How Owners And Operators Successfully Negotiate In France ‘reverse’ Hotel Management Agreements
By Christopher Boinet, Lawyer at the Paris Bar and Partners at In Extenso Avocats
In France, the negotiation to determine whether the hotel's employees are employed by the owner or the operator is a contractual key matter. French owners require more frequently to pass the responsibility of employment to the operator, which has significant consequences on the negotiating and on the drafting of hotel management agreements.
For the owner (investment funds / financial institutions, etc.) the main objectives are to:
- select the operator who will maximise profitability and consequently the value of the asset,
- secure, under the best possible conditions, the terms of the agreement signed with the operator whereby the owner is freed from all responsibility for the operation of the property, and
- at the same time, ensure that the fees paid to the operator correspond to them meeting or exceeding the agreed performance criteria.
The operator agrees to provide the owner with his experience and know-how, particularly in terms of human resource management and organisation procedures, even though under traditional management agreements, the owner usually remains the legal employer of staff.
A hotel's human resources are an essential key to its success and help validate the company image. However, from a purely financial point of view, payroll constitutes a high expense item, and if not properly structured can present a significant source of legal and social risks.
Yet owners may find themselves accountable for human resource strategies, which in practice, have been exclusively developed by hotel operators, since they alone, are familiar with the hotel business. Given this, certain French financial owners will only enter into 'reverse' management agreements under which the operator is the sole employer of the hotel's staff.
Quick comparison with hotel lease management contracts " contrats de location gérance " Under a lease management contract, the tenant – by law – rents the business at his own risk and is pursuant to the law, the sole employer of the personnel. A lease management contract thus appears to offer a more simple solution, so why aren't they used more often?
In practice, the hotel operator agrees to employing staff, but subject to being able to pass the burden on to the property operated. The contractual management of staff thus constitutes the major challenge in negotiating a 'reverse' hotel management agreement. Given this, an owner will pay particular attention to negotiating the key terms of contracts relating to the supervision of staff, specifically examining the conditions and brand standards submitted by the operator, notably with regard to human resources.
The owner must, in fact, control the operator in terms of the contract's execution, the key objective being to ensure the project's financial success. The owner then enters into negotiations with the brand by prioritising the essential clauses of the contract in this respect – from those that are non-negotiable to those that are up for discussion, and by setting out defined objectives and a clear vision of the owner's legal and financial interests.
DESCRIPTION OF THE PROCESSES INVOLVED IN FRANCE IN DRAFTING A 'REVERSE' HOTEL MANAGEMENT AGREEMENT
The owner may launch a tender to select a hotel operator, often requesting – and in reality imposing in the term sheet – that the operator accept full responsibility for the hotel's staff. The selected operator will then propose an extremely detailed management contract to cover the risk of employing the personnel.
A 'reverse' hotel management agreement often stipulates that the owner is the sole employer of the hotel's staff, including the General Manager. The operator will then be extremely vigilant in ensuring that all expenses related to personnel management are translated into operating costs for the hotel.
For this reason, agreements generally specify that the operator alone may exercise authority over staff (management and disciplinary power). The operator is granted all rights/ prerogatives and obligations relating to their role as an employer with regard to individual and collective working relations in accordance with the applicable legislation in France. The operator is thus responsible notably and amongst others for:
- the selection, recruitment and training of staff, administrative management (monitoring of absences, holidays, etc.), career management (promotions) and contract terminations,
- the setting and monthly payment of staff salaries,
- the determination of working conditions,
- the drafting and updating of all legally required documents and notices, and
- the organisation of professional elections and the maintenance of industrial relations (employee representative bodies, unions).
However, these stipulations – useful as they are – need to be applied in practice. In fact, the owner must refrain from giving orders and instructions to staff, otherwise these contractual provisions have no value. Further, they cannot exonerate the owner from any possible liability.
The parties contractually agree that the appointment of the General Manager (and sometimes other key positions, too) will be subject to the owner's prior written approval. However, the owner has no right of veto, and cannot unreasonably defer or refuse their agreement. For example, in order not to obstruct the management of the property, hotel management agreements often include a provision stipulating that the owner may not reject more than two candidates proposed by the operator for the position of General Manager. Similarly, management agreements generally require the operator to communicate the General Manager's salary to the owner at the time of hiring, and as part of the budgetary procedure thereafter throughout agreement's term.
The operator's criteria with respect to salary levels, retirement and employee participation schemes are often established by taking into account habitually observed practices in hotels of a comparable category. These criteria are regularly benchmarked against competitor hotels, preselected by the operator and owner.
Parties must also pay particular attention to clauses relating to 'hotel staffing costs' (covering, in particular, recruitment expenses, salaries, benefits and bonuses, employee participation schemes, contract terminations and other expenses, employer contributions and taxes – including the CVAE, a tax based on a company's added value). These expenses must be set out as comprehensively as possible, with particular consideration given to debts, claims, miscellaneous costs, reasonable legal fees and all costs and benefits associated with expatriate contracts and the application for work permits and visas. These expenses are re-invoiced down to the last euro by the operator and absorbed by the property under operating expenses.
Foreign workers employed by the hotel
To the extent that the employment of overseas workers is authorised by the owner, the operator is often requested to bear any risk inherent in the recruitment of foreign staff. As the sole employer, the operator is required to undertake all the necessary formalities with regard to filing employee work permit or visa applications and obtaining these documents thereafter.
Expenses related to these applications, along with any legal, tax or other advice required to obtain permits and visas or to negotiate and sign expatriate employment contracts, will be listed as hotel operating costs.
The end of the hotel management agreement
Upon termination of the hotel management agreement, whether it has expired or been terminated early for any reason whatsoever, hotel employees are automatically and fully transferred to the owner of the business (fonds de commerce) or to the new hotel operator. This situation is the result of the application of Article L. 1224-1 of the French Labour Code and is often emphasised in management agreements.
Furthermore, the hotel management agreement may specify that if the conditions laid down in Article L.1224-1 of the Labour Code are not met, the owner must make every effort to ensure employees are transferred to a possible new hotel operator.
The owner may officially request to be kept informed of the content of agreements and transactions concluded with staff and any resulting expenses. The owner may impose a contractual right of veto on possible agreements considered disproportionate, although care should be taken with regard to this. Indeed, by imposing such practices, the hotel owner runs the risk that their 'control' be considered as 'interference' in the management of the hotel's employees. If this intrusion becomes too great, the recognition of the owner as a co-employer of the hotel's staff cannot be ruled out. Similarly, the 'flat rate' remuneration of such transactions, where they exist, must be examined in connection with the legislation covering bargaining and the lending of for-profit labour.
In the event that the hotel ceases trading, parties stipulate in the agreement that the operator is responsible for terminating employment contracts. The owner then contractually undertakes to reimburse the operator – in full and upon presentation of receipts – all expenses relating to staff termination, compensation of any kind, litigation costs and generally speaking, any monies due to hotel employees or social welfare organisations (unless, of course, the operator is liable for such).
Hotel management agreements thus often specify that this contractual commitment be subject to the double condition that the operator has made every effort to:
- transfer or redeploy hotel staff, or
- properly instigate the redundancy information and consultation procedure within a reasonable period of time (for example, no later than three months prior to the expiry or termination of the hotel management agreement).
The legally and financially sensitive case of transferring or redeploying staff to other properties: the operator specifically requires that the owner reimburse all costs and monies due to employees or social welfare organisations in connection with such transfer or redeployment.
The terms of payment of monies owed by the owner to the operator with regard to such: the operator necessarily imposes a system under which invoices are refunded without delay via a direct debit authorisation from the hotel's bank account.
What is more, operators generally request a financial guarantee from owners in return for managing and assuming the responsibility for the hotel's staff.
To conclude, in France,'reverse' hotel management agreements are not the most prevalent amongst hotel operators. However, operators do accept the constraints of these contracts, notably in return for their ease of implementation and the guarantees that can be obtained from owners. Each co-contracting party can therefore assess – from the time the agreement is signed – the extent and limits of their commitments.
As Claude Lelouch the famous French director said, 'constraint solicits the imagination' (2016, Le dictionnaire de ma vie), and the fertile imagination of hoteliers will no doubt enable them to shape hotel agreements to take into account the constantly-evolving constraints of labour law regulations.
1 Assuming an average of one employee per room, payroll can equal 40% of total turnover in luxury hotels and 30%, even, in 3 or 4 star hotels.
2 Amounts mentioned in these contracts are also included in the accounts under operating costs.
Christopher has extensive experience in corporate finance, commercial and real-estate transactions, hotel business, construction law and litigation related matters. He has an extensive practice in managing and structuring investment operations, acquisitions and assignments of resorts (business and premises), financing operations, joint ventures, management and franchising contracts and any management contracts as well as business organization, audit and resolution of disputes.More from Christopher Boinet