After seemingly bouncing back from the challenges posed by the COVID-19 pandemic and related labor, supply chain, and governmental mandate issues, the hospitality industry experienced a year of volatility in 2023, with slackening growth, fraught debt markets, increasing supply and labor costs, and declining real estate values making it a challenging year. While 2024 promises to continue to be another year of challenges, it will also undoubtedly offer opportunities for those that can find creative solutions.
Below are eight issues that we expect to impact the hospitality industry in 2024.
1. Ransomware
According to Sophos’ "The State of Ransomware 2023" report, ransomware affected two-thirds of all organizations in 2023. The effects can be devastating, with data — including sensitive trade secrets and personal data — being encrypted and held ransom for what can be a large payment to obtain a decryption key, which sometimes does not work, to avoid having these data made public by the threat actor.
In addition to business disruption for weeks or more, ransomware attacks force companies to address multiple legal issues in short order. Companies that decide to pay the ransom must be sure to avoid Office of Foreign Assets Control (OFAC) sanctions restrictions. They also must have an incident response program ready to go, and tested with tabletop exercises, so that when the attack happens, workstreams are clear. From notifying insurance carriers to onboarding incident response forensics companies, to engaging crisis communications and data mining firms, there are multiple policies and agreements to review. There are also contractual notification obligations for business partners and a patchwork of over 50 state data breach notification laws to navigate, such as notice deadlines for individuals and regulators as short at 15 days from discovery of the incident.
Ransomware attacks and other data breaches can also result in liability arising out of state and federal regulatory investigations, class action litigation, and shareholder derivative litigation. They can trigger indemnity provisions in commercial contracts. In this environment, it is critical to have an up-to-date data security program to try to prevent ransomware attacks and other data breaches and an incident response plan to respond to attacks that do happen. The landscape is developing quickly.
For example, in 2023 alone, the US Securities and Exchange Commission (SEC) adopted a rule requiring registrants to disclose material cybersecurity incidents and to annually disclose material information regarding their cybersecurity risk management, strategy, and governance. The California Privacy Protection Agency initiated a rulemaking on detailed cybersecurity audit regulations, and the Federal Trade Commission (FTC) updated data breach notification requirements for non-bank financial institutions. Is your data security program up to date? Have you pressure-tested your incident program with tabletop exercises? Do you need assistance staying current on this evolving legal and regulatory landscape? ArentFox Schiff can help.
2. More Expansive Definition of Joint Employer Liability by NLRB
The National Labor Relations Board (NLRB) published its final rule addressing the Standard for Determining Joint-Employer Status, with wide-ranging implications for many industries and small-business owners. The NLRB determined that two or more entities may be considered joint employers over a group of employees if each entity has an employment relationship with the employees, and each entity shares or codetermines one or more of the employees’ essential terms and conditions of employment. The effective date of the new rule has been extended to February 26 to facilitate resolution of various legal challenges.
The NLRB defines “essential” terms and conditions of employment as: (1) wages, benefits, and other compensation; (2) hours of work and scheduling; (3) the assignment of duties to be performed; (4) the supervision of the performance of duties; (5) work rules and directions governing the manner, means, and methods of the performance of duties and the grounds for discipline; (6) the tenure of employment, including hiring and discharge; and (7) working conditions related to the safety and health of employees.
The NLRB now considers an alleged joint employers’ authority to control essential terms and conditions of employment, regardless of whether such control is exercised, and without regard to whether any such exercise of control is direct or indirect. Critical to the NLRB’s determination of joint-employer status going forward is whether an alleged joint-employer maintains authority to control essential terms and conditions of employment, even where such employer has not yet exercised such control. Under the new rule, indirect control, control exercised through an intermediary, or a contractually reserved but never exercised right to control, is sufficient to establish joint-employer status. The NLRB was careful to note that neither all franchisors and their franchisees, nor all staffing or temporary agencies and their client employers will automatically be deemed joint-employers; rather, the joint-employer analysis is driven by the alleged joint-employers’ relationship with the affected employees and their authority to control one or more essential terms and conditions of employment. However, institutions need to be concerned with language in their franchisor/franchisee agreements, employment agency agreements, and management agreements given the NLRB’s newly expansive interpretation of joint employer.
The new rule presents real exposure for alleged joint-employers, including but not limited to: (1) liability for acts of principal employer; (2) obligation to participate in union-related negotiations; (3) exposure to Request for Information Demands relative to both businesses; (4) strikes/boycott of both businesses; and (5) negative public relations. The NLRB rule applies only to cases filed after the rule becomes effective. The US House of Representatives has voted to repeal the new rule, and Senator Joe Manchin (D-WV) has stated he opposes the new rule; however, President Biden has vowed to veto any efforts to overturn the new joint-employer rule.
The NLRB has distinguished its joint-employer analysis from that employed by the US Department of Labor (DOL), with the former being grounded in the National Labor Relations Act (NLRA) and the latter applying an “economic-realities” test to interpret “employer” for the purposes of the Federal Labor Standards Act (FLSA). Under the NLRB, two or more entities may be considered joint employers of a group of employees if each entity has an employment relationship with the employees, and if the entities share or codetermine one or more of the employees’ essential terms and conditions of employment.
3. Corporate Transparency Act Reporting Requirements
Effective January 1 of this year, the Corporate Transparency Act (CTA) requires a number of newly formed and existing entities organized under state law, as well as non-US entities that register to do business in the United States, to disclose their “beneficial owners” (i.e., individuals who, directly or indirectly, either exercise substantial control over the entity or own or control at least 25% of the entity’s ownership interests) and provide certain other information to the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Department of the Treasury. Entities that are exempt from CTA reporting include, among others, highly regulated entities such as public companies, banks, large operating companies, and companies that are wholly owned or wholly controlled by entities exempt from CTA reporting (subject to certain exclusions).
A reporting company formed or registered in 2024 must file its initial report with FinCEN within 90 days of its formation or registration, and a reporting company formed or registered beginning in 2025 must file its initial report within 30 days of its formation or registration. The CTA will also apply to companies that were formed or registered prior to January 1, 2024. Such preexisting reporting companies must file their initial reports by January 1, 2025. After filing its initial report with FinCEN, a reporting company must update its FinCEN registration within 30 days of a change in its beneficial ownership or certain other information.
The CTA will directly impact many companies in the hospitality industry. Some entities may be exempt if shares of their stock are publicly traded. Others could be exempt if they satisfy the large operating company exemption, which requires that a company (1) employ at least 21 full-time employees in the United States (there is no consolidation of employees with affiliated companies for this purpose); (2) have an operating presence at a physical office in the United States; and (3) have filed a federal return in the United States for the previous year demonstrating more than $5 million in US-sourced gross receipts or sales. Yet other companies may be exempt if they are wholly owned subsidiaries of CTA-exempt entities.
However, there are many situations where a company will not satisfy any exemption from the CTA and will be required to register with FinCEN. This may be the case particularly where joint ventures are involved, as a company’s exemption may depend on understanding the ownership structure of all joint venture partners. Therefore, care needs to be taken in properly ascertaining an entity’s potential exemption from the CTA, and, if it is not exempt, in identifying its “beneficial owners,” which is not always a straightforward inquiry.
Companies are well-advised to begin their CTA analysis as promptly as possible. This is especially important for companies that may be actively creating new subsidiaries, as those subsidiaries have a comparatively short timeframe to file their initial reports with FinCEN if they are required to register under the CTA. Importantly, there is no consolidated reporting under the CTA, and so each reporting company is required to file its own report.
There are substantial penalties for non-compliance. Any person that willfully fails to submit the required beneficial ownership information, or that provides false or fraudulent beneficial ownership information, may be subject to a civil penalty of up to $500 for each day that the violation continues and a criminal fine of up to $10,000, imprisonment for up to two years, or both. Penalties for failing to comply with the CTA can be imposed not just on the company itself, but also on its senior officers personally and on individuals who willfully cause a company not to file a required report or to report incomplete or false information. This includes refusing to provide required information to a company, knowing that the company will not be able to provide complete beneficial ownership information to FinCEN, or providing false or fraudulent beneficial ownership information to the company.
4. Property and Casualty Insurance Premiums
According to the Council of Insurance Agents & Brokers, commercial property and casualty insurance premiums increased for the 24 quarters preceding Q4 2023. This included increases of 18.3% and 17.1% in Q3 and Q4. Numerous factors are credited for this precipitous rise: the increased intensity and frequency of extreme weather events, the limited supply of reinsurance (which has led to extremely high reinsurance costs), and persistent inflation in the costs of both labor and materials in the construction industry. It seems likely that many, if not all, of these factors will continue to impact the property and casualty insurance market in 2024, with increasing construction demand likely to be a strong factor.
Responding to the continuing surge in these premiums, hotel managers and investors have attempted a variety of strategies to reduce insurance costs. Possibly the most used solution has been to simply obtain lower premiums by agreeing to higher deductibles or lower policy limits. However, there has also been an increased use of captives and other self-insurance methods by those with the financial wherewithal to make such methods viable.
In undertaking any of these cost-reduction strategies, hospitality industry participants must be mindful of their insurance responsibilities to third parties. These third parties frequently include lenders, but may also include ground lessors, franchisors, managers, owners’ associations, and tenants, among others. It is unusual for the relevant agreements to provide sufficient flexibility to allow for large increases in deductibles or reductions in limits or to permit significant self-insurance, but it may be in all parties’ interests to negotiate changes to avoid extremely burdensome costs in the new insurance environment. Before entering into these agreements, hospitality participants may also wish to consider provisions that allow for the alteration of insurance requirements in response to pervasively high insurance premiums.
5. Tax Provisions in Recently Passed House Bill That Could Impact Hospitality Industry
On January 31, the House of Representatives passed the Tax Relief for American Families and Workers Act of 2024. The legislation contains a limited number of tax provisions, many of which deal with individual taxes. Of particular note for the Hospitality Industry are the following:
- Business Interest Expense. The legislation would increase the deductibility of business interest by restoring the depreciation and amortization addback to adjusted taxable income for purposes of computing the Section 163(j) business interest expense limitation. The legislation would return to a 30% limit based on taxpayer-favorable EBITDA (earnings before interest, taxes, depreciation, and amortization) rather than the less taxpayer-favorable EBIT (earnings before interest and taxes). The EBIT limitation took effect beginning in 2022 and applies going forward, absent a change of law. The bill would allow companies an election to use the EBITDA-based limitation for 2022 and 2023 and require the EBITDA-based limitation for 2024 and 2025.
- Depreciation. The legislation would:
- Restore 100% bonus depreciation for equipment and other short-lived capital assets placed in service after 2022 and before 2026. Under current rules, after 2022, bonus depreciation starts to phase out by 20 percentage points per year. The existing 20% bonus depreciation deduction for property placed in service in 2025 and 2026 would be retained (with some exceptions).
- Increase the Section 179 maximum deduction from $1.16 million to $1.29 million and increase the phaseout threshold from $2.89 million to $3.22 million for qualified tangible personal property placed in service in tax years beginning after 2023.
- Employee Retention Tax Credit. To pay for the tax cuts in the legislation, the bill would accelerate the deadline for making claims of the COVID-era employee retention tax credit (ERTC) and tighten enforcement. The ERTC can be claimed up to $26,000 per employee for certain wages paid by employers between March 12, 2020, and before October 1, 2021. Under current law, the ERTC may be claimed on amended returns through April 15, 2025. The bill would disallow ERTC claims after January 31, 2024, increase the statute of limitations on assessments of the ERTC, and apply penalties to “ERTC promoters” who have failed to comply with requirements for preparing ERTC claims. (The amount of ERTC claims filed by taxpayers has greatly exceeded original congressional estimates).
While the House vote on January 31 was bipartisan, the bill’s outcome in the Senate remains uncertain. In response to the ERTC proposals, some companies are preparing to submit qualified ERTC claims now that have not yet been submitted.
If you have any questions regarding the legislation, our team of attorneys following the legislation can assist you.
6. Adoption of "Building Performance Standards"
“Building Performance Standards” (BPS) refers to policies and laws that require existing buildings to meet energy or greenhouse gas emissions-based targets as part of an attempt to reduce or offset the carbon impact of those buildings. Through its Building Technologies Office, the US Department of Energy (DOE) has sought to encourage and support state and local governments in their adoption of BPS. According to the DOE, Colorado, Maryland, Washington, Oregon, and the District of Columbia have adopted statewide BPS, while California is currently considering adoption. In addition, 11 counties and municipalities (including New York, Boston, Seattle, Denver, and St. Louis) have adopted BPS and 27 others are weighing adoption.
BPS vary in their terms and restrictiveness, but the version adopted by New York City as Local Law 97 is being viewed by some as a model. Local Law 97 requires owners of buildings larger than 25,000 square feet to track and report greenhouse gas emissions, with the first reports being due May 1, 2025. The thresholds are set to achieve a 40% reduction (based on determination of carbon emissions per square foot) in the subject buildings’ greenhouse gas emissions by 2025 and will be ratcheted-down on a periodic basis beginning in 2030, with a goal of achieving “net-zero” (where the amount of greenhouse gas emissions going into the atmosphere is balanced by the amount being removed) emissions by 2050.
If a building fails to meet the applicable threshold, Local Law 97 imposes an annual penalty of $268 for each ton of carbon dioxide (CO2) equivalent above the threshold. While, according to an Axios report, approximately 91% of the applicable buildings comply with the thresholds in place for 2024, the website developed by the Mayor’s Office of Climate and Environmental Justice predicts that numerous hotel properties (such as the Beekman and the Conrad Downtown hotels) will fail to meet the 2024 standards. The more restrictive 2030 thresholds are predicted to cause far more fines to be imposed, with the same website identifying properties such as the Westin Grand Central, Hilton Club West, and the W Times Square as being unlikely to comply with the 2030 levels.
Adding to these state and local requirements are the long-gestating climate change disclosure rules being promulgated by the SEC. These rules, which are currently scheduled to be finalized in Spring 2024, will likely require public companies to make disclosures related to the amount of greenhouse gasses generated by their activities, greenhouse gases that a company is indirectly responsible for as a result of their activity, and the expected impact of climate change on their businesses.
BPS such as Local Law 97 promise to impose higher costs upon many hotel owners, whether those costs result from fines for failure to meet the law’s thresholds or upgrades necessary to avoid those fines (for example, replacing older gas-fired furnaces with more efficient heat pumps). Local Law 97, like other BPS, does allow for the use or purchase of renewable energy credits (RECs) and other emission offsets through greenhouse gas reduction projects or the installation of onsite solar/wind, to mitigate the impact of the buildings. The disclosure compliance costs under Local Law 97, similar BPS, and the SEC’s disclosure rules will also add financial burdens to the hospitality industry in the coming years. Affected participants would be well-advised to develop a plan to ensure that they are efficiently and effectively complying with applicable disclosure requirements, take advantage of any BPS compliance exemptions (such as Local Law 97’s postponement of compliance during the implementation of a decarbonization plan), and weigh the relative benefits of refitting a non-compliant building.
7. Developments in Artificial Intelligence
The hospitality industry, as with many other industries, is seeking to keep pace with developments in artificial intelligence (AI) and how to best integrate the newly developed AI technologies into their businesses. The ability of AI to analyze large volumes of data promises to allow the industry to improve purchasing, supply management, staffing, scheduling, and reservations. AI’s pattern recognition abilities may also allow the industry to better forecast demand, anticipate inventory needs and spoilage, handle or vet inquiries from guests and potential customers, or automate check-in and food service functions. In addition, industry participants may be able to use AI to assist in monitor facilities and other security and guest safety functions.
As AI technology evolves, so too is the legal landscape surrounding AI. On October 30, 2023, President Biden issued an Executive Order to, according to the contemporaneous Fact Sheet issued by the White House, establish “standards for AI safety and security, protects Americans’ privacy, advances equity and civil rights, stands up for consumers and workers, promotes innovation and competition, advances American leadership around the world, and more.” The Fact Sheet noted the Administration’s concerns about job displacement, lowered compensation, and hiring practices in connection with the adoption of AI technologies. It also put a heavy emphasis on privacy concerns and protections to be implemented on the development side of AI.
Federal agencies have already begun rolling out various policy initiatives to implement the Executive Order. For example, the FTC has been increasingly focused on the effects of the rapid development and deployment of generative AI tools, with a particular focus on its impact on consumer products and privacy issues. The US Department of Commerce promulgated a rule that requires reporting by companies that have large computing clusters for training AI systems or assist in foreign AI training. These initiatives are likely just the tip of the iceberg, as lawmakers and regulators are also attempting to react to rapid developments in emerging AI technologies.
We are continuing to monitor developments in AI. Please following this link to pre-register for our upcoming webinar, “AI in 2024: What Every GC Needs to Know,” and to receive periodic updates.
8. Repurposing of Office Buildings in Urban Center
In the fourth quarter of 2023, office vacancies in major US cities reached the highest level since at least 1976 (which is when Moody’s Analytics began recording that data). These rising vacancies coincided with precipitous declines in the value of office properties. Capital Economics estimates that the peak to trough decline in US office values will eventually reach 45% and, possibly more concerning, will likely take two decades or more to come back to their peak 2020 valuations.
The dire situation facing the office sector has led to a good deal of exploration into converting existing, underutilized office spaces for alternative uses, including hotels. CBRE estimated that, as of the third quarter of 2023, conversions of approximately 60 million square feet of office space in the United States was either underway or in the planning stages, a substantial increase from the prior year. However, conversions to hotel space made up just a small fraction of the total office conversions — approximately 4%.
Many have found that adding the plumbing, bathrooms, and light wells and enhancing existing heating, ventilation, and air conditioning (HVAC) systems necessary to convert and office building into a hotel, especially when coupled with high borrowing and construction costs, to be too expensive for a conversion to make financial sense. However, as office values continue to decline, that calculus could change.
Moreover, faced with an erosion of their taxes bases due to both declining real estate values and a lack of business activity in their urban cores, many cities have taken steps to encourage development through tax incentives and streamlining development approvals. Most of the tax incentives thus far have been tied to the creation of affordable housing and the stimulus of residential conversions. However, Calgary, Alberta, which is widely considered a model for office conversions, identified the conversion of offices into hotels a key piece of its downtown revitalization plan. Given the burgeoning vacancies and precipitous declines in tax bases in urban cores in the United States, it seems likely that the development of hotels will be part of domestic municipal development stimulus plans.
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