An Overview of Hospitality Law
Hospitality law is a broad legal discipline that encompasses both individual rights and also common interests. Its unique interpretation is largely based on the wide variety of constituents in the hospitality field. In fact, there is an extensive list of legal topics that converge under this umbrella.
When discussing hospitality law, it’s important to address its role in the overall hospitality industry. The term hospitality is defined as something given freely. Within the industry, it describes the interaction between the server and the served . As an example, the hotel-guest bond is both a relationship and a contract (known as the lodging contract). Both constitute hospitality law.
Interests of hospitality law are varied and wide ranging. For both lawyers and clients, the most important framework is that the hospitality industry embraces law in general. This includes regulatory issues, employment laws, partner and corporate matters, tenant/landlord relations, torts and insurance, leases, contracts, and contractors. Some argue that hospitality law is best understood by considering the range of topics it does NOT cover. We’ll consider this in the next section.
Contractual Agreements in Hospitality
There are a variety of contracts common in the hospitality industry. Ownerships often start out by purchasing a property under a sales agreement, which lays out the purchase & sale transaction and any contingencies involved. The new owners then hire designers to develop the interior and exterior of the properties and they contract with management companies to oversee the commercial operations.
The commercial operation on the property leads to another large category of contracts, ranging from employee agreements to vendor contracts to franchise agreements with such national brands as Hilton, Marriot, Starwood, Choice and Intercontinental (for example, Sheraton, Hampton Inn & Suites, Westin, etc.). There are also service contracts for hotel and other guest services, ranging from concierge to ground transportation to cleaning services.
The contracts range from those meant to be performed over a few short weeks, such as the vendor and service contracts, to those with terms of a decade or more, such as the franchise agreements. Properly drafting these contracts is key for successful commercial operations, especially in the high stakes, high reward industry that is the hospitality market.
Employment Law Considerations in the Hospitality Industry
When it comes to employment laws, hospitality businesses have a myriad of issues to navigate. Anticipating these laws and understanding them fully is key. For example, many hospitality employers erroneously assume that they must pay all employees at least the federal minimum wage, currently $7.25 per hour (and increasing to 10.50 on July 1, 2016). But tipped workers – for example front desk attendants, bellmen and boot boys, bartenders, servers, and housekeepers – don’t have to earn the minimum wage. That’s right. With a few exceptions, employers may credit up to $3.02 per hour (the annual minimum tip rate in California) in tips toward meeting the minimum wage requirement, as so long as they pay employees no less than $2.23 per hour in cash wages. Some hotels combine the cash wage rate, now minimum $11.52 per hour, with 4% of the "value of meals and lodging" (which can include benefits like health insurance).
Navigating the laws that govern wage and hour issues is tricky for hospitality employers, in part because of variations in the particulars of the laws of each county, city or municipality. Are employees classified as exempt from overtime? Are they covered by a "tip credit" (as detailed above)? What about commission rate and other payment considerations? Does the employer need to prepare and maintain accurate time records, even if the employer is not covered by a minimum wage law?
Another area that requires careful attention- and that is closely tied to the Wage Order provisions that predominate in the hospitality industry – is the law regulating overtime compensation. Employers must pay non-exempt employees overtime at one-and-a-half-times their regular hourly rates when those employees work more than 8 hours in any single day or more than 40 hours in a week. The law is less forgiving than an individual may expect, as the laws of some states impose overtime payment requirements despite any kind of employment agreements or contrary industry practice. As an example, employers should keep this in mind when scheduling overtime work for employees. At the risk of providing attorneys with more opportunities to bill "billable hours", employers must keep in mind that wage and hour and overtime laws are complex and changing, and it can be hard to know exactly where to turn when you need guidance.
Licensing and Regulatory Matters for Your Business
In addition to employment and wages, licensing, permits and regulatory compliance are significant sources of concern for hospitality industry clients. Licensing issues are often first and foremost with chains and franchises. Franchisors work very closely with local management to ensure that all permits and licenses are in order. Franchisors also demand that the franchisees maintain certain systems and standards with regard to permits and licenses. On the other hand, smaller operations such as residential hotels, bed and breakfast establishments and inns, often operate without the knowledge of a municipality and/or authority until a complaint is made or a fire inspector drops in.
Many municipalities regulate hotels, motels, resorts, inns, groups homes as well as restaurants, bars, night clubs and lounges. The proscriptions are relatively uniform with regards to zoning and fire safety, but vary widely when it comes to operation issues. The Uniform Fire Safety Act requires that all premises licensed as a hotel, motel or multiple dwelling comply with the State Uniform Construction Code and the New Jersey Uniform Fire Code. This temports into the subject of accessibility under the Americans with Disabilities Act (ADA). In addition to concerns about fire safety and the fear of liability for claims of discrimination under the ADA, hoteliers must be concerned about the food, liquor and entertainment licenses and permits they need to operate their establishments. For example, the Division of Alcoholic Beverage Control (DABC) issues liquor licenses and directories. Similarly, the New Jersey Division of Alcoholic Beverage Control provides local municipalities and counties with a catalog of special permit forms they may use to regulate on-premises sales.
Licensing of hoteliers tends to be more intensive because of the variety of commercial matters involved. In addition to liquor licensing, the New Jersey Division of Taxation requires hospitality establishments to file quarterly sales tax returns and pay the service and sales tax on all taxable occupancy. Establishments that employ anyone other than immediate family members must pay all payroll taxes and fees and submit various reports to the New Jersey Division of Unemployment Insurance. People who rent rooms at inns, motels and hotels are subject to the filing of a sales and use tax return. A tax is assessed on occupied rooms at a rate of 7% of the rent. There also are periodic assessments by the New Jersey Department of Labor concerning payroll taxes, unemployment insurance and health and safety standards. Failure by the operator to file a return or pay taxes due could result in fines and/or imprisonment.
Despite the layers of licensing and zoning requirements, the hospitality industry is vital for economic expansion. Hospitality is highly labor intensive. For example, operating a restaurant usually requires 4 to 6 employees per 100 seats. This stems from the many hours needed to prepare food and maintain the facility. And while the majority of food preparation is performed by hand, automation has been embraced in the hospitality industry as well. As a result, there is likely more flexibility in the hospitality industry to replace employees with machines should there be a financial downturn. The best way most hospitality establishments deal with their regulatory and licensing requirements is by including an attorney with experience in hospitality in the restructuring of their operations.
Liability and Managing Risks in the Hospitality Sector
In order to operate a successful hotel or restaurant, the owner/operator should take steps to minimize liability and risk. In addition to insuring the property itself, there are numerous insurance products and risk management practices, which serve various purposes and are tailored to the industry, that can and should be purchased in order to minimize risks to guests and employees and to help protect against potential liability exposure. Hotels and Restaurants may face liability for a variety of guest and employee claims . To help manage these risks, owners/operators of hospitality businesses should implement policies, procedures, training, and best practices: There are also a number of insurance coverages to consider when it comes to managing risk and minimizing liability, including: Under most circumstances, the cost of the premiums associated with any of the products above are far less than what the potential liability associated with a risk may be. A comprehensive risk management program associated with all aspects of a hospitality company’s business is critical to managing the multitude of risks facing hotels and restaurants. The owner/operator should consider legal issues and insurance from inception and on an ongoing-basis to successfully operate within the hospitality industry and to remain competitive.
Understanding IP in Hospitality
In the highly competitive world of hospitality, being able to protect your intellectual property (IP) is critical to the success of your business. There are so many ways in which you can find yourself infringing the IP rights of others, whether it is through employees developing items in the course of their duties, websites, advertising and marketing to guests and customers (including on social media), and so on – there are IP issues at large in all corners of a hospitality organization. The role of IP in the hospitality industry is diverse and complicated, from the use of third party software and websites which require licensing and copyright/trademark agreements, through to negotiating with developers of mobile applications and booking sites, and franchising, licensing and protecting the proprietary elements of your business.
The IP rights most commonly come in the form of the branding and trademarks of the relevant operator (whether that be a hotel management company, a restaurant, or a more niche provider of hospitality services).
Branding
It is common, particularly in hotels, that the brand will own the rights to the relevant trademarks and branding elements. This will also be the case if the operator is using any third party software to deliver the hospitality services, for example room booking systems, payment systems, and so on. Whilst the hospitality company may therefore not directly own the IP, provided that they have the requisite licenses and arrangements with the brand owner to use the IP, this should not be an issue for hospitality companies. It is worth checking, however, that the terms of the commercially negotiated licenses are sufficiently detailed and cover the necessary territory, including duration, exclusivity and permitted territory.
Trademarks
The subject of trademarks in the hospitality industry is a thorny one. It can be common for parties entering into franchise arrangements (often the most relevant type of agreement for hospitality businesses, as it allows an operator to use the branding of another company) to have differing understandings of what the "brand" to which they have been given access relates to. For example, whilst a brand may undertake significant advertising and promotional work, and have a well regarded reputation, the applicable trademark may not actually be registered with the U.S. Patent and Trademark Office (USPTO) or any other relevant licensing body. This may leave the hotel in a position of having significant rights protected by its brand owner (the rights owned by the brand owner as the registered holder of the relevant trademark), but potentially significant gaps in the brand protection – which can be capitalized upon by infringers. This can be a particular problem in hospitality, where the brand is often the most important factor in making a successful sale of a product (room service menu, food and beverage offerings, overnight stays, and so on). This can make it all the more attractive for would-be infringers to develop competing products, using the branding elements owned by the hotel or restaurant.
Under U.S. law, you may stop use of a trademark by a competitor once you have developed a reputation for and are known by that brand. This is called a common law right. However, a far more robust – and appropriate – mechanism is to ensure that you have registered the brand elements with the relevant trademark licenses and agencies before you develop such a reputation. This can include filing for state trademark registration, using the symbol TM whenever your branding is used, filing to register the brand with the USPTO, and monitoring the USPTO, common law and social media for potential infringement.
To protect fully against infringement – including by competitors who might seek to copy branding or marks – as well as in the event that you wish to sell the business or enter into a merger (which will almost always involve the trademarks being valued as part of the transaction), you should ensure you are fully protected before you launch the brand (and not after you have begun).
Copyright
Another area of IP lies in the copyright element of your business, whether in the IP contained in the software you use, advertising materials which have been developed, and so on. When using third party software, a hospitality company will need to review carefully any applicable license agreement, ensuring that it includes the appropriate permission (or prohibition) on modification, copying, distribution of the software, and how the agreement is terminated. This can be particularly acute in the hospitality industry as there are now a very high number of "white label" agreement which allow the implementation of a series of software "off the shelf" – particularly with respect to room booking systems and other types of point of sale systems.
The Role of Alternative Dispute Resolution in Hospitality
The hospitality industry is fraught with potential legal disputes. From tenant and landlord disagreements to breach of contract claims, conflict is part and parcel of industry operations. Accordingly, savvy professionals must be prepared to address disputes as they arise and be familiar with the most prevalent dispute resolution mechanisms.
Mediation is often the most common form of alternative dispute resolution in the hospitality and real estate fields. Mediation is typically a voluntary process, where a neutral third-party mediator attempts to facilitate a mutually beneficial solution to the conflict. Mediators may weigh in on the possible outcomes of litigation, and will suggest possible solutions to the parties. However, while mediators may offer opinions on possible results of litigation, ultimately, the parties control the negotiation process, and must agree on the ultimate resolution between themselves.
In a perfect world, mediation would resolve every conflict that parties face in the industry, but, in reality, this is rarely the case. In the event that parties cannot come to an agreement through mediation, litigation is a viable option. Like all forms of dispute resolution, litigation is fraught with risk. However, litigation is sometimes necessary for certain conflicts. Particularly, problems with the written record often must be resolved through litigation. These problems could include disputes over interpretation of lease or commercial agreements, conflicts over other industry-related paperwork, and conflicts based on verbal representations.
In some cases, operations manuals and employee handbooks can also be basis for litigation. These documents are often created in-house, and when they are used as evidence of employment policies in litigation, the parties may disagree over interpretation of the underlying manual or policy.
Top Legal Issues Emerging in Hospitality
In addition to disruptions from the pandemic, the hospitality industry continues to face challenges from privacy-related regulations. The European Union’s General Data Protection Regulation (GDPR) and the California Consumer Privacy Act (CCPA) are among the most stringent laws requiring large businesses to notify their customers of their data practices and obtaining their consent to continue using their personal data for marketing or other company purposes. Several states that are typically major tourism destinations, such as Florida and New York, are contemplating legislation similar to the CCPA. However, the hospitality industry is also subject to a patchwork of laws that vary by state and locality. New York is experiencing a wave of cases under its new "pay transparency" law requiring an employer to disclose the minimum and maximum compensation for a job, which can be expensive.
More than 400 million people travel to the United States every year from abroad and more than 80 million Americans travel abroad. However, litigation surrounding the global pandemic has turned international travel into a contentious issue for global corporations. Employees, customers, and vendors allege discrimination based on their countries of origin. For example, two Asian American former employees have sued Delta Airlines for refusing to pay severance under the airline’s policy against "avoiding anything that would contribute to the further spread of COVID." The lawsuit alleges that Delta "tipped a racial balance" by suspending some U.S.-based employees without pay, but allowing foreign nationals to work under the CARES program, despite the fact that the CARES Act does not mandate such treatment. Moreover, ongoing visa issues have prevented corporations from sending their non-U.S.-based employees to their offices in the United States. Last summer, the Trump Administration announced that it intended to cancel the H-1B program, where U.S. employers sponsor foreign workers. Since that policy was announced, U.S. Customs & Border Protection advised that non-immigrant workers who failed to obtain a visa stamp cannot return to the United States to resume employment.
Moreover, local or state government agencies are among the most common litigants in cases involving anti-discrimination and harassment policies in the United States. Many businesses are likely unaware that their executives and managers could be personally liable for discriminatory conduct, expenditures like fines or damages, and even attorneys’ fees. For example, the EEOC has stated that officers and directors are personally liable for damages if an employer operated a senior level "good ole boys club" where male officers regularly sexually harassed female employees, who were intentionally denied job opportunities in favor of less qualified male candidates, and pressures women into sex in exchange for promotions . Similar lawsuits continue to be filed.
California’s Proposition 22, which states that once enacted, a company’s app-based drivers, such as Uber or Lyft, are independent contractors, not employees, and thus outside the coverage of an array of employment laws. As a result of this and other voting initiatives, the number of employees hired under an employment relationship has fallen. While some companies take advantage of the flexibility of that position, many of the restaurant and hospitality industry companies are behind the curve. This trend has created significant labor organizing and representation campaigns in several major cities, which is occurring despite employee misclassification.
Similarly, California’s AB 5 – the "gig workers" law – also places Uber, Lyft, DoorDash, Instacart and others in the same role that they have been in before AB 5 passed. Without AB 5’s limitations on employers’ ability to test past misclassifications and convert those app workers into employees, many of these companies would immediately face large class actions for unpaid overtime, workplace injuries, and other employee rights violations. Since 2017, however, every year has seen a record number of strikes and unionization efforts throughout the United States. This trend will likely continue into 2024, as the National Labor Relations Act ("NLRA") continues to expand.
The implementation of the new National Labor Relations Board ("NLRB") Chair Jennifer Abruzzo’s agenda is likely to alter the course of this area of existing law. The Board recently issued ruling to make it easier to prove discrimination in the workplace. The ruling allows for "indirect evidence" to prove a violation. The change addresses how courts balance conflicting evidence of motivation when an employer has multiple motivations for an action. Likewise, chairwoman Abruzzo has instituted new NLRB rules designed to restrict the use of captive audience meetings and mandatory arbitration agreements.
Moreover, the Board has re-created a multi-step process for determining whether workers are entitled to unionize on a "micro-unit" basis. In the past few years, unions have increasingly tried to organize non-union workplaces through these "micro-unit" elections, since employees that have similar job functions, hours and working conditions can be a "bargaining unit." Unions have often targeted insecure, service jobs to organize small numbers of employees first, and then use those bargaining units to expand their membership. This change may impact a union organizing campaigns at companies like Marriott or Starbucks.