We are currently running a 10-part series discussing particular provisions and concepts within hotel management agreements.
The purpose of this series is to discuss common hotel management agreement provisions and concepts from the perspective of both hotel managers and hotel owners. Hopefully, we will touch upon one or more topics which spark an "I've always wondered why that is the way it is but nobody has taken the time to explain it" reaction with you. We trust the discussion goes some way to demystify the topic.
Our 10-part series will cover the following topics:
- Why is the manager's fee based on hotel's revenue and profit and not some other basis?
- Why do some agreements provide that the manager is the owner's agent and some do not?
- Why does the owner employ most or all of the hotel employees (and not the manager)?
- What is the risk/reward relationship between an owner and manager?
- Why does the owner indemnify the manager?
- Why do we need a non-disturbance deed between the owner, manager and financier?
- Why the need for an area of protection?
- Why is the owner usually prevented from selling the hotel to one of the manager's competitors?
- Why does the manager impose restrictions on the owner's ability to finance the hotel?
- What is the importance of brand standards?
Today, we will continue this series with the third topic.
Why does the owner employ most or all of the hotel employees (and not the manager)?
Most conventional hotel management agreements (HMAs) provide that all hotel employees (Hotel Personnel) are to be trained by, and under the supervision of, the manager. Such agreements usually go on to provide that the owner shall implement such guidance and instruction as provided by the manager.
To a person new to the hotel industry, it may seem a little odd that even though the Hotel Personnel are under the control of the manager, it is usual for most if not all of the Hotel Personnel to be employed by the owner.
In some instances, a small number of senior Hotel Personnel such as the general manager, and the chief financial officer may be employed by the manager directly. In these circumstances, the employment costs of these senior personnel would always be reimbursed to the manager by the owner.
This is a practice which has existed in the hotel industry for a very long time and is adopted by every hotel operating company we have been involved with whether domestic or international.
This seemingly is a universal practice and whilst there may be other reasons, we understand that the primary reason for this is that managers do not wish to be responsible for the redundancy costs of Hotel Personnel if the owner experiences a financial crisis and becomes unable to continue to fund hotel operations.
If this circumstance arises, and the hotel needs to cease operations in circumstances where Hotel Personnel cannot be redeployed to another hotel, then such employees would need to be made redundant. Such redundancy costs can be significant and the manager does not want to be responsible for such costs in addition to the cost of losing the management fee income stream.
From an operator's standpoint this is entirely justifiable. It is a service provider to the owner who runs the hotel business through the services of the Hotel Personnel. Furthermore, if the manager's fees had to be calibrated to take into account the redundancy cost, which would exist if the Hotel Personnel were employed by the manager, then such fees would potentially be prohibitive.
With respect to senior Hotel Personnel, it is understandable why the manager would be prepared to bear the risk of their employment. These are the key personnel, which need to feel particularly close to the manager. In any event, the redundancy risk with such Hotel Personnel would be significantly less than the remainder of the workforce due to the relative ease with which such senior Hotel Personnel can be redeployed to other hotels operated by the manager.