Former Employees Say New York Sports Club Has Mishandled Customer Memberships For Years

For weeks, the parent company of the New York Sports Club chain faced a backlash on social media for continuing to charge members while its gyms have closed during the coronavirus pandemic. Now, amid reports of the company considering filing for bankruptcy, former employees say some disturbing gym management behavior and other problems have persisted for years. 

Town Sports International Holdings, which trades on Nasdaq and owns New York Sports Club, Boston Sports Club and others, was forced to shutter most of its 186 gyms on March 16 because of shelter-in-place orders. But it came under fire when it continued to charge members weeks after the closures, despite laying off most of its gym staff. The Facebook page for New York Sports Club bristles with 2,000 comments, many of them from enraged customers. One member wrote, “I’m a nurse, risking exposure to myself to COVID daily, and waking up to see a charge from you guys was the real cherry on top of the cake. You guys should feel ASHAMED for charging people during a time like this. DISGUSTING.” 

On Twitter, dozens of members complained about being charged their monthly fee on April 1 or 2 — two weeks after the gyms were shut down. Said one: “I assume you will be paying back April fees + interest? None of us agreed to give you an interest free loan.” In response to many of these comments, New York Sports Club apologized and directed members to contact customer service via email.

On March 31, Town Sports CEO Patrick Walsh sent an email to members saying the company would issue account credits and address all membership-related concerns once the gyms opened. He also offered members a membership to Town Sports’ Elite clubs, which are higher-end clubs that can cost upward of $100 per month at their current membership rate, through the end of 2020. If members did not want to be upgraded, Walsh directed them to email a customer service email address, where a representative could freeze their membership.

Exasperated, club members in New York and Boston filed class action lawsuits against the company in March and early April, alleging Town Sports wrongly charged membership dues while their clubs were closed. Two separate lawsuits were filed by Boston club members and are still ongoing. Jack Siegal, an attorney representing Town Sports, says the company expects membership fee actions will be dismissed, and commented, “These lawsuits, which the [attorneys general] have declined to initiate, are improperly intended to leverage the current global health crisis in which the company and all of its peers find themselves. There is no merit to the lawsuits.”

On April 3, attorneys general in New York, Pennsylvania and Washington, D.C. sent a letter to Town Sports demanding the company freeze membership dues without fees until its gyms reopened. 

It wasn’t until April 8 that Town Sports posted a letter to members on the New York Sports Club website that memberships would be automatically frozen at no cost. However, the club did not offer to refund April charges; instead, it said members would receive additional days of membership equal to the number of days paid for when clubs were closed. The company responded to questions through attorney Siegal and Town Sports Vice President Anthony Messina. “As planned, the Company froze all memberships when it became clear the clubs would not open by May 1, 2020,” Siegal commented. He added that memberships are annual fees that are amortized and billed monthly, and are not adjusted on a monthly or other basis. The letter to members also said that if customers wanted to cancel their membership, they should contact the company. 

Two weeks later, on April 24, New York Attorney General Letitia James announced she had secured commitments from Town Sports to credit members for the time the gym is closed, allow members to electronically cancel memberships without penalties or conditions by April 30 and resolve all complaints filed with her office. On Monday, Washington, D.C. Attorney General Karl Racine announced an identical commitment from the company.

This reporter had been a member for three years; I first sent an email to New York Sports Club requesting an account freeze on March 18. After receiving an automated response saying my concerns would be addressed when the clubs reopened, I sent four subsequent emails, including one to the address that Walsh instructed members to use. After nine days without a response, I reached out to my credit card company to reverse the charge from New York Sports Club.

Town Sports wasn’t the only gym to react this way. Facing a similar social media backlash, and a lawsuit filed by a gym member, 24 Hour Fitness suspended all membership billing, services and fees on April 16 – a month after some states had ordered gyms to be closed. Members were told they would receive additional days of club access equal to the number of days paid for while the clubs were closed in their area between March 17 and April 15. The company would not comment on pending litigation. Crunch Fitness gyms suspended billing at their North American locations as of April 1, while Gold’s Gym froze memberships at its company-owned gyms on March 24. In comparison, Equinox froze membership dues at no cost to members on March 17, and Planet Fitness froze membership dues upon club closures in mid-March. 

At least 24 federal lawsuits have been filed against Town Sports for membership-related issues since 2015. That compares to at least 18 such suits filed against Planet Fitness and at least three against Crunch Fitness. For context, as of December 2019, Planet Fitness had 14.4 million members at its 2,001 gyms in 50 states, while Town Sports had 605,000 members at its 186 fitness clubs in nine states plus Washington, D.C. and Puerto Rico.

“As a veteran in the fitness industry, I’ll say this: No gym companies, between all the branches, none of them is going to get an A-plus, 100% ethical,” says Jonathan, a former Town Sports employee who asked to only be referred to by his first name. “That’s just the nature of the beast.” However, at Town Sports, he said there was “maybe a little too much” unethical behavior going on. 

The chaos of the past month has wreaked havoc on Town Sports’ stock price, which has plunged 60% since right before it shuttered most of its gyms in mid-March. Shares were trading at $0.42 on April 24, down from $2.86 in mid-January. Meanwhile, publicly-traded competitor Planet Fitness (with a $5 billion market capitalization) was trading at $57.90 on April 24, down from $79.17 in mid-January.

Town Sports — which lost $18 million on $467 million in revenues last year— now has a market capitalization of a mere $12 million. Citing people with knowledge of the matter, Bloomberg reported on April 14 that Town Sports is considering a bankruptcy filing. When asked to comment on the report, the company said it was “focusing its efforts on operating day-to-day in the current environment and planning for its re-opening, when that is allowed to happen.” 

But Town Sports’ troubles started long before coronavirus hit. The $30 billion fitness and health club industry has already been shaken up by a new generation of upstarts including luxury fitness retail chains and boutique classes like Peloton, Orangetheory and SoulCycle. Peloton alone raked in $915 million in revenue during its fiscal year ending in June 2019, and currently has a nearly $9 billion market capitalization.

Meanwhile, membership growth at traditional gyms like New York Sports Club has been trailing the upstarts. Between 2013 and 2017, membership at boutique studios cumulatively grew by 121%, while it grew only 15% at traditional gyms, according to the International Health, Racquet, and Sportsclub Association. 

The recent backlash from members comes as little surprise to many former employees. Tensions between Town Sports management, members and employees have been simmering for years, according to 12 former Town Sports employees who spoke to Forbes on condition of anonymity. These employees describe a corporate culture that was hyper-focused on signing up new members. Failure to sign up more members than were lost in a given period meant no commission and the potential to be fired for repeated sales misses. “If you hit your numbers and you’re making them money, you get no questions,” says one former employee, who worked as a fitness manager. “They don’t ask you anything. They don’t check anything.” 

In response, Siegal says performance management of employees (including termination) is behavior-based, not solely metric driven. He says the company checks all sales through frequent and thorough sales audits, and all clubs and employees are included regardless of performance.

But to make those numbers, some bent the rules. Faced with intense pressure from corporate to meet enrollment numbers, senior managers and mid- to lower-level employees told Forbes that they witnessed morally dubious practices to inflate member numbers.

“There were a lot of fraudulent sales [upper management] turned a blind eye to,” says one former employee, a senior manager who worked at Town Sports in New York City for more than three years. Town Sports Vice President Messina denies that he did so, and Siegal says the company “does not tolerate improper sales of any kind.” He says improper sales account for less than 1% of sales activity. 

The former employee says they witnessed New York Sports Club employees re-sign up former gym members without their consent between 2016 and 2017. Employees would do this by using gift cards, such as the ones powered by major credit card companies, the former employee said. They would use the gift cards as the down payment to enroll fake members or members who had previously canceled, the former employee recounted. These former members would typically find out they had been re-enrolled when their credit cards were charged for subsequent months, the former employee said. In 2017, the company caught on to this practice and put up a block in its computer system to discourage fraud — one that flagged memberships signed up using the same card, the former employee said. 

“The amount of current or past members who called me saying they were called by a collections agent, [former members] who had left and weren’t even living in the state — that was disgusting,” the former employee said. 

However, Messina says the block was put in place to curb member abuse of gift cards. He says members would enroll using gift cards instead of credit cards, thus avoiding future fees. Town Sports banned the use of gift cards in its clubs in 2018. Messina says there was no incentive to use gift cards to re-sign up former members, as employees are not paid commission for reinstating former members. In “rare” instances, the company terminated employees when Messina became aware they were signing up fake members using gift cards, he says.

Siegal says the company does not re-sign members to contracts without their consent. “The notion that the company’s employees would use gift cards to sign up members — who would only discover the sign up when their personal credit cards were charged — makes zero sense,” he says. “Signing up using a gift card actually ensures the opposite result: a member’s personal card is not charged, which is why the company cracked down on any use of gift cards in that fashion.”

Former employee Jonathan said the commission structure incentivized sales associates to delay member cancellations requests as they were paid commission off “net member gain,” or the amount of members they signed up versus those who cancelled each month. If sales associates found they could not meet their net member gain numbers because they had too many cancellation requests, they would put off canceling memberships, he said. Three other former employees acknowledged that this practice occurred between 2016 and 2019, though two said they witnessed some fellow employees get fired for doing so. Town Sports says it has as an internal audit process for addressing such potential misconduct. The company said it fired the individuals involved in these “isolated” incidences. 

Town Sports has a history of being sued for its cancellation policies. In November 2016, the Washington, D.C. attorney general’s office announced a settlement with Town Sports, claiming the gym continued to bill consumers after they had canceled. Under the settlement, Town Sports was required to refund members who filed complaints that they were billed after cancelling their memberships or who filed such complaints for the next three years. Three years later, in January 2019, the Washington, D.C. attorney general’s office filed a lawsuit against Town Sports claiming the company was violating the terms of the 2016 settlement. Because the case is still ongoing, Town Sports said it could not “provide a substantive comment, but it is optimistic the matter will successfully resolve in its favor, based on the lack of evidence of any wrongdoing or violation of the settlement agreement.” 

Six former employees said the gym occasionally increased its monthly fees without first informing members. Under terms of recent New York Sports Club contracts, monthly fees are automatically increased by $5 annually. If the company wants to increase fees by more than $5, they are required to give members 30 days notice. Each member received an increase once per calendar year, two former employees said. These increases were typically around $10 per year, three former employees said.

However, Town Sports says the company has always notified members before raising membership dues, and validates notice to members through a third party service.

Another former employee said he thought the company did make a good faith effort to contact members about increases to their monthly fees by email or by a mailed letter. “The company isn’t trying to maliciously or unethically charge members,” this former employee says. “Is there room for improvement in terms of how the company communicates with members? I think so.”

Multiple consumers reported having issues with seemingly random rate increases, as well as issues cancelling their memberships, to the Better Business Bureau, which gives Town Sports an F rating. Why? Town Sports’ failure to respond to 54 complaints filed against it, as well as 22 complaints filed that were not resolved, according to the Better Business Bureau. The company was unable to comment on its rating, but said, “Members vote with their feet and membership retention has been historically good on a company-wide basis.” For comparison, New York rival gym Planet Fitness has a score of B-, Blink Fitness (owned by Equinox) has a B and 24 Hour Fitness scored an A+. Luxury gym Equinox scored an F rating, as well. Equinox declined comment on its rating.

Town Sports has been around since 1973, but former employees say many of these issues only came to a head in the past few years, after Walsh was appointed CEO. Walsh, an entrepreneurial investor known for shaking profits out of restaurant chains like BJ’s and Red Robin, bought a stake in the company in August 2014. Shortly after, he won a shareholder campaign to replace Town Sports’ board. He was named executive chairman of the board in June 2015 and became CEO in September 2016. In the two years that followed, Town Sports’ stock price nearly quintupled, rising from roughly $3 per share to $14.75 per share in July 2018. 

On March 13, three days before it was forced to close 95% of its clubs, Town Sports borrowed $12.5 million from its revolving credit facility, according to the company’s annual report. As of December 2019, it reported $178 million in debt outstanding under the loan term, maturing on November 15 of this year. However, the company said in its annual report dated March 20, 2020 that it does not have enough cash to satisfy the loan on that date. 

As various states discuss conditions for re-opening businesses, the future of all gyms across the country seems uncertain.

Editor’s note, April 28, 2020: This article has been updated with additional responses from a lawyer for Town Sports International Holdings.