The employment of hotel staff can be one of the most confusing aspects of hotel management agreements (HMAs). In this article, we will do our best to demystify the topic and have you talking like an expert.
Hotels operated under an HMA do an excellent job of disguising the legal relationships that sit behind them. Take hotel staff, for instance.
They wear the uniform of an Operator, take their directions from the Operator, and go to lengths to give you the Operator guest experience – and so it’s easy to think they’re employees of the Operator.
But most commonly, it is actually the Owner (or an Owner affiliate) that is their legal employer.
This follows from the underlying principle of HMAs that the hotel and all its assets belong to and are the liability of the Owner – and makes practical sense (from the Owner's perspective!) inasmuch as it ensures that the staff remain at the hotel if the HMA comes to an end.
It does, though, lead to a complex setup where the staff are employed by the Owner, but all staff matters (hiring, firing, training, setting of employment terms and policies and handling of HR matters) are directed and managed by the Operator.
There are some exceptions – for example, an Owner will usually negotiate approval rights over key roles (such as the general manager and the finance director) and possibly over levels of staff remuneration. In addition, an Operator usually reserves the right to employ certain senior positions itself for practical reasons (so it can more easily redeploy valuable senior staff to other hotels).
There are also situations where an Operator (or an affiliate of the Operator) will agree to employ the staff, though it is less common. This typically arises if an Owner cannot employ staff for legal or regulatory reasons (such as in the case of certain pension funds, insurance companies and state-owned entities) – or if the Owner is otherwise in a strong bargaining position to secure this concession.
So, what is at stake when it comes to employing the staff?
It is mainly a question of risk and liability. The legal employer will have contractual and statutory legal obligations towards its employees – and so will bear direct liability for these.
The HMA may contractually allocate staff liabilities as between Owner and Operator, but this will be secondary and will, at best, only allow the legal employer to recover the relevant liability from the other party after it has been incurred – either by way of an operating expense, indemnity or damages claim (depending on the situation).
To give an example – if a hotel employee experiences harassment in the workplace by another employee, then their primary (and most straightforward) remedy would be to bring a claim against their employer who is, in general, vicariously liable for the acts and omissions of their employees in the course of their employment. Depending on the facts, a negligence claim against a non-employer may also be available to the employee – but this is a harder claim to make out (as the employee would have to establish that the non-employing party owed them a legal duty of care) and is therefore a much less straightforward course of action.
In the normal HMA set up, the legal employer would be the Owner – and so the Owner would be named as defendant on the claim and bear direct liability for it (even if the Owner had no actual practical involvement with the staff and it was the Operator’s fault).
If it was the Operator’s fault or negligence that led to the claim, then an Owner may be able to recover its liability from the Operator by way of a contractual claim for breach of the HMA – but an Operator’s liability under an HMA is usually very limited (often extending only to gross negligence or wilful default), leaving very narrow paths to recovery for an Owner.
By not being the legal employer of the staff, it is also easier for the Operator to distinguish its own actions from those of the Hotel employees – with the Operator's position being that it can give directions to the staff, but cannot force a third party's employees to comply with those directions. This principle can be reinforced in the wording of HMAs, which can refer to the Operator “giving directions” to the senior Hotel staff for them to manage the Hotel (and rest of the staff), rather than the Operator (itself and directly) managing the Hotel and staff. This separation helps an Operator to deflect liability for breach under the HMA on the basis that the actions of Hotel staff (which may otherwise be a breach if committed by the Operator) cannot be imputed to the Operator.
It's therefore not difficult to see why normally, Owner as employer is the Operator’s preferred position. While this may seem unbalanced to an Owner, an Operator would say that narrowing its liability vis-à-vis Hotel staff is proportionate given the Operator’s limited financial return by way of its fees (as compared to the Owner’s higher potential return).
By the same token, liability is also what drives Owners (and Operators, where applicable) to use affiliated SPVs to employ the staff, because it will segregate and ring-fence that direct employee liability within the SPV (which may also be joined as a party to the HMA). While using an SPV can bring some benefit, it will not, however, change the overall liability position as between Owner and Operator under the HMA.
There can, also, be VAT/cash-flow advantages to the Owner (or a VAT grouped affiliate) employing the staff – since Operator-employed staff may need to be charged to the hotel business as a service attracting VAT.
In closing - here is a quick run-down of the key areas to focus on with staff when it comes to negotiating an HMA:
We will endeavour to cover these in more detail in future instalments of HMA Bites in our Check-In newsletter.