Hospitality franchising in 2017: What to expect in the year ahead


By Robert Cresanti and Chip Rogers

For hotel franchisees, the year ahead may be one filled with many workforce and labor changes. New rulings coming from Washington would significantly impact small businesses across the country. It’s an important time to understand these changes and what they mean to you, the bottom line and your employees.

On the heels of the recent presidential election and a new administration at the helm, we wish we could say that these decisions will be a boon for hospitality industry. But, we have some major concerns about what is happening on Capitol Hill, and we want you to be aware of what new regulations could mean for your company and the nearly 30 million other small businesses, and nearly 733,000 franchised units in all industries across the United States.

New Overtime Requirements
As we all know, one of the biggest costs for hotel franchisees is labor. Having the right and best employees in a tight labor market affects every aspect of your hotels – from the skills and overall experience of a general manager to the knowledge and abilities of your IT department, to the thoroughness and dependability of your housekeeping staff.

Hotel owners are very worried, both in terms of costs and employee morale, about a new Department of Labor (DOL) ruling regarding overtime that was issued in May and went into effect Dec. 1. This DOL ruling increases the threshold at which salaried workers are exempt from overtime from $23,660 to $47,476 (or $913 per week). This is an increase of more than 100 percent. With having to pay overtime to employees who make less than $47,476, there will be a ripple effect in hospitality of positions being consolidated or eliminated completely. What was designed to help employees achieve great salaries could actually wind up in the net loss of jobs, which benefits no one.

“The government has basically made a decision regarding business without any input from the business community,” said Imesh Vaidya, CEO of Albuquerque-based Premier Hospitality, which has six properties open, one under construction and two in development.

Premier Hospitality offers full benefits and believes in being loyal to its staffers, and it has gained that loyalty in return from some long-term employees. Vaidya is concerned that this ruling can eat away at the loyalty and relationships that he has built with his employees over the years.

Darshana Patel, CEO at Shivmir Hospitality Management Inc. in Owensboro, Kentucky, which has three properties, is also wary of this ruling and its effect on her company.

“When you have a labor-intensive small business that is open 24 hours a day, 365 days a year, managing employee costs is so important to the success of this kind of operation,” Patel said. “I am going to have cut back some employees’ hours and take on more responsibilities myself.”

Patel said that taking on additional direct responsibilities managing her hotels will give her less time to be involved with hotel industry and community-related activities, which have been very important to her over the years.

In addition, the new overtime regulations will give many hotel owners no choice but to change employees’ classifications from a salary, exempt from overtime, to hourly in order to comply.

“This will affect morale, and could result in higher turnover since some employees may lose a sense of pride and ownership that they have in making their schedules and feeling empowered,” Vaidya said.

In addition, this will limit these employees to a strict 40-hour work week. The new rule also complicates the process of tracking incidental work, such as emails and phone calls made after regular hours. And, hotel owners and other entrepreneurs will find it harder to incentivize employees in order to reward those who want to work hard and advance.

“I have a manager who has been with me for 14 years, and I now will have to ask him to clock in and out; what will this do to his self-esteem?” Patel pointed out. “Also, there are not enough hours in the workday to finish all the work, but it will be hard to be able to afford the overtime pay for the work that needs to get done after hours.”

As a solution, we ask you to speak to your local representatives and senators, and ask them to support and push forward the Protecting Workplace Advancement and Opportunity Act, introduced in both the House of Representatives and Senate in 2016. This legislation would nullify the overtime rule and require the DOL to conduct a major economic impact study before developing any future regulation.

Joint Employer Status Changes
Another ruling, this one created by the National Labor Relations Board (NLRB), threatens to erode some of the autonomy that small business owners over working conditions and other aspects of their companies. The ruling changed a 30-year old legal standard of determining liability in business relations. Previously, to be considered an “employer,” an entity needed to directly control the terms of employment. These would include hiring, firing, discipline, supervision, etc. However, under the new definition of “joint employer” status, the NLRB determined that an employer could be an entity that has indirect and unexercised control over working conditions – such as a franchisor. This means that franchisors will likely be considered a “joint employer” with franchisees.

“We treat our employees as family; we know their birthdays and anniversaries,” Vaidya said. “To have joint employer status doesn’t really make sense, since the franchisor is just not going to be as familiar with the needs of all of a franchisee’s employees.”

To lower their liability in the event of any legal action taken by an employee, franchisors would likely also take more direct control over employment decisions in franchisees’ businesses. As a result, franchisees will lose their hard-earned independence and become, in essence, employees of the franchisor. Frankly, this tears away at the very reason entrepreneurs go into business for themselves – and that is to have as much control as possible over their own professional destiny.

“A franchisor may not know what is going on specifically in my market or in the community,” said Patel, who owns one franchised hotel and two independent properties. “The purpose of being a small business owner is to have control over my business, and this joint employer act takes away some of that control.”

We at AAHOA and the International Franchise Association (IFA) believe that this ruling also shows a lack of understanding of the nature of the relationship between franchisor and franchisee – and this relationship is so important to the success of hotel properties in all types of franchised brands. This also threatens to cut the franchisee out of the management equation, and essentially makes the employee of a franchisee also the employee of a franchisor. Organizations like AAHOA and others have fought for years for the rights of franchisees, and have helped establish excellent partnerships between our industry’s franchisors and franchisees.

In addition to the fact that franchisees would lose independence over some of their decision making, franchisors may wind up increasing fees and royalties due to their added participation and control. This could dramatically impact franchise contracts going forward. And, we fear that some hotel franchisees might leave the industry, since they don’t want to run someone else’s properties.

There are Senate and House bills as well that need support to counteract this NLRB ruling. H.R. 3459 and S. 2015 re-establish that employers must have “actual, direct and immediate control” over employees in order to be considered joint employers. These bills help create certainty in the relationship between franchisees and franchisors, and reaffirm the independence in small business ownership and operations. They also will help encourage continued expansion in the franchise world. Once again, we encourage you and other hotel franchisees in your market to reach out to your local elected officials to encourage them to pass these alternate bills, which will help preserve the lifeblood of small businesses everywhere.

Changes in Defining Small Businesses and Minimum Wage
Although this is still localized in some parts of the country, it is of great concern to us. Currently, Seattle has a new minimum wage law that stipulates a business of 500 or less employees that contracts with a recognizable brand (like a franchised brand) would have to pay the city’s minimum wage of $15 per hour on an enhanced phase-in period of just two years versus five years for other small businesses. This puts businesses with 10 or 30 employees in the same category as those that have 500 employees, which would definitely put a hardship on small business owners in that particular market. It seems inconceivable to us that a company with 500 employees would be in the same category as a more traditionally defined small business with less than 50 employees.

As we all know, the majority of hotel franchisees across the nation have properties with less than 50 staffers. A forced $15 per hour minimum wage could be devastating to these entrepreneurs, if this trend spreads. We are very concerned that if this trend in categorizing the size of small businesses in relation to minimum wage increase continues in other markets, it could result in franchisees cutting back employees because of increased costs, which could also hurt productivity and negatively impact customer service.

“You are going to see hotels replacing front desk people with more automation − such as kiosks at check-in – to save on the costs of labor,” Vaidya said.

In conclusion, this is the time for action on the local, regional and national levels to help overturn these aforementioned rulings. They would be detrimental to the future success of franchisees in the hospitality industry, as well as those in other professions. We at AAHOA and the IFA have worked tirelessly over the years to preserve and enhance the rights of small business owners, and will continue to advocate as we welcome in the new administration. We are all stronger together with one unified voice.              ■


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