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Hospitality Posts
Hospitality Posts

Hospitality Posts (140)

It is clear that the boutique/lifestyle hotel niche is longer occupied by just a handful of rogue, counter cultural hoteliers. The evolution of lifestyle hotels from a very small, extremely specialized industry segment, to its current status as one of the fastest growing product types, has been nothing short of astounding.

It is sometimes debated who actually was the pioneer who developed the first of what has become generally known as contemporary boutique hotels, in the United States. But clearly, the concept did not come from the mainstream hotel industry. Depending on to whom you talk, Ian Schrager, starting with Morgan's Hotel in New York, gets the credit; others will say that Bill Kimpton was the founder, converting broken down old small hotels in San Francisco into "gems", with "hot" restaurants next door.

However, the "winner" may very well have been a gentleman by the name of Ashkenazy, who converted several vintage apartment buildings in the West Hollywood district of Los Angeles into genuine, high style boutique hotels back in the 1970's; one of which was the original Mondrian on Sunset Boulevard, now one of the most notable and successful boutique hotels owned by the Morgans Group, and originally redeveloped by Ian Schrager.

All three of these gentlemen were visionaries, highly creative, and none came from either a hospitality or even corporate background. Also, the hotel industry at large was moving in an entirely different direction; but these entrepeneurs weren't taking notice. They were following their passions and instincts, with no track record or "feasibility studies" to support their initial projects. Many of the properties weren't instant successes, but these hoteliers pressed on nonetheless, knowing that they were onto something that would bear fruit in the years to come.

What's most noteworthy, however, is that the ultimate success of the segment that these brave men launched arguably was derived from an entrepeneural vision of one individual; as opposed to flowing from a corporate, risk-averse, large public, or even private, hotel company. The idiosyncracies that made at least a couple of these hoteliers challenging with whom to deal, were the same ones that were vital to the singular vitality and innovation of their respective products. The concepts were not formed by committees, work groups, or brand teams, as they typically are today. Despite the obvious advantages of "group think", and gleaning opinions and recommendations from a variety of people with complementary disciplines, I would contend that at the end of the day the final result may not have the leading edge 'push the envelope' attributes of those derived from one briliant, take no prisoners, pioneer, with no shareholders of Boards of Directors to whom to account.

For most of the period during which the boutique hotel concept was forming and growing, the industry at large generally regarded this product type as an oddball, replete with challenges that the legacy chains found to be too daunting to take on. The conventional wisdom maintained that boutique hotels were: too small to be truly profitable, couldn't stamp them out and thus too expensive to build, couldn't compete effectively with a chain affiliation's marketing clout, difficult to finance, didn't perform as well in an economic downturn, etc. So the chains allowed the niche operators to dominate this segment, while they watched from the sidelines.

To most of the chains, the byword was "segmentation" and branding; clarity of delineation of brand attributes to the consumer who, they felt, wanted and expected "no suprises". Their first priority was to create sub-brands in specific segments (limited service, extended stay, hard budget, etc) offered by their big name competitors. The chains were for the most part playing 'follow the leader', as opposed to undergoing groundbreaking efforts to create new and highly unique lodging products that could appeal to a hidden target customer that would flee the big box hotels in large numbers, if they had a choice. That's not to say that there wasn't innovation going on; there certainly was. The Courtyard concept redefined limited service in its time; Embassy Suites went against the developer's conventional wisdom of squeezing as many keys as you can into a site, opting for creating a more residential and spacious experience for its customers, as well as inventing the free cocktail hour/breakfast concept; all of which presented significant 'value added' for both the mid level corporate as well as family leisure traveler, to great success. But "cool", hip, non-flagged hotels, with trendy, free-standing, and stylish restaurants and bars; with less than 200 rooms worth of revenue to flow to the bottom line? No thank you! Meanwhile, Schrager and Kimpton hotels were slowly, under the radar screen, grabbing up market share and their own customer "brand loyalty", resulting in Revpar indexes in many markets heading north of 100% against competitive sets made up of the full service chain brands.

But not everyone was just watching and waiting. Barry Sternlicht saw the potential of combining the allure of the lifestyle concept with the marketing and financial clout of a large hotel company. So Barry followed his vision and created W; and in the process, defied and proved wrong the Kimpton and Schrager mantra that boutique hotels and a hard brand could not co-habitate successfully.

The W phenomenon proved that, under the right circumstances, a successful niche lifestyle brand could be developed and rolled out by a large, brand-oriented hotel organization. As a result, some of the legacy chains have now hit the drawing boards to design their own lifestyle brands, so as not to be left in the dust by continuing to ignore this product typ; with its success being fueled by ever more sophisticated and affluent travelers with time and money on their hands; yes, the famous 'baby boomers' and 'gen-exers'; the key target lifestyle hotel consumers, who are now coming out of the woodwork as a dominant consumer of literally every type of product and service, in addition to travel and leisure.

However, I would challenge the big boys to take care regarding how they develop, and who is made responsible for developing, their lifestyle hotel prototype. Designing a brand that can compete successfully with the W's and Kimptons of the world requires a change of mindset and approach. This task is far different from creating brand which is for the most part a variant of the traditional hotel product. It is a leap of faith to believe that the same executive team that has made a living rolling out and operating legacy brands can all of a sudden reinvent themselves and magically alter what may be their more traditional viewpoint of the industry. Everyone knows that the pioneers within Kimpton, now the dominant player in the segment, most of which are still with the company, were for the most part home-grown entrepreneurial types who left the chains to follow Bill Kimpton's vision ; and no one would accuse Ian Schrager's original team of being conventional hoteliers.

Many people don't realize that W was not born from the Sheraton and Westin brand teams; but from a hand-picked group of "outsiders" that operated virtually independently from the White Plains team, and taking direction from Barry himself. In fact, many of the people initially responsible for designing the look and feel of W were from the lifestyle retail industry, from companies such as Pottery Barn, as Barry felt that retail and fashion veterans were inherently more creative and marketing savvy than many of their hotel industry counterparts. Who knows what W would have become if Barry didn't take this "hothouse" and groundbreaking approach to birthing this brand?

So, I would suggest that the legacy chains not ignore the unique dynamics, as well as the profiles of the people themselves, that have been behind the successful evolution of the lifestyle segment. I would take a long, hard look in the mirror, and take inventory of the tools in their company's toolbox before embarking on developing a boutique brand. After all, hammers and nails are great for building a house, but won't work too well for carving a sculpture. The same brand attributes that attract the traditional corporate "road warrior" and family leisure customer don't cut it for the prototype lifestyle hotel target demographic It will take more than an interesting design package, and young employees dressed all in black, to lure away loyal customers from the dominant boutique brands. It is the "soul" of a true lifestyle hotel, not the body, which is its true differentiation. The legacy chains will need to find that "soul" within their organization, or import it from the outside, to become real players in this fascinating and growing segment of our industry.

Reprinted from the Hotel Business Review with permission from www.HotelExecutive.com.

The history of food safety, corporate irresponsibility, and workers’ rights is long and tortuous (as well as tortious). From the days of Upton Sinclair (rotten and diseased meat), unpasteurized and tuberculosis-laden milk, all the way through the present, the dangers of unsafe food have been compounded by improperly trained and poorly paid food workers.

In fact, during my career as a food safety lawyer on behalf of people harmed by contaminated food, I can honestly say that only a few cases did not involve food workers who were insufficiently trained, poorly paid or both.

That’s particularly true in the restaurant industry, especially in fast food restaurants. Employees of those establishments who are paid poorly, have few benefits and no pensions are time and time again implicated in foodborne illness outbreaks. That happens because if you are a marginalized worker, you do not have the luxury that most of take for granted: paid sick time or a livable wage sufficient to accrue the financial cushion on which most of us depend.

I am reminded of this financial reality by a recent newspaper article concerning a protest to demand higher wages and sick leave for all employees (http://www.startribune.com/local/stpaul/284174151.html). This paragraph from the article, exemplifies the problem:

     Guillermo Lindsay, the night manager at McDonald’s Midway restaurant, said he was recently forced to come to work      with the stomach flu because managers didn’t answer their phones when he called four times to alert them that he        was ill. “If I didn’t come in, I would have gotten written up, suspended or fired. Instead I came in and then two              other workers got sick.”

The problem is not stupid, lazy, inconsiderate workers; it’s a system that under-values human dignity and public safety. If you want food safety, you have to pay for it. It’s really that simple.

 

 

For the first time in two years, foie gras can be sold by retailers and gourmet California chefs can add the delicacy to their menus. A U.S. District Court judge yesterday ruled that the prohibition on the sale of the fatty liver dish violated the federal government’s regulatory domain. The judge based his decision on the federal Poultry Products Inspections Act, which proscribes states from imposing certain conditions on food. While the city of Chicago passed a restriction (that was quickly overturned), California is the only state to have enacted such a law. 

The act of force-feeding ducks and geese in order to enlarge their livers was seen as inhumane by the 2004 California Legislature that passed the prohibition, though it did not take effect until 2012. The ban was challenged by poultry producer Hudson Valley Foie Gras of New York, Hot’s Restaurant Group in Southern California and the Canadian trade organization Association des Eleveurs de Canards et d’Oies du Quebec. Several Bay area restaurants immediately began serving foie gras—including Dirty Habit, Goose & Gander, Hapa Ramen, La Toque and Torc.

People for the Ethical Treatment of Animals (PETA) was amongst animal rights organizations to criticize the ruling. It is noteworthy that the actual production of foie gras in California remains illegal. 

Ask nearly any leader in the hotel industry and/or their HR manager for the definition of a “hostile work environment,” and they will have a pretty solid answer. That’s because many of them have had to handle employee claims for illegal harassment. Further, these leaders, for the most part, have dealt with such employee issues as inappropriate conduct that have the potential to become a lawsuit.

Now ask these same leaders and their HR managers to provide a legal definition for the term “assault.” Getting an accurate definition likely will be more difficult. But it is a legal awareness that is becoming more important for managers to understand in supervising their hotel employees and ensuring that the workplace is not a breeding ground for litigation. While HR managers are accustomed to investigating employee complaints with an eye towards the common federal claims upon which they have been trained, they are now going to have to pay attention to emerging state law claims, as well. 

Civil claims for assault and battery have existed for decades, but in recent years, lawyers representing employees have started to make use of these claims more frequently. Summarized below are the primary reasons for this shift:

 •  Civil assault is typically defined as an instance in which a person demonstrates the intent to hurt another and the      victim believes that he/she will be hurt. There is no requirement of actual contact or physical injury, which is          why the legal definition of assault is so different than the common English meaning. The legal standard is                  relatively low and contains a subjective element, i.e. that the victim believes that he/she is in danger of                  immediate harm. Thus, an assault claim can be hard for an employer to disprove. Likewise, battery is typically          defined as a physical touching without consent. Again, the standard here is often fairly low.

 •  Assault and battery claims regularly come down to contested factual questions, usually between the recollection     of the victim and the alleged wrongdoer as to the nature and specifics of the incident(s) in question. Thus, it can     be hard to get summary judgment in these “he said, she said” situations. In contrast, federal discrimination and       harassment claims involve either adverse employment actions for which the employer is in possession of the             relevant information regarding the rationale for the action or a hostile work environment, which is a high burden     for a plaintiff to meet.

 •  Assault and battery claims are based on state law, which means that a plaintiff can avoid federal court (provided      that the plaintiff is not also pleading federal claims and diversity jurisdiction does not exist). This is significant        because state judges are often less likely to grant summary judgment and are more prone to take a hands-off            approach to discovery.

 •  Most states do not have a broad body of reported case law regarding assault and battery claims, especially in the     employment context. This stands in contrast to federal law on discrimination and harassment claims, which is           extensive and generally useful for an employer seeking summary judgment on claims brought by a former                 employee. In short, assault and battery claims are harder for an employer to litigate in a clean, quick fashion.         They are more fact-intensive, there is less law upon which an employer can rely and they are typically litigated        in forums that are more favorable for employees. Thus, the settlement value of an assault and battery claim is          often higher than that of a discrimination or harassment claim based on the same facts.

Therefore, hotel leaders and their HR personnel should follow some specific steps to help protect against an assault and battery claim. Here are a few such steps:

  1. Be Aware That These Claims Are Real - The first step in guarding against a threat is to know that it exists. Thus, it is important for managers to be aware of the applicable definition of assault and battery in their jurisdiction. Although the definitions are generally similar, there are important variations from state to state.

  2. Listen For the Key Terms - One of the basic skills necessary for being a good HR manager is being an adept listener. Dealing with potential assault and battery claims is no different. With discrimination and harassment claims, the focus is on whether the hotel’s employee is being treated differently on the basis of a protected characteristic. Thus, the words to listen for all relate to fairness and equal treatment. With assault, the focus is on whether the employee was in apprehension of an injury and with battery, the focus is on actual physical contact. Thus, the key words to listen for relate to fear and then to any sort of touching. The treatment of other employees is critical in a discrimination or harassment case, but not as much with assault and battery.

  3. Ask the Right Questions - HR managers have grown adept at looking for the key factors for a harassment or discrimination claim when a hotel employee complains about the conduct of a co-worker, especially when that co-worker is a supervisor. So for example, HR managers know to ask questions about how the co-worker treats other employees and how the co-worker’s conduct affected the complaining employee’s ability to do his/her job. HR managers are less experienced in asking the questions that are critical in the assault and battery context - questions like “did he actually make contact with you?,” “do you have any injuries?,” “do you need to speak with a physician or a mental health professional?,” “did he place you in a position in which you felt like you were about to be physically harmed?,” and “what about his conduct made you feel like you were in danger of an injury?”

  4. Document the Results of the Investigation - This is good advice for any investigation, but it is especially important in the assault and battery context because employees rarely know that assault and battery can be civil claims against their employer. A prudent HR manager should try to avoid a situation in which a hotel employee has a general sense of being disrespected and then, over the course of an interview with a lawyer, is directed into describing the incident(s) as one of assault and battery. Thus, getting an employee to document his or her grievances in the immediate aftermath of an incident can be very useful in combating the coached descriptions that can come out once an employee has been prepared for a deposition in a civil suit.

  5. Emphasize the Importance of Avoiding Fear and Physical Contact in the Workplace - Again, this is good advice in general, but the specter of an assault and battery claim can be useful ammunition in dealing with employees (and especially managers) who come too close to the line for acceptable conduct. For instance, a supervisor who is sometimes loud and aggressive with subordinates might defend his way of managing as being necessary in the particular work environment. It’s one thing to defend that manner of management as being a personal style; it’s another thing to have to defend that style after being told that placing employees in a state of fear of injury can expose the company to the possibility of defending a messy lawsuit. An HR manager can ask that supervisor “do you really want to have to explain in a deposition that you did not intend to hurt that employee in a situation where the employee says that he/she was in fear of immediate injury?” and get the point across quite effectively.

  6. Use Arbitration Agreements - Arbitration provisions are not perfect for every employer/employee relationship, but the assault and battery context is one in which they can be useful. Defending against assault claims can be challenging for any employer in the hotel industry, as it needs to convince the fact-finder that the conduct of the accused might have been insensitive or even rude, but it did not meet the legal definition of assault. That argument will be far more effective when the fact-finder has a legal background, as is the case in arbitration and is not the case in a jury trial. Arbitration provisions are not a panacea, but when weighing whether or not to use them, the prospect of an assault and battery claim is increasingly as one factor to consider.

 Reprinted from the Hotel Business Review with permission from www.HotelExecutive.com

Yes, it's that time again – time to prepare to file your H-1B petitions for Fiscal Year 2016. Starting April 1, 2015, the U.S. Citizenship and Immigration Services will begin accepting H-1B petition filings – subject to the cap – for the next fiscal year, which begins October 1, 2015. We strongly recommend that H-1B petitions that are subject to the cap be filed as close to April 1 as possible because we expect the cap to be exhausted in the first week of April. 

To be able to file on or as soon as possible after April 1, employers will need to begin preparations now.

There is an annual limit on the number of H-1B visas that can be issued each fiscal year to persons subject to the H-1B cap (primarily first-time H-1B beneficiaries) – approximately 65,000 in the general category and 20,000 limited to persons with U.S. master's or more-advanced degrees. In 2014, both caps were exceeded in the first week of April (a total of about 172,500 petitions were received that week), and the USCIS had to conduct a lottery to determine which petitions would be considered. Petitions filed after the first week in April were not even included in the lottery. There is little doubt that the cap will be exceeded in the first week of April 2015 as well.

Exceptions to the H-1B cap

The H-1B cap does not apply to the following: 

• Persons who are or who have been in H-1B status within the last six years;

• Petitions for exempt organizations – institutions of higher education, or a related     or affiliated non-profit entity, non-profit research organization or governmental       research organization; or

• J-1 non-immigrant physicians who are changing status to H-1B and who have            obtained waivers of the two-year return home residency requirement through the    Conrad 30 Program (in which the physician agrees to work in a medically-                underserved area).

Alternatives to the H-1B

If the H-1B option is not available, employers may want to consider these alternatives:

• As a prelude to filing for H-1B, optional practical training for foreign graduates of U.S.              colleges and universities who may be eligible for a year of employment (or up to 29 months      for students in Science, Technology, Engineering and Math fields) after USCIS approval of an      individual's Application for Employment Authorization.

• TN visas under the North American Free Trade Agreement for Canadian and Mexican                   professionals.

• L-1 visas for intracompany transferees. If an employer has foreign operations (or decides to      create them), this visa permits employees to transfer to the U.S.-affiliated company in a          similar position if they have worked abroad for the foreign parent, subsidiary or affiliate            continuously for at least one year within the preceding three years as an executive,                  manager or in a specialized knowledge capacity.

• E visa classification for treaty traders and investors if the L-1 visa is not available.

• J-1 exchange visitor classification for business trainees, scholars and others.

• O-1 visas for individuals with extraordinary ability. Although the standards vary somewhat          depending on the type of employment, generally speaking, the O-1 visa applies to those            recognized as being at the top or near the top of their field of endeavor.

What is the impact of the FDA’s New Food-Labeling Regulations?  The new rules cover any restaurant or “retail food establishment” selling “restaurant-type food.”  Does that include the wide array of retail and hospitality businesses, including bakeries, cafeterias, coffee shops, convenience stores?  Dan Vecchio, a litigator in our Seattle office, has been watching the latest developments.  As our guest author today, Dan can shed his insights on how these new regulations might affect hoteliers and restaurateurs.  Thank you for today’s post, Dan! – Greg

In the spirit of the giving season, the FDA has finally issued its long-awaited final rules on menu labeling, which had languished in draft form for several years.  But for many hospitality businesses, the agency’s year-end gift is little more than a lump of coal.  That is because when the rules go into effect on December 1, 2015, they will require restaurants, hotels, and other sellers of “restaurant-type food” to provide nutrition information for the items on their menus, closing what the FDA perceived as a “regulatory gap” in the food-labeling sphere.

The new rules apply primarily to chain or franchise establishments (although the FDA is quick to point out that other businesses may voluntarily opt in if desired)! Specifically, the rules cover any restaurant or “retail food establishment” that is part of a chain of twenty or more locations doing business under the same name, serving substantially similar food items at each location.  Sounds simple enough, but it is the FDA’s definition of “restaurant” that has caused considerable heartburn.  In the view of the agency, a restaurant can be any one of a wide array of retail and hospitality businesses, including  bakeries, cafeterias, coffee shops, convenience stores, delicatessens, bowling alleys, amusement parks, grocery stores, fast food restaurants, table service restaurants, or any establishment offering for sale what the FDA has helpfully dubbed “restaurant-type food.”

What is “restaurant-type food,” exactly?  According to the new rules, it is food that is usually eaten at the restaurant, or while walking away, or “soon after arriving at another location,” and is either sold for immediate consumption or is ready-to-eat somewhere else.  In other words, whether it’s take-out, dine-in, or maybe a deli sandwich for dinner tonight, the rules will apply.

So, what makes a restaurant part of a chain?  According to the agency, it must be doing business under the same name (or a substantially similar name, such as “Restaurant” and “Restaurant Express”) as at least nineteen other locations, and must serve the same or substantially similar menu items.  “Locations” include restaurants within other facilities, and indeed multiple restaurants within the same building (a mall, for example) are counted individually.  If the restaurant has no name of its own – for example, a cafeteria in an office building or an unnamed hotel café – then the restaurant is considered to be doing business under the name of its parent entity.  So, that means that if each of a hotel’s twenty or more locations has an identically-named or unnamed restaurant (including the one providing room service), the rules will apply to them.  On the other hand, the rules would not apply to a hotel restaurant if it has its own unique name.

To comply with the rules, businesses must include calorie and other nutrition information on their menus, menu boards, signs adjacent to the food, or the like – essentially, wherever the standard food items and prices are listed.  They also must print a “succinct statement” informing customers of the recommended daily caloric intake for adults or children, depending on the menu’s target audience.  Restaurants also must keep nutrition information for their standard fare on hand in case it is requested by a customer – and the restaurant must note on the menu that such information is available.

Failing to adhere to the rules is sure to cause quite the bellyache, as well.  In response to public comments, the FDA noted that any person exercising authority and supervisory responsibility over a restaurant or similar retail food establishment could be liable for a violation.  That could mean that even the owner of a single franchise could get his or her goose cooked if that location isn’t up to snuff.

If there is any silver lining for the hotel industry, though, it is that these rules today don’t apply to alcoholic beverages that are “food on display” and not self-service, such as those bottles of liquor behind the hotel bar.  Of course, any drinks that are listed as standard menu items still will need to be labeled.  Bon appétit!

Originally published on HotelExecutive.com

In the hotel industry, the myriad of complex business relationships also creates legal land-mines for the unwary. In that regard, hotel asset managers, hotel operators and franchisors should be extremely mindful of their legal obligations to their client, the owner of the hotel. Even if the hotel is a single asset, there are potentially four groups that, for a better term, have their fingers in the pie – the owner, hotel asset manager, hotel operator and franchisor. But at the end of the day, each of these relationships confer legal rights for the benefit of the owner and potentially, to the detriment of the asset manager, hotel operator and franchisor.

Hotel Asset Managers

In this day and age, it is very common for an owner of multiple hotels (whether it be individual owners, investors, and lenders) to hire an asset management company to oversee the hotel operator’s day-to-day management of the hotel. For instance, the hotel asset manager will have oversight of operations and the physical asset (the hotel), which includes monitoring ongoing financial performance, the competitive set, the hotel asset, provide support and review of the budgeting process and advise ownership as to management issues.

The hotel asset manager will also manage the hotel by advising the ownership as to optimum investment strategies, the investment community, select and oversee operators, franchise affiliations and consultants, negotiate and administer contracts and approve/monitor capital expenditures. In addition, the hotel asset manager should oversee the actions of the franchisor as well. Regardless of what role the hotel asset manager has undertaken, it will review and analyze daily-reports, financial statements, and other hotel reports prepared by the hotel operator. Even though the hotel asset manager is one step-removed from the hotel operator, the owner is relying on the hotel asset manager to be its “eyes and ears” for the hotel owner. Simply said, the hotel asset manager is the agent for the hotel owner.

Hotel Asset Managers Bound by Agency Law Principles

Historically, the Bible of Liability in the hospitality industry has been the RESTATEMENT (SECOND) OF AGENCY. It has served as the basis for seminal legal changes in the hospitality industry that now generally govern the conduct of hotel operators, and is relied upon extensively in hotel management disputes and is equally applicable to hotel asset managers. Under agency law principles, the hotel asset manager is the agent for the owner, its principal and is legally bound to disclose anything and everything to the owner, its principal. Generally speaking, the failure to disclose such information would constitute a breach of fiduciary duties. The elements of a claim for breach of fiduciary duty are: (1) existence of a fiduciary duty; (2) breach of that duty; and (3) damage caused by the breach.

As an agent of the owner, the hotel asset manager owes certain fiduciary duties to the owner and those duties include but are not limited to, the following: (a) a duty to act in the owner’s best interests; (b) a duty of loyalty; (c) a duty to disclose all information relevant to the owner affairs (candor); (d) a duty to keep and render accounts; (e) a duty not to accept secret payments or other amounts not authorized by the owner; (f) a duty to ensure that the principal's profits are maximized; (g) a duty of care and skill; (h) a duty of good conduct; (i) a duty to act only as authorized; (j) a duty to obey; and (k) a duty not to act for an adverse party without the principal's consent.

A hotel asset manager’s intentional breach of a fiduciary duty is a tort for which the plaintiff may recover punitive damages. While it is a general rule in many jurisdictions that courts allow the recovery of punitive damages where the defendant, in committing a tort, acted willfully, maliciously, or fraudulently, where punitive damages are awarded for breach of fiduciary duty, the actual motives of the defendant and whether the defendant acted with malice are immaterial. But something more than a simple breach is required for the recovery of punitive damages; the acts constituting the breach must have been fraudulent, or at least intentional. An intentional breach may be found where the fiduciary intends to gain an additional benefit for himself.

The hotel asset manager can get into trouble real quick if it fails to monitor reports prepared by the hotel operator, fails to review third-party contracts or avoids “drilling-down” in the financial data, agreements, and contracts to understand the operational side of the hotel. And sometimes, the big hotel asset management companies might have a cozy relationship with national hotel operators and/or hotel franchisors and on occasion, look the other way, because the hotel asset manager is more concerned with cementing future hotel asset management assignments.

Hotel Operators

In 1925, the Hotel Association of New York City designed a hotel account system to provide uniform classification of revenues, expenses, assets, liabilities and equities for hotels to attain and provide comparable financial statements. The system has since then been adopted by the American Hotel & Lodging Association (“AH&LA”) and is now referred to as the ”Uniform System of Accounts for the Lodging Industry.” In addition, the American Hotel & Lodging Educational Institute provides industry leadership in certifications necessary to operate hotels pursuant to the “Uniform System of Accounts for Hotels.”

i) Violations of the “Ten Commandments”

Notwithstanding these operational “Ten Commandments”, the landscape is replete with litigation against hotel operators. For example, there have been cases where the operator has “cooked the books” to obtain incentive fees. Specifically, the hotel operator allegedly ordered items in the last quarter of the calendar year and told the hotel’s vendors to bill the hotel in the first quarter of the next year, in order to obtain an incentive bonus. It’s a simple equation -- the hotel operator fraudulently understated the hotel’s expenses to increase net operating income to achieve its performance bonus. That could be called theft, conversion, fraud or any number of things that would serve as the basis for a lawsuit. 

ii) Control of Hotel Operations Equates to Potential Liability

In another case, the hotel operator (also the franchisor) threw an expensive party at the owner’s hotel but the hotel received no benefit at all - - the party was for the sole benefit of the hotel operator (and franchisor), yet the owner’s hotel was charged the costs for throwing the party. Despite uniform financial controls that are essentially mandated by the “Ten Commandments”, hotel operators still manage to open themselves up for litigation by doing bad acts.

In the context of hospitality litigation, it is much easier to find negligence, malfeasance and/or willful misconduct against the hotel operator because their scope of involvement is “more-hands-on”, more “real-time” and covers a “24/7” cycle with day-to-day operations of the hotel, as opposed to the asset manager that reviews reports after the fact. From an operational stand-point, the hotel guests, the restaurant guests, the bar and lounge patrons and banquet guests all “trigger” immediate responses, needs and crisis’s, whether someone falls, is too drunk, gets food poisoning or the invitee of the guests causes a problem. For the hotel operator, the potential for liability is exponential vis-à-vis the hotel asset manager, due to guest check-ins and check-outs, safety issues, food & beverage operations, convention/meeting room banquets, and failing to implement competent financial controls at the hotel property level so the owner can make money.

iii) Hotel Operators Are Bound by Agency Law Principles

In the past two decades or so, there has been a plethora of hotel management contract decisions that held “hotel owners had the power to terminate a hotel management contract based on agency law principles.” For a long time, the legal rationale for terminating hotel management agreements was based on the RESTATEMENT (SECOND) OF AGENCY. That is true, because the RESTATEMENT (SECOND) OF AGENCY sets forth the common law concept that a principal (hotel owner) has the power to terminate an agent (hotel operator) at any time unless the agency is coupled with an interest (which means an economic interest by the hotel operator in the hotel). But despite these adverse rulings, national hotel operators have attempted to disclaim that hotel management agreements constituted an agency relationship - - but the courts looked to the actual relationship of the parties and held that the “common law of agency trumps explicit contract language.”

In 2011, the Court in the Turnberry decision re-affirmed with crystal-clear clarity, that the hotel owner, based upon agency law principles, can terminate a hotel management agreement:
The notion of requiring a property owner to be forcibly partnered with an operator he does not want to manage its property is inherently problematic and provides support for the general rule that a principal usually has the unrestricted power to revoke the agency.

iv) Agency Coupled With an Interest

With regard to an economic interest, the courts have further held that for an agency to be coupled with an interest, the hotel operator must have a specific, present, economic interest in the hotel i.e., an equity interest or key money in the deal to create an agency coupled with an interest. But recent decisions seem to suggest that hotel operators have an uphill battle to argue their hotel management contract is an agency coupled with an interest and therefore, the hotel owner cannot terminate the hotel management contract.

v) Personal Services Contracts

In Marriott International v. Eden Roc and RC/PB, Inc. v. The Ritz Carlton Hotel Company, the RESTATEMENT (SECOND) OF AGENCY was not the basis for terminating the hotel management contracts. Instead, in the Eden Roc and Ritz Carlton cases, which applied New York and Florida law, respectively, the courts held that because the hotel operator had a broad delegation of power of discretionary authority that required the operator to exercise special skill and judgment, that the hotel management agreements were personal services contracts and could not be enforced by injunction or specific performance.

Both court’s analyzed the hotel management contracts under “the concepts of involuntary servitudes and assessed the difficulties courts would encounter in supervising the performance of special skills and judgment,” and ruled hotel management contracts may not be enforced by injunction or specific performance. Both holdings resulted in the hotel owners having the power to terminate hotel management agreements under the theory the contract was a personal services contract and not an agency law concept.

vi) Summary

In summary, California, New York and Florida courts have held that hotel owners can terminate hotel management contracts under agency law principles (unless an agency is coupled with an interest) or as personal services contracts. It appears the law is now settled.

vii) Wrongful Termination and Damages

But it is extremely important for the hotel owner to understand, that although it has the power to terminate a hotel management contract under either theory, the hotel owner may not have the contractual right to terminate the hotel management agreement. Therefore, the hotel owner may be liable for wrongful termination and the hotel operator may seek damages for the remainder of the hotel management contract term. So, the moral of the story is simple - - the power or right of termination can be expensive.

Franchisors

Although agency law principles have been applied in the context of terminating hotel management contracts (and should be applicable to asset managers), franchise agreements have been generally immune from these legal challenges. The reason is simple -- the franchisor doesn’t really exercise control over the franchisee, unlike hotel operators that control the entire hotel operation for the hotel owner.

Historically, franchisees’ have filed lawsuits against franchisors for claims such as wrongful termination and nonrenewal, breach of contract (failing to provide support, training, advertising, territorial protection and the like), claims for market withdrawal by franchisor, the ability to transfer a franchise, misrepresentation claims (earnings, revenue, success/failure rates, etc.), encroachment claims (area of protection clauses), failure to provide certain disclosures pursuant to Federal Trade Commission mandates, antitrust claims and breach of fiduciary duty claims (advertising fund expenditures). However, filing lawsuits based on agency law principles and breach of fiduciary duty are far and few between.

In 1998, a little known lawsuit was filed that could serve as the guide post for future lawsuits that could find an agency law relationship between the franchisor and franchisee. In the Empire Holdings LLC v. Radisson Hotels Int’l case, the New York Supreme Court (trial court) came dangerously close to ruling that an agency relationship existed between the franchisor (Radisson) and its franchisee (Empire Holdings). In the Radisson case, the dispute dealt with the franchisee’s right to terminate the franchise agreement if Radisson failed to produce a fixed number of gross room reservation nights through Radisson’s national reservation system in a fiscal year. One of the claims against Radisson was based on agency law and an alleged breach of fiduciary duty. In the franchise agreement, there was a clause stating that Radisson was the “agent” for Empire Holdings as it related to booking hotel reservations, etc. In denying Radisson’s motion to dismiss, the court stated in dicta that Radisson’s role as an “agent” for Empire Holdings in booking hotel reservations could result in a fiduciary relationship between the franchisor (Radisson) and franchisee (Empire Holdings). Although the Supreme Court in New York is a trial court, the door was opened, albeit very little, to finding a franchise agreement constituted a fiduciary duty relationship between the franchisor and franchisee.

Agency law principles and fiduciary duties are found in the context of control -- the hotel operator controls the operation, management, and pursue strings of the hotel. In other words, the more control the party has, the more likelihood there will be an agency relationship between the two parties. In the context of a franchise agreement, there is generally no control by the franchisor over the operation, management, and pursue strings of the hotel. But as illustrated in the Radisson case, if the agreement remotely states or implies the franchisor is the agent for hotel reservations, or the agent for collecting marketing fees, etc., or requires the franchisor to be in charge of funds paid by the franchisee to the franchisor, then the traditional agency law principles and fiduciary duties might be applicable to franchise agreements. Arguably, if the franchisor is controlling funds paid to it by the franchisee and misuses those funds, then the franchisee could bring a claim for conversion, which could be the catalyst to trigger agency law and fiduciary duty obligations and related claims against the franchisor.

The evolution of case law can take years. But I suspect there is a franchise agreement that effectively vests more than “nominal control” in the franchisor over the franchisee’s operation. That test case could be the one that finds a franchise relationship can be terminated like a hotel management agreement under agency law principles. If that time comes, then the franchisee’s power to terminate a franchise relationship versus its legal right to terminate, must be balanced against a wrongful termination claim by the franchisor and subsequent damage claims. When that ruling is decided, it will send shock-waves through the entire hotel industry and immediately create a “new” legal relationship between the franchisor and franchisee.

A December 2014 study of the effects of minimum wage violations commissioned by the U.S. Department of Labor (DOL) found associated violations to be “concentrated in the leisure and hospitality industry” and “most prevalent in the service occupations.” The study analyzed the financial and economic impact of minimum wage violations in California and New York on such areas as lost wages, taxes, government programs and poverty.

For companies, owners and operators in the hospitality industry, the DOL’s aggressive enforcement efforts is not news. The industry has been a major target of the DOL over the last decade and part of the estimated $1 billion dollars that has been recovered for 1.2 million workers by the DOL’s Wage and Hour Division (WHD) since 2009.

What should concern the industry is that the DOL seems resolute to not just keep the pressure up on the minimum wage front, but actually increase it. In fact, the WHD has had the hospitality industry in its sites for some time, classifying it as a “high risk” industry. In response to the report, U.S. Secretary of Labor Thomas Perez remarked that, “to address the scale of this problem, we will redouble our enforcement efforts and partnerships to ensure workers take home the wages they earned and deserve.”

Regulatory and Legal Pressure

As if an invigorated and focused DOL was not motivation enough to treat the wage and hour risk seriously, hospitality industry players are facing significant financial risk from the private plaintiffs’ bar in the form of class and collective action lawsuits. Recent examples include multimillion dollar suits filed against a national restaurant chain and a franchise fast food chain, settlements paid to employees of a chain of New York restaurants and those of an Indianapolis hotel staffing company.

Private lawsuits filed under the FLSA are on pace to hit a new record high in 2014 and top 8,000 cases filed in federal court, easily topping the 7,764 FLSA cases filed in 2013. Nearly a decade ago the number of FLSA cases was half that.

Nationwide chains and franchise operations have proven particularly susceptible to class action risk as plaintiffs’ attorneys have sought to recruit and gather individuals for large classes. NERA Economic Consulting estimated that some 10 percent of all private wage and hour settlements in 2012 involved defendant companies in the food and food services industry alone.

Hospitality companies are particularly challenged by wage and hour issues, because they employ a large number of low wage workers in an industry that often has razor thin profit margins.

But minimum wage is just part of the story. Overall wage and hour violations present similar if not greater risks to the industry. This includes challenges to the use of tip credits (as well as its use with employees who perform tipped and non-tipped roles), allegations of “off-the-clock” work, and alleged failure to pay for training time.

Protecting the Business

Thankfully, hospitality owners and companies can take definite and immediate steps to mitigate against the risk that alleged wage and hour violations present. The DOL’s most recent study, and the agency’s redoubled enforcement efforts, reinforce the need for companies in the hospitality industry to evaluate their pay practices in an effort to mitigate against the risk of both regulatory and litigation threats.

Hospitality companies should consider a wage and hour audit to identify compliance challenges before they become fodder for the DOL or class and collective action litigation. Wage and hour audits can examine a wide array of pay practices, including worker classifications (exempt vs. non-exempt; independent contractor vs. employee; intern vs. employee; etc.), exposure from off-the-clock work, review of neutral pay practices, and address whether current policies and practices comply with federal, state and local legal frameworks. Depending on the outcome of these audits, companies can then take the steps necessary to address their specific risks.

As evidenced by the DOL’s most recent report, the DOL remains focused on alleged wage and hour violations in the hospitality industry. Whether a hotel, bar, restaurant or food service company, be sure that hospitality industry related pay practices and policies likely will continue to be scrutinized, not just by the DOL, but also your employees backed by plaintiffs’ law firms. Failure to address the inherent risks could spell headaches from both a regulatory and litigation standpoint, along with the attendant financial risk.

In order for a restaurant to run smoothly and deliver excellence on a consistent basis, Standard Operating Procedures (“SOPs”) and Sanitation Standard Operating Procedures (“SSOPs”) are an integral part of the business. No matter whether you’re a corporate chain or an independent owner/operator, it behooves you to take a moment to think about your SOPs and SSOPs. You have them, of course, don’t you? Or are they only in your head and it takes a visit to Total Recall in order to pluck them from your brain? Are they written policies or are they handed down verbally from person to person? Or will it take a lawsuit in order for you to address your policies and procedures?

SOPs and SSOPs protect your business in case something goes wrong. Written policies and procedures provide consistency and a way to trace back where something went awry in the case of a critical incident. Just like a chef follows a recipe to ensure the uniformity and quality of food delivery time after time, SOPs provide a recipe for the staff to follow too. While you may think that you’ve verbally communicated everything important to your staff to avoid issues and problems in the future, chances are that not everyone knows everything that needs to be done. That is why SOPs and SSOPs need to be in writing. Documentation is critical for success.

Take the game of “Telephone.” The first person thinks of what to say and passes the message on to the next person. By the time the message has been relayed from person to person and it reaches the last person, the end message tends to become jumbled and doesn’t resemble the original thought. Add in to the mix age differences or cultural differences and it becomes a recipe for disaster.

For example, how do you handle the delivery of hot food to a child? Do your servers drop the food off in front of the child and hope for the best? Or do you have a procedure in place for the servers to follow in this instance? Proper procedure dictates that the server should put the food in front of the parent or adult at the table and give a verbal warning that the food is hot. That way, the restaurant limits its liability by allowing the adult to dole out the food to the child and thus avoid a potential lawsuit if the child gets burned.

The benefits to have written SOPs and SSOPs far outweigh the time it takes to initially establish them and to keep them updated. Not only does it provide a map for staff to follow in regards to their job duties, it also promotes quality and safety. Having written procedures provides protection in the event of a lawsuit. Policies minimize miscommunication and variations between staff. By having SOPs and SSOPs posted where employees can view them, it allows them the opportunity to refer back to them in case an individual is unsure of a procedure. It reinforces what was taught in the initial training and helps them to remember more.

Every restaurant has its own set of rules that must be followed. In the case of a temporary worker coming in to cover a shift, having written SOPs and SSOPs minimizes errors and lets them know what your standards are. It doesn’t help if only some of the procedures are documented. All SOPs and SSOPs need to be in writing. This is extremely important in the handling of the three biggest health issues that any restaurant faces: allergies, blood born pathogens and vomit. Does your staff know EXACTLY what to do in case they’re confronted with any of these three issues? If not, it could cause huge problems not only with your  customers, but with the health department and the legal community as well.

By now you should understand how critical it is to have policies and procedures in place. Remember that it’s not enough to just have the SOPs and SSOPs documented in writing. It is imperative that you monitor compliance on a routine basis. It also requires timely updates; yearly should be sufficient. Once your policies and procedures have been established, it is important to keep your staff informed of any changes or updates as they occur. Pre-shift meetings are the perfect opportunity to review any health and safety issues that arise. 

The Taste of Failure

New York Pizzeria, Inc., a Texas-based pizza chain, attempted to register a truly unconventional trademark: the taste of its pizza. Predictably, a U.S. District Court rejected the bid as “half-baked” concluding that taste is a “functional” element of the offered pizza product (i.e., the essential element of its use), and hence, cannot be monopolized through trademark protection. 

While this ruling is not terribly surprising, it is worth noting that other forms of nontraditional trademark protection are on the rise. For instance, in-store layouts and configurations that are recognizable to the public as a source-indicator for certain products have been protected. Recently, courts have also upheld registrations for specific usages of colors associated with well-recognized brands (think Tiffany’s little “blue” bags and T-Mobile’s magenta campaign). Therefore, while the unique taste of food is unlikely to be a strong candidate for trademark registration, a brand-owner may be able to protect its image through the registration of other non-functional, yet creative and unconventional marks that consumers readily associate with that owner’s particular brand and products. Business owners would be wise to scrutinize whether their branding unwittingly incorporates some protect-able elements.

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