When you defeat the boss of the quest, at the top of the tower, your player gets poisoned. The poison is special, last 7 days and prevents you from using stealth.
The poison is removed when you complete the next quest in the chain, or if you have a high(?) level player cast some form of remove poison spell.
If the foreman doesn't have the key on him, you'll probably need to kill him and wait for him to respawn.
If you don't pick pocket the key from the foreman (killing him doesn't give you the key, it must be pick pocketed) and kill the boss you will get a 7 day debuff, which prevents you from using stealth. This prevents you from using pick pocket on the foreman, making the quest impossible.
The solution to this is to have a high level healer cure you of the poison, then return and pick pocket the key.
The directions given to get to the next quest should be followed (southwest from the undead city, then east). If you take a shortcut and go straight south / southeast from the undead city to your destination you will pass through an area with much higher level enemies.