Hotel Management Agreements

Hotel Management Agreement Negotiations - the Issues Which Currently Take Up the Time and Generate the Angst

The implications of the owner employing the hotel employees whilst being under the direction of the operator

Baker & McKenzie

During the course of a hotel management agreement negotiation there are many issues to be identified, negotiated and resolved. Some issues seem to come up more regularly than others and seem to take a disproportionate amount of time to deal with to the satisfaction of both owners and operators. In this series we will focus on a number of issues which fall into this category.

We will start with the issue which is particularly perplexing to first time owners - the requirement of most hotel operating companies (particularly the international operators) that the owner is required to employ the hotel employees (except perhaps for a small number of senior employees such as the general manager, finance director, and/or director of sales and marketing), but that such employees are to be under the control of the operator.

A typical clause to effect this arrangement is as follows:-

"Subject to the terms of this Agreement, Owner engages [Operator] to supervise, direct and control all aspects of the operation of the Hotel on a sole and exclusive basis during the Operating Term, and [Operator] accepts such engagement. During the Term, Owner grants to [Operator] the sole and exclusive right, authority and discretion to take or cause to be taken all such actions in the name and on behalf of Owner that [Operator] reasonably deems necessary or advisable."

The reason why operators insist upon this requirement is simple. In the event of the owner's financial collapse which necessitates closure of the hotel and the termination of hotel employees the operator does not want to be the party legally required to make termination payments which may involve hundreds of employees and very substantial amounts of money.

Since we are based in Australia, we will approach the questions below from a broadly Australian perspective. Local employment laws in other jurisdictions may vary the discussion on any one or more of the questions posed.

  
Topic     Discussion
  1. What control does the Owner have over Hotel employees which it employs?
Where an Owner employs Hotel employees, the Owner will be regarded as having absolute control over those employees as a matter of law.

Whilst the Owner may give the Operator permission to direct and control its employees at a practical level, the Owner will retain ultimate control over, and responsibility for its employees, including in relation to compliance with minimum wage obligations and other minimum terms of employment, and with work health and safety (WHS) and discrimination legislation.

 

  1. What control does the Operator have over Hotel employees?
Generally, an Operator will be given scope to direct and control day-to-day management of Hotel employees, even though those employees are employed by the Owner.

The scope of the Operator's control will generally be described in a Management Agreement. Some actions or decisions (particularly those that are likely to create a risk of additional liability for the Owner, like termination of employment) should require the involvement and approval of the Owner.

 

  1. What control does the Owner have over any employees which the Operator employs?
The Owner has no automatic right to direct and control Operator employees, except through the Management Agreement.

The exception to this might be where the Owner has a concern about health and safety, and may seek to exercise ultimate rights of control over its premises (and therefore persons on its premises). Although, the Owner would in such circumstances have simultaneous WHS obligations to those of the Operator, requiring consultation over particular WHS measures.

 

  1. What are the consequences for the Owner if the Operator terminates an employee illegally or inappropriately?
The Owner will be liable for any penalties, damages, compensation or other order arising out of an inappropriate or illegal dismissal.

The Owner can protect against this kind of circumstance by requiring its involvement in termination decisions, or otherwise by including indemnities for such loss arising out of the Operator's conduct. However, the Owner will not be able to enforce indemnities for certain types of conduct  (for example, in relation to criminal offences - see below).

 

  1. What are the consequences to the Owner if an employee does something wrong (such as serves alcohol to a person who is obviously heavily intoxicated)?
The Owner will always be vicariously liable for the conduct of its employees in connection with their employment. This is regardless of the Operator's involvement in directing employees' day-to-day activities.
  1. What redress does the Owner have against the Operator in the circumstances set out in paragraph 5 above?
An Owner may be able to seek redress under the Management Contract. To the extent that the Operator is charged with overseeing and managing performance of the Owner's employees, the Owner can seek to include indemnification for any Operator failure leading to inappropriate employee conduct.

Alternatively, where the Operator has failed in its own duty of care, an Owner may be able to bring a claim against the Operator in negligence (or join the Operator to proceedings as a defendant in certain types of claim where the Owner is itself a defendant).

 

  1. What are the consequences to the Owner if an employee does something or doesn't do something which he or she should have done which constitutes a criminal offence?
The Owner can protect against this kind of circumstance by including indemnities for such loss arising out of the Operator's conduct.

However, the Owner will not be able to enforce indemnities for certain costs associated with defending criminal proceedings (or costs arising out of a criminal offence). Amongst other things, Courts will not enforce indemnities relating to criminal charges on public policy grounds.

 

  1. What practical steps can an Owner take to mitigate its civil and criminal liability?
An Owner can seek indemnification for the acts and omissions of the Operator in managing Owner employees. However, indemnities may not be enforceable in all instances (particularly in relation to matters that may end in criminal liability).

In any event, establishing appropriate systems to prevent breach, and regular review of compliance with those systems, is key to managing potential liability.

Ideally, an Owner should be monitoring the standard of the Operator's Human Resources management. The Operator's Human Resources capability and track record should be a key criteria for consideration in appointing (or renewing the appointment of) an Operator.

The Owner will retain obligations in relation to its workforce, and will need to be able to demonstrate that it has considered those obligations at the outset of any Management Agreement, and also during the course of its operation. For example, WHS laws require a business to take reasonable steps to prevent risks of harm, including in relation to auditing compliance with appropriate policies and controls. Where an Owner delegates oversight to an Operator, the Owner must still be able to demonstrate that it is regularly auditing the Operator's performance against policies and controls, and reporting key compliance information appropriately.

 

 

About Baker & McKenzie

Founded in 1949, Baker & McKenzie advises many of the world’s most dynamic and successful business organizations through more than 11,000 people in 77 offices in 47 countries. The Firm is known for its global perspective, deep understanding of the local language and culture of business, uncompromising commitment to excellence, and world-class fluency in its client service. Global revenues for the fiscal year ended 30 June 2014, were US$2.54 billion. Eduardo Leite is Chairman of the Executive Committee. (www.bakermckenzie.com)



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