It is has become a regular practice for hotels to outsource entire departments. Today, routinely outsourced departments include: laundry, housekeeping, garage, night cleaning, security, valet, information technology, engineering, retail, groundskeeping, spa and food and beverage. Some properties even outsource multiple departments to different operators in an effort to manage ever-increasing payroll expenses.
Decisions to outsource have largely been based on cost considerations. However, the practice of outsourcing departments just became significantly more risky for owners/managers. Of course, misclassification claims can (and often do) arise when owners/managers improperly classify employees as independent contractors. On July 15, 2015, the Department of Labor issued Administrator’s Interpretation No. 2015-1, a 15-page memorandum, in an attempt to clarify the economic realities test and provides new guidance on the Fair Labor Standards Act. Significantly, the DOL states that “most workers are employees under the FLSA’s broad definitions.”
Unfortunately for hotel owners and operators, the DOL’s guidance sets the bar extremely high for what constitutes a hotel independent contractor, and may potentially be detrimental for outsourcing practices. In light of the DOL’s interpretation, owners/managers should look at the following in determining if their outsourcing practices are compliant:
Is the Work Integral to a Hotel’s Business?
The DOL is casting a wide net, and saying that independent contractors are a rare category of workers and cannot include individuals who are an integral part of a hotel’s business. Additionally, whether or not the work is performed off site or away from the hotel’s premises has no impact on the analysis. This could greatly factor into the ability to outsource departments such as housekeeping and IT (reservations) that would be considered integral to the hotel’s operations.
Is the Worker’s Relationship with the Hotel Temporary or Permanent?
If the worker is not completing a one-off job, the chance that he or she will be considered an employee under the FLSA increases significantly. Most of the outsourced departments are not performing one-off jobs. Though a valet parking attendant hired only for a particular event would be considered temporary, an attendant who parks regular hotel guests’ cars or one who routinely works events hosted at the hotel would likely be classified as an employee.
What Degree of Control Does the Hotel Have over the Worker?
A hotel’s lack of direct supervision will not necessarily be determinative of classification, but is a consideration. If a worker controls his own schedule, duties, hours, etc., he or she may be more apt to be considered an independent contractor. Of course, many of the commonly outsourced departments are operating on schedules based specifically on the needs of the property – housekeeping, security, valet and groundskeeping schedules are timed specifically in conjunction with the hotel’s needs.
Now Is the Time to Review Your Worker Classifications
Certain jurisdictions focus much of the classification determination on control. However, many of the aforementioned departments do not actually operate outside the control of the property. Departments that can be outsourced effectively may include security, spa and food and beverage.
In light of the DOL’s recent guidelines, hotel owners and operators should strongly consider whether outsourcing is in the best interest of the business. Making the decision to outsource may be shortsighted, especially in light of the risks associated with potential employee misclassification lawsuits, class actions and DOL audits and enforcement. If a hotel does decide to outsource, closely examining the DOL’s economic realities test is absolutely necessary. Further, discussing indemnification language in the outsourcing agreement, in addition to procuring proper insurance coverage, with the assistance of an experienced employment attorney, is recommended to mitigate risk and avoid liability. If nothing else, this new guidance is a good reminder for hotel properties to have their outsourcing practices reviewed.
Lara Shortz is an experienced litigation attorney at the law firm of Michelman & Robinson, who represents clients in the hospitality, and restaurant, food and beverage industry. Shortz advises management on state and federal employment acts (such as EEOC, FEHA, ADA, ADEA, WARN, etc.), hiring, firing and wage and hour compliance in the areas of employment law for management. She also handles executive employment contract disputes and conducts workplace training, investigations and compliance.