minimum wage increase that is being considered by the City Council. If that is implemented before July, it could cause the City Council to amend, change or even rescind the current Ordinance.

Hotel To Do List

We recommend that all Los Angeles area hotels do the following:

First, determine if the Ordinance applies to your property. Union hotels without a “clear and ambiguous waiver” should contact labor counsel to determine if one can be promptly negotiated.

Second, covered hotels should:  (1) Consult with legal counsel promptly to confirm compliance with the impending service charge requirement; (2) consult with local, state and federal hotel associations if they are interested in participating in legal challenges; (3) provide tax notice to current employees and add it to new hire packets going forward; and (4) budget for pending changes in minimum wage and time off policies, and plan to update policies and handbooks before July 2015.

Third, hotels not covered should consider how the Ordinance may create pressure to increase wages to retain employees, and budget/plan accordingly.

Finally, everyone should stay tuned to Fox Rothschild for future blog posts on the California Employment Law Blog and alerts on this topic.