There was a time when the notion of outsourcing an entire hotel department would have been deemed “crazy talk,” but over the last 25 years the industry has gone through several revolutions that have significantly changed the landscape of hospitality ownership and operations.
The wholesale adoption of outsourcing entire departments that exists today was spurred, in part, by the financial crash. Today, departments are routinely outsourced, including laundry, housekeeping, garage, night cleaning, security, valet, information technology, engineering, retail, groundskeeping, business senter, spa and, of course, food and beverage. Some properties even outsource multiple departments to different operators.
Factors that typically induce hoteliers to outsource a department are cost savings and time management. Outsourcing minimizes overall operating expenses by reducing payroll and payroll taxes, and the expenses related to workers’ compensation and health care premiums.
From a budgeting stand point, a full slice of hotel operations gets converted to a simple line-item expense. With respect to time management, outsourcing a department can increase the productivity of the executive and managerial staff because the time and effort spent on issues related to the outsourced department can now be spent on initiatives that will improve overall guest satisfaction.
Outsourcing obstacles
Yet, outsourcing is not without its potential drawbacks.
Outsourcing a department involves a loss of control and can have a negative impact on morale. Furthermore, a poorly negotiated outsourcing agreement can leave the owner/manager with exposure that was assumed to have been transferred to the company running the outsourced department.
When a department is outsourced, the owner/manager naturally must give up a fair amount of control related to the operation of that department. As a result, the outsourced workers might have less incentive to maintain hotel brand standards and might not receive training commensurate with owners’ and operators’ expectations. This can lead to unsatisfactory guest experiences.
Consequently, when negotiating an outsourcing agreement, both sides need to carefully consider how the outsourced employees will be trained so that brand standards are upheld. However, owners/managers should be careful not to exert too much control over the outsourced workers’ training and job duties because litigation over misclassification could ensue, with the “outsourced” workers effectively operating as hotel employees.
Another factor to consider when deciding whether to outsource an entire department is the impact it will have on the hotel’s work environment. Outsourcing usually requires layoffs, which can cause low morale among the remaining employees. It is imperative for executive and management teams to carefully plan the department’s transition and to demonstrate sensitivity and thoughtfulness throughout the process. This will go a long way toward ameliorating employee grievances.
Liability isn’t outsourced
Mistakenly, owners/managers presume when they outsource a department, they also outsource liability for all incidents associated with the department’s operation. However, in most states, the owners’/managers’ duties with respect to operating the hotel are considered to be “non-delegable.”
This means that, while an owner/manager may contract to outsourcers part(s) of the overall operation, the owner/manager shall remain primarily liable for any incidents that occur during the course of the operation of the hotel, including any outsourced departments. If a lawsuit should be filed in such an instance, the owner/manager will definitely be named as a defendant.
It is possible to shift the risk associated with running the outsourced department to the company running that department, in part, by including broad indemnity language in the outsourcing agreement. This language should require the operator of the outsourced department to defend, indemnify and hold the owner/manager harmless from any and all claims that might arise out of the outsourced operations. This must include issues related to possible data breaches or the theft of personal information.
This contractual language needs to be coupled with the requirement that the owners/managers be named as “additional insureds” on the insurance policies carried by the operator of the outsourced department. When the owners/managers are added to the policy as AIs, it places them in a “first party” relationship with that carrier, binding the carrier with heightened responsibilities and duties to the owners/managers.
Lastly, it is critically important that the outsourcing agreement plainly states the insurance requirements placed on the operator of the outsourced department. The owner/manager must be proactive in obtaining certificates of insurance that verify the coverage, and those certificates must list the owner/manager as an AI. These efforts will not prevent the owner/manager from being sued if a claim arises, but they pave the way for the owner/manager to effectively tender the defense to the operator of the outsourced department and its insurer.
David M. Samuels, Esq. is a senior litigation partner with Michelman & Robinson, LLP and a member of the firm’s executive committee. His practice is primarily devoted to providing legal counsel and guidance to hotels, resorts and private clubs in cases related to personal and catastrophic injury, premises liability and administrative law.
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