UK: The Hotel Owner, His Operator And The Employees

Last Updated: 7 August 2008
Article by Christoff Piennar, Aisha Dickson, David Israel and Julian Yew

In recent years, Operating Company (OpCo) and Property Company (PropCo) structures have increasingly found favour with private equity firms looking to create value from businesses that are asset-rich. Typically, the private equity firm will acquire the hotel business and separate the ownership of the hotel property from the operational business. The PropCo leases the hotels to a separate OpCo for an open market rent reviewed five-yearly or on an annual indexation basis. The OpCo (or owner) then appoints a hotel operator to run the hotel under a hotel management contract.

Human capital

The principle behind a management contract is that the hotel operator acts as the OpCo's agent in all matters relating to the operation of the hotel.

Typically, the hotel operator has the responsibility of hiring and training hotel personnel. In a significant proportion of management agreements, the general manager, financial controller or director of sales and marketing are usually employed by the hotel operator with the owner's prior approval and with the payroll for those staff being charged back to the hotel operation. The rest of the hotel personnel are usually employed directly by the owner.

It is not uncommon to ensure that the owner can at least review the standard form of employment contract produced by the hotel operator and have some input regarding group and other benefits that may impose additional liabilities on it.

Employment law issues

In a triangular relationship of this nature, the question is who has day-to-day control of the employees so as to give rise to an employer–employee relationship? For example, if there are any performance-related issues with the F&B or housekeeping staff, should the hotel operator manage these issues on behalf of the owner? If the relationship is not working out, who has the power of dismissal? Would the owner be responsible for any discriminatory acts carried out by the hotel operator?

Most of the employees are directly employed by and belong to the owner, otherwise the owner will lose all the staff when it decides to change 'brands' – a disastrous consequence indeed for the operations director. He or she would have a hotel but no staff to serve the guests! However, can the employees of the owner claim that as they work under the day-to-day control of the hotel operator, they are actually employees of the hotel operator rather than the owner so that if the management contract is terminated, they should transfer to another property managed by the hotel operator together with senior management under the Transfer of Undertakings (Protection from Employment) Regulations 2006?

OpCo and PropCo structures present some employment law challenges for the HR director in these respects.

In addition, as the owner will often need to change the employment benefits offered to their staff depending on the hotel operator's standard practice, it is important for the owner to ensure that the employment contracts of its junior staff expressly allow for their contractual benefits to be changed from time to time and aligned to any operator appointed by the owner to manage the property.

Agency workers

The 'triangular' contractual relationship peculiar to the hotel industry is akin to the current debate on the rights of agency workers providing services to 'end users' via the 'employment agency'. Many hotels use temp workers, particularly in the housekeeping and banqueting departments. Litigation over who is the legal employer with whom employment rights rest against continues to dominate legal headlines. Typically, such workers would claim that they are no different to ordinary employees employed by the hotel and should therefore have the same employment protection rights and contractual benefits.

There have been a number of inconsistent tribunal decisions on the employment status of agency workers, but the view from the appellate courts is that the time is ripe for the Government to legislate on this area to provide more clarity for employers and employees. Following pressure from various campaign groups and trade unions, government proposals are under way to confer agency workers equal pay and holiday entitlements after 12 weeks in the job. The proposal will hinge on a Europe-wide agreement on agency workers' rights. Only when Brussels passes a directive will the Government be able to implement legislation of its own. It is likely that any new laws passed will impact on how temp workers are used by hoteliers to supplement their ordinary workforce going forward.

Risks management

The current industry practice between hotel owners and operators is vulnerable to employment status disputes and should be carefully managed. Where appropriate, indemnities should be agreed in the hotel management contract between the owner and hotel operator in relation to any employment-related liabilities (including acts of discrimination) connected with the hotel staff.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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