It seems fitting that my first post of 2014 would come from the year's first major industry conference - the Americas Lodging Investment Summit (ALIS) held each January in Los Angeles. As expected, this year's Summit set near record attendance (nearly 2,600 registered attendees) and its attendees were brimming with confidence.
For me, however, the highlight of this year's Summit occurred on Monday a few blocks away. On Monday afternoon, Thayer Ventures hosted its third annual meeting focusing on innovation (and investing in innovation) in the travel industry. This year's meeting included a presentation by Skift CEO and founder, Rafat Ali, a panel discussion by the CEOs of each of Thayer's portfolio companies, and a final presentation by three well-known investors in the travel technology space.
Of the three presentations, Rafat Ali's was the most noteworthy. Rafat provided his predictions for the travel industry in 2014, including Rafat's top travel trends:
1. The Rise of the (Digitally Empowered) Silent Traveler
3. Visuals - the New Language in Travel
4. The Rise of Locality
5. The Rise of the Chinese Independent Traveler
6. Low Cost Carriers Eat the World
7. The Rise of the Sharing Economy
8. Substandard Travel Start-ups
9. Mobile Is Not a Trend - It Is Everywhere
If you are not a regular reader of Rafat's many websites, blogs or tweets, I strongly encourage you to become one.
The discussion among Thayer's fund companies that followed Rafat's presentation, included the CEOs from Adara Media, Duetto, Hipmunk, HotelMe, Posiq, tripBAM, and others, and focused on many of the trends identified by Rafat as well as distribution, the underserved (and often ignored) business travel market, millennials' demand for personalization, and each participant's thoughts on what it takes to truly become a "disrupter" within the travel industry. Nearly all of the participants had strong feelings about all or nearly all of the panel's topics.
Thayer's own Jeff Jackson moderated the final presentation by representatives of Gideon Hixon Fund, Altimeter Capital and the Priceline Group. Among their many observations, they each acknowledged seeing unprecedented numbers of new start-ups in the travel and technology industry.
Returning to the Summit on Monday evening and overhearing the many lobby conversations about interest rates, discount rates, and other real property investment metrics and attributes, I was reminded of the growing chasm between those who own and operate hotels and those who are using technology to reach, communicate with, and anticipate the needs of, those who stay in those same hotels. More on my observations on this issue in future blog posts.
I’m pleased to introduce another guest author from local accounting firm Clark Nuber P.S. Julie Eisenhauer is an audit and accounting principal specializing in the hospitality industry. We're grateful that Julie has offered to share her experience and knowledge with our readers. Welcome, Julie, and thank you for today’s post on this important revenue ruling. – Greg
IRS Guidance Effective January 1, 2014
In a recent Revenue Ruling that took effect on January 1, 2014, the IRS provided guidance on the difference between tips and service charges. This guidance may cause accounting for mandatory tips on large dinner parties or banquet bills to be more costly and complicated.
Now is the time for restaurateurs and hoteliers to reevaluate their policy for mandatory tips. Revisions to the policy may be necessary after considering the IRS’s definition of a tip vs. a service charge, the tax implications involved, as well as accounting and reporting requirements.
Tips vs. Service Charge (i.e., Wages)
A hotel or restaurant classifying a payment as a “tip” doesn't necessarily make it so. The IRS may determine through its independent review of facts and circumstances that the payment is actually a service charge. If the service charge is distributed to the employee in the course of employment, the service charge is considered “wages” for FICA tax and other purposes.
The Revenue Ruling lists the factors that the IRS will consider when evaluating whether a payment is a tip or service charge. To be considered a tip, the following must be present:
- The payment is made free from compulsion
- The customer has the unrestricted right to determine the amount
- The payment is not the subject of negotiation or dictated by employer’s policy
- The customer has the right to determine who receives the payment
The Revenue Ruling clarifies that automatic or mandatory tips are service charges (i.e., wages) and cannot be treated as tips due to the fact that the customer is restricted from determining the amount of the tip and did not make the payment free from compulsion.
So why does it matter if the customer payment is defined by the IRS as a service charge vs. a tip?
If the payment is a tip, the current law continues to apply, making it the responsibility of the employee to report all tips received in any calendar month to their employer by the 10th of the following month. The employer is required to pay FICA tax (Social Security and Medicare) on these tips. The good news is that a Washington State employer is allowed a FICA Tip Credit for all FICA tax paid on its employee tip income.
Like tip payments, service charge payments distributed to an employee for their services (wages), are subject to employer FICA tax obligations. However, since these payments are not tips, any FICA tax paid on the service charge would not be subject to the FICA Tip Credit.
Under Washington's State Excise Tax Rules, tips representing donations or gifts by customers that are clearly voluntary are not part of gross revenue subject to tax. However, mandatory tips added to the sales price by the seller – whether labeled service charges, tips, gratuities or otherwise – must be included in the gross sales price and are subject to both the retailing business and occupation tax and retail sales tax. Consistent with the Washington State Excise Tax Rules, mandatory tips are included with gross revenue subject to income tax for Federal tax reporting purposes, while any related payment to the employee is a deduction against income.
To meet the definition of a tip by the IRS and Washington State, restaurants and hotels should consider revising their policy for adding mandatory tips on large parties or banquet bills and instead include sample calculations of tip amounts on the bottom of its receipts provided to customers. This will demonstrate the customer’s unrestricted right to determine the amount of the tip and that it was made free from compulsion.
If the restaurant or hotel continues their policy of adding mandatory tips to large dinner party or banquet bills, special care should be taken to make sure the accounting system is correctly accounting for these payments as gross revenue when the payment is received and wages to employees when distributed to them. These payments should be segregated from tip payments in order to simplify both State and Federal income tax reporting requirements.
Restaurateurs or hoteliers should evaluate the risks and rewards of adding mandatory tips to customer bills. Is the tax obligation or the reduction in the FICA Tip Credit significant? Is accounting and reporting of service charges as wages cumbersome? Are you including the statutorily required guest and customer disclosures? Taking the time to evaluate your policy now may help you avoid possible IRS scrutiny later.
The recent death of a hotel guest in Texas has again brought attention to guest access and use of our nation's public safety system. Colin Andrews, a member of our communications practice in Washington, D.C., has been monitoring the situation and provided us with the timely update and call to action below. Thank you, Colin, and welcome to the blog! - Greg
In a letter sent to major hotel chains, FCC Commissioner Ajit Pai urged hotels to program their telephones to be able to dial 911 without first dialing 9. The motivation behind this initiative is the death of Kari Hunt Dunn, who was stabbed to death at the Baymont Inn in Marshall, Texas this past December, while her daughter unsuccessfully attempted to dial 911 for help. The Baymont Inn’s phone system required all guests to dial 9 before dialing 911. As a result, the daughter was unable to reach emergency services.
Commissioner Pai proposes a uniform 911 system: “when consumers dial 911, they need to reach emergency personnel; it shouldn't matter…whether they are using a phone at a hotel, motel, or office building. If you dial 911 in a large building, you need to reach someone qualified to help.” Commissioner Pai’s letter asks hotel owners to answer the following questions by February 14, 2014:
1) How many hotel and motel properties in the United States does your company own?
2) In how many of those properties would a guest dialing 911 from the phone in his or her room reach a Public Safety Answering Point or 911 call center? In such cases, does the phone system also alert a hotel employee that an emergency call has been placed?
3) In how many of those properties would a guest dialing 911 from the phone in his or her room reach a hotel employee? In those cases, have hotel employees answering such calls received appropriate training in how to respond to emergency calls?
4) In how many of those properties would a guest dialing 911 from the phone in his or her room not complete a call to anyone?
5) If your company has any properties where a guest dialing 911 from the phone in his or her room does not reach emergency personnel, what is your company’s plan for remedying this situation? If you do not have a plan, why not?
In response to Commissioner Pai’s letter and media attention given to the issue, the American Hotel & Lodging Association (“AHLA”) has created a task force to develop recommendations on how this problem could be addressed. Commissioner Pai responded favorably to the proposed AHLA task force in a statement last Friday, saying that he was “pleased” and that he “urge[s] the task force to work with dispatch to find simple solutions” to the issue. AHLA President, Katherine Lugar, noted however that there might not be a simple fix in all cases because hotels must “take into consideration a variety of factors, both internal, including operational challenges, and external, including municipal, county, and state requirements.”
If you did not receive a letter there's no need to respond to the questions above, but please take this opportunity to review your own call systems to see how they function when 911 is called. If you have further questions regarding the initiative or how you might get involved, please contact me or Colin.
A recent Virginia court of appeals’ decision, including allegedly false reviews on Yelp!, have drawn a lot of attention to false reviews and hoteliers and restaurateur’s options for responding. Our newest post from recent Garvey Schubert Barer addition, Judy Endejan, looks at the Virginia decision and offers vendors some practical advice on managing their social media reputations. We are thrilled to welcome Judy and the extensive communications and First Amendment expertise she brings to GSB. Welcome Judy! - Greg
A common modern headache most hoteliers and restaurateurs face is a negative review that torpedoes the room, the food, or the room service to be posted by an anonymous blogger on Yelp!, or any one of the other well established user review websites or blogs. How should you react?
First, do not overreact. If the negative review is far outweighed by positive reviews, most readers will give little weight to an outlier, concluding that the poster either had a fight with his or her partner or a cosmic headache.
Second, analyze the review. If the review appears to contain false information that needs to be corrected, you have a different path than if the review, viewed overall, appears to be nothing but a statement of opinion. In the latter case, frankly, there is little that you can do because the First Amendment protects a statement of a personal opinion about a business that they patronized. The review must tell the reader, however, the factual assumptions upon which the opinion is based. The First Amendment does not protect a statement of opinion that is based upon an undisclosed or false statement of facts.
Defamation litigation is problematic from many standpoints. First, defamation litigation might cause a “Streisand Effect” – meaning that your lawsuit against an anonymous blogger might generate far more publicity than any publicity possible from the negative review. This could be bad for business.
Second, you will face several hurdles in a defamation action. The first hurdle will be to discover the identity of the anonymous negative reviewer. Yelp! defends against disclosing the identity of its users quite vociferously. Recently it lost a case at the Court of Appeals of Virginia (Yelp!, Inc. v. Hadid Carpet Cleaning, Inc., Record No. 0116-13-4). There, the Court applied a special Virginia procedural statute targeted at unmasking anonymous bloggers and upheld a contempt order against Yelp!, when Yelp! refused to identify seven anonymous bloggers that posted specific critical reviews of the carpet cleaning company. The Virginia statute has a lower standard for protecting anonymous speech than those adopted in other leading cases regarding unmasking internet bloggers. The Virginia Court did not follow these leading cases, Dendrite International, Inc. v. Doe #3, 775 A 2d 756 (N.J. Super Court App. Div. 2001) or Doe v. Cahill, 884 A. 2d 451 (Del. 2005), which impose a fairly strict standard for a defamation plaintiff to pass. Under Dendrite and Doe, the plaintiff has to provide evidence that substantiates that the speech was tortious (i.e., defamatory) or otherwise illegal to overcome First Amendment protection of anonymous speech, which requires a compelling state interest. The Virginia Court applied the Virginia statute, which has a lower burden, requiring only that you prove, among other things, that the review is or “may be” defamatory, or that you have a legitimate, good faith basis for “believing” that the review is defamatory. In the Virginia case, the plaintiffs presented evidence that could prove the seven reviewers were not actual customers of the carpet cleaner. The Court reasoned that if the reviewers weren't customers, then whatever they said must have been false, hence defamatory.
While the Virginia case may indicate some easing of the burden for getting redress against a negative Yelp! review, that case is based on a specific state statute and should not be viewed as having universal application in other parts of the country.
Even if your business could succeed in unmasking the identity of a negative reviewer, you still face the considerable burden of proving that the speech was libelous, which is subject to other constitutional burdens. In some states, like Washington and California, anti-SLAPP statutes allow a defendant to test the strength of a plaintiff’s case for defamation by requiring the plaintiff to prove why it will win at an early stage of the litigation. If the plaintiff can’t do that,the plaintiff has to pay attorneys’ fees and a possible penalty to the defendant.
In sum, before considering a litigation option, your business will need to think long and hard before undertaking the burdens associated with it. In the end, the best way to deal with a negative review is to bury it among positive reviews.
By now, most hoteliers and restaurateurs know that all employers are required to prepare and maintain the Form I-9 for all of their employees. But did you realize that those forms can be a basis for financial liability if they were improperly prepared? This post will identify your risks and strategies to reduce a fine if you are ever audited by the government.
Legal Employment/Improperly Completed Form
You can be fined even if all of your employees are legally authorized to work. The government can fine an employer between $110 and $1,100 for first-time violations for each improperly completed Form. Fines go up for violations identified in a subsequent government audit.
Important Lesson: Train the personnel who are responsible for Form I-9 compliance so they know how to properly complete a Form I-9 before it gets put into your filing cabinet. The government’s webinars are a good place to start training, but you might consider in-person training by your regular labor and employment law advisor or one of the GSB Labor and Employment Team Members.
Illegal Employment/Properly Completed or Nonexistent Form
It happens. Either fake documents are presented without you realizing it, or worse, someone in your organization knowingly hired someone who had no legal authority to work. A government audit will identify both situations, but you will likely be fined in the second situation only, between $375 and $3,200 for each unauthorized employee for a first audit. You might not be fined at all if you did everything correctly.
Important Lesson: Make sure that personnel responsible for Form I-9 compliance know which document can be used and that they understand their responsibilities, including:
- The document presented relates to person presented
- The document appears to be genuine
- Do not entrust Form I-9 compliance to just one person
- Link payroll to Form I-9 compliance as a double-check to be sure that all personnel on the payroll have properly completed forms; don’t add anyone to payroll unless it’s been confirmed that a properly completed Form I-9 exists.
No matter how good your protocols are, you will invariably find mistakes. An annual internal audit, by a fully-trained person or team, can identify errors and trends, many of which can be corrected to reduce or eliminate liability.
Great Policy/Lack of Follow-Through
Mistakes, changes in personnel, and lack of training are just some reasons even the best of policies can’t protect you from liability. And if you don’t regularly conduct your own internal audits and take action to fix things, your cabinet will still have liability.
- Include regular (preferably annual) internal audits of the Forms I-9 prepared in the previous year.
- Follow the government protocol to “correct” the mistakes on documents that you can, and memorialize why you can’t for the others.
No employer does it all right. Mistakes happen and rogue employees exist. But by facing up to these realities and proactively addressing them, you can reduce and possibly even eliminate liability for the Forms I-9 you are required to complete and retain.
Greg Duff, Editor
Greg Duff founded and chairs GSB’s national Hospitality, Travel & Tourism group. His practice largely focuses on operations-oriented matters faced by hospitality industry members, including sales and marketing, distribution and e-commerce, procurement and technology. Greg also serves as counsel and legal advisor to many of the hospitality industry’s associations and trade groups, including AH&LA, HFTP and HSMAI.