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Board_Report_-_IHG_Living_Wage_Controversy.pdf

Dear student,

Kindly take note that your assignment requirement is

slightly different from these sample assignments. The

content is not necessarily accurate for you to use.

Please adhere to the assignment requirement,

guidelines and brief that stated in the Module Study

Guide – Brand Reputation Management. By looking at

this sample assignment, you will be able to

understand the structure and format for a boardroom

report.

Your tutor,

Sherine Kwok

14 April 2021

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IHG LONDON LIVING WAGE CONTROVERSY

Brand Reputation Management

Professor Sherine Kwok

University of West London

15 May 2020

EXECUTIVE SUMMARY

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The purpose of this report is to critically analyse the impact of InterContinental Hotel

Group’s (IHG) decision to revoke its promise to pay its London employees the London

Living Wage on IHG’s brand reputation by analysing the threat this decision posed, the steps

IHG took to address it and by providing recommendations as to how IHG could improve its

practices going forwards.

In 2012, after Holiday Inn, one of IHG’s brands, was appointed as an official hotel provider

to the 2012 London Olympics, IHG announced that it would voluntarily pay all of its London

employees the London Living Wage, which is a base salary higher than that of the legally

required National Living Wage. After calls to honour its promise by London mayor Sadiq

Khan and Unite Union in 2017, IHG released a statement saying it no longer intended to

fulfil its promise to pay the London Living Wage. This led to criticism by Mr Khan, Unite

Union and others that IHG had behaved in an untrustworthy manner which in turn damaged

the IHG brand as a trustworthy organisation.

Applying the RepTrak Analysis, we see that this loss of trust affects three key reputation

drivers: governance, citizenship and the workplace. By promising a benefit to its employees

and then retracting it at the last possible moment, this should a failing in governance because

IHG was not ethical or transparent. Similarly, IHG suffered damage to its citizenship

reputation driver by retracting its promised good deed. Paying the LLW could have

enhanced IHG’s perceived CSR but this was negated. Finally, it’s likely that the image of

IHG’s workplace suffered as low paid employees who were promised a £5,000 a year pay

increase were denied this increase. This likely led to a lower approval rating by these

employees of IHG and could have potentially damaged IHG in recruiting employees.

IHG did not take a proactive response to the LLW controversy. Instead, it waited until the

end of its self-imposed deadline and after being called out by the London Mayor’s Office and

Unite Union for failing to fulfil its promise. IHG’s reactive response was to release a limited

statement saying that IHG did not intend to fulfil its promise because of increased

employment costs associated with new government policies (the National Living Wage,

which is lower than the LLW, and pension auto-enrolment). IHG also tried to draw attention

to employee programmes it offers such as programmes to train low skilled workers. IHG did

not take responsibility for its broken promise, apologise or promise to be more trustworthy in

future. This was a poor response as it showed a lack of empathy for IHG’s lowest paid

employees and a lack of accountability as an organisation.

To do better in future, IHG should issue a prompt, empathetic and genuine apology directed

to the affected stakeholders. In this specific instance, IHG’s reputation would likely benefit

from reversing itself and actually implementing the LLW to its employees as promised.

IHG’s high profits and the low number of employees affected suggest this is financially

possible and it would portray IHG as a company with a moral conscience willing to see tough

decisions through, as set out in IHG’s own Code of Conduct.

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TABLE OF CONTENTS

I. Introduction

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II. Critical Review of the Reputation Driver and Impacts on Stakeholder Groups

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a. Governance

5

b. Citizenship

6

c. Workplace

6

III. The Current Management Practice and Alternative Perspectives

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a. The Current Management Practice

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b. Alternative Perspectives

8

IV. Conclusion and Recommendations for Alterations to Practices

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V. Reference List

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VI. Appendices

15

a. Appendix 1 - The RepTrak System

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I. Introduction

The InterContinental Hotel Group (IHG) is one of the world’s most recognisable hotel

companies. It is the fourth largest hotel chain in the world with 5,903 hotels in more than

100 countries (IHG, 2019). Its hotels operate under 16 brands which range in market

segment from economy to luxury hotels (IHG, 2019)1.

In 2012, after IHG’s brand Holiday Inn was awarded the coveted status of official hotel

services provider to the 2012 London Olympic Games, IHG’s then Managing Director of UK

and Ireland announced that IHG would implement the London Living Wage (LLW)2 in all of

its managed hotels in London over the next five years (i.e. by 2017) (Dominiczak, 2012). At

the time of IHG’s promise, the LLW would have effectively resulted in its lowest paid

London employees receiving a nearly £5,000 pay rise (Ibid.). This announcement was

widely reported and celebrated at the time and it is likely that IHG’s reputation benefited as a

result (LivingWage.org, 2012)3.

Despite calls for IHG to fulfill its promise over the years, including by Unite Union, IHG had

not implemented the LLW in its managed London hotels by 2017. In March of 2017,

London Mayor Sadiq Khan called on IHG to clarify whether it intended to fulfill its promise

to enact the LLW (Khan, 2017). However, IHG did not respond until November 2017, when

the company announced via a spokesman, that it would not be implementing the LLW in its

managed hotels.

This announcement was strongly criticized by Mayor Sadiq Khan in a public letter posted on

Twitter (Khan, 2017). In it, Mr Khan acknowledged that London hotels faced a number of

economic pressures such as high business rates and Brexit, but he pointed out that IHG had

enjoyed rising profits over the past five years. In 2017, IHG had announced a group

operating profit of $763 million (IHG, 2017).

Mr Khan suggested that IHG had only agreed to bring in the LLW to be chosen as an

Olympic partner, he called IHG untrustworthy and said that if IHG did not fulfill its promise,

1 IHG has an adopted an asset light business model –69.6% of its hotels are franchised, 29.6% are managed and

only 0.07% are owned – which means that the majority of employees who work in IHG branded hotels are

employed by franchisors instead of IHG itself, with the exceptions being IHG’s luxury hotels which are

typically staffed and managed by IHG (IHG, 2019).

2 The LLW is an hourly rate of pay which is calculated independently by the Living Wage Foundation to reflect

the high cost of living in London with the aim of giving workers enough money to afford the essentials and to

save (Mayor of London, 2019). Participation in the LLW is voluntary and is higher than what companies are

required to pay their employees by law. Currently, over 1500 employers participate in the LLW. For reference,

the current LLW is £10.55 per hour whereas the National Living Wage for employees over 25 is only £8.21 per

hour (GOV.UK, 2019).

3 At the time, Neil Jameson, London Citizens Director, said, “This is a brave and historic move by IHG.

London’s hotel sector has too long suffered from widespread poverty pay. Finally, we have a leader in the

market and we encourage all supporters of the Living Wage to do business with IHG’s managed hotels.”

While Boris Johnson, the then Mayor of London said, “This is a welcome decision by IHG and I am

delighted that they have been persuaded of the huge benefits the London Living Wage will bring. Not only

does it foster a loyal and hardworking workforce, it can help lift people out of poverty and give them a proper

reward for their labours."

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he would not endorse any future partnership between the Greater London Authority and IHG

(Khan, 2017).

IHG’s reversal on the LLW and Mr Khan’s criticism was reported in the national and trade

press (see, Inman, 2017; Price, 2017; Travelmole, 2018). Additionally, IHG’s decision was

aggressively criticized by Unite Union which staged protests outside one of IHG’s London

Crowne Plaza hotels (see, Price, 2016; Trades Union Congress, 2019; Unite the Union,

2019). This incident damaged IHG’s brand reputation because it portrayed IHG as

untrustworthy in that IHG did not honour its promise to its employees and the London

community. It also suggested that IHG lacks transparency because IHG did not take a

proactive approach to addressing the LLW promise. Instead, IHG waited until the end of its

own deadline to address why it had not fulfilled its promise and seemed to only do so because

it had been called out by Mayor Sadiq Khan and the Unite Union.

II. Critical Review of the Reputation Drivers and their Impacts on Stakeholder Groups

In reversing itself on such a publicly praised issue as promising to pay its London employees

the LLW, IHG opened itself up to criticism that it behaved in an untrustworthy manner, both

towards its employees and towards the public. This is problematic for IHG as earning and

maintaining stakeholder trust is crucial for improving a company’s performance (Dowling,

2006). Ponzi et al. (2011) identify trust as one of four key emotions felt by stakeholders

towards a corporation which are crucial in determining a corporation’s reputation.

The RepTrak System is built around four emotions (feeling, trust, admiration and esteem)

which inform seven reputation drivers (leadership, citizenship, governance, workplace,

innovation, products/services and performance) which can be used to quantify and measure a

firm’s reputation (Fombrun et al., 2015 and Roper and Fill, 2012).4 Three reputation drivers

are associated with the feeling of trust – governance, workplace and citizenship – which are

therefore relevant in analysing the impact of IHG’s revocation of its LLW promise on its

reputation.

a. Governance

Under the RepTrak System, a firm with good governance is one that is open and transparent,

behaves ethically and is fair in the way it does business (Fombrun et al., 2015 and Roper and

Fill, 2012). The way a company is governed directly impacts how stakeholders view that

company because “the corporation tends to be viewed less as property and more as a public

entity with a broad range of responsibilities to creditors, workers, the public and others”

(Soleimani et al., 2014:4). According to Fombrun et al., “the more a company is perceived

as ethical and transparent, the more likely it is to generate admiration and trust in the minds

of most stakeholders – and hence to build reputation” (Fombrun et al., 2015:7).

i. Impact on Stakeholders

In the case of IHG’s living wage promise, IHG could be seen by employees, customers and

members of local government to be lacking in transparency, behaving unethically and acting

in an unfair manner. IHG made a promise to pay its London employees the London Living

4 See Appendix 1 for a diagram of the RepTrak System.

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Wage in 2012 shortly after Holiday Inn was selected as an official hotel partner of the

London Olympic Games (Khan, 2017). This announcement was made by IHG’s Managing

Director of UK and Ireland, which suggests that the decision was approved at the very senior

levels of regional management if not the very highest level of corporate management. This

means that IHG’s management made a promise to the people of London (seemingly in return

for being given a lucrative role in the London Olympics). Following a change in IHG’s CEO

in July 2017, IHG announced in November 2017 that it would renege on its promise to pay

its London employees the living wage. This announcement coinciding with a change in

leadership suggests that IHG’s promises are not binding from one leader to the next. IHG’s

employees could easily view this broken promise as a lie which would clearly be unethical.

Similarly, the London Mayor’s Office may feel that IHG acted in an unfair manner by

securing the London Olympics nomination and then reneging on a promise associated with

that. Although less directly affected, customers may feel that IHG behaved unethically and

that if IHG cannot be trusted to keep a promise to its employees and the government, it

cannot be trusted to provide customers with a high level of service.

IHG justified its decision to revoke its LLW promise based on changing economic factors,

specifically increased worker’s benefits in the UK, including the introduction of a National

Living Wage (a mandatory minimum wage which falls below the voluntary London Living

Wage), pension auto-enrolment, higher national insurance and the apprenticeship levy (Price,

2017). Given IHG’s rising profits at the same time these worker’s benefits were introduced,

it is questionable whether it was financially necessary for IHG to renege on its promise (IHG,

2017). However, shareholders may take the view that given these increased employment

costs it was prudent for IHG to stop implementing the LLW and that by making a public

announcement about its intention, IHG was being transparent with the public. This view

would be bolstered by other hospitality firms’ concerns at the same time about the rising cost

of doing business in the UK (see Price, 2017 and Sembhy, 2018).

b. Citizenship

Linked to the reputation driver of governance is the reputation driver of citizenship. The

RepTrak System defines a firm with good citizenship as one that is environmentally

responsible, supports good causes and is a positive influence on society (Fombrun et al, 2015

and Roper and Fill, 2012). Research suggests that stakeholders place a higher value on

companies that commit good deeds (Orlitzky and Swanson, 2012) and that corporate social

performance highly correlates with corporate reputation (Lange et al., 2011). In promising to

go above and beyond what was required by law in terms of pay, IHG would have been seen

by customers, employees and the government as being a positive influence on society.

However, shareholders may have felt that spending additional company resources on higher

pay is not a valuable exercise (Koschate-Fischer et al., 2012).

c. Workplace

The RepTrak System identifies a firm with a positive workforce as one that rewards

employees fairly, prioritises employee well-being and offers equal opportunities (Roper and

Fill, 2012). Fombrun et al. summarise the importance of a good workplace:

Our qualitative research suggests that most stakeholders like and respect companies

that maintain good workplaces. Research asserts that satisfied employees are more

likely to commit to long-term involvement, less likely to turn over and so more likely to

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act as ambassadors of the company and give a good employer a favourable rating. In

turn, a firm’s reputation as a good workplace is critical in recruiting a high-quality

workforce.

(Fombrun et al., 2015:6 citing Alniacik et al., 2012 and Nolan et al., 2013)

i. Impact on Stakeholders

This reputation driver will be viewed subjectively based on the stakeholder in question.

There is evidence that many of IHG’s lowest paid London employees do not feel they are

being rewarded fairly as evidenced by Unite Union’s reports (see Trades Union Congress,

2019 and Unite the Union, 2017). However, this is a common complaint across the hotel

industry and affects other large hotel chains as well (Trades Union Congress, 2019). In a

July 2019 report to the Director of Labour Market Enforcement, research showed that UK

hotel workers experience high levels of pay insecurity and low wages due to unpaid overtime

for salaried employees and insecure wages for zero-contract employees (Lopez-Andreu et al.,

2019).

In addition to employees, customers may also see low pay as a negative reputation driver for

a company (Roper and Fill, 2012). Wealthy customers purchasing luxury goods, in particular,

place a high value on CSR in making their purchasing choices (Ho, 2016). Given that most of

IHG’s employees are employed in their luxury managed hotels in the UK, it may be that

customers who followed this news story would see this as a negative reputation driver and

that this would also be felt by the employees themselves.

III. The Current Management Practice and Alternative Perspectives

a. The Current Management Practice

IHG did not take a proactive response to the LLW controversy because it took no action

between its announcement to implement the LLW in 2012 and its own self-imposed deadline

in 2017. Instead of either taking steps to implement the LLW or to discuss its reasons for not

doing so with its employees and other stakeholders, IHG waited until the end of 2017 and

only made an announcement after being called to do so by Mr Khan and Unite Union. This

means that IHG’s only response – its spokesperson statement – served as a reaction to the

LLW controversy that IHG created.

IHG has a well-publicised Code of Conduct (the Code) which addresses the value of

trustworthiness linked to the key reputation drivers set out above (IHG, 2019). The Code sets

out five “Winning Ways” which purport to be the way IHG employees behave every day and

which “reflect the values that are important to [IHG]” (IHG, 2019:6). One of the “Winning

Ways” is to “Do the right thing” which provides: “We always do what we believe is right and

have the courage and conviction to put it into practice, even when it might be easier not to.

We are honest and straightforward and see our decisions through.” (IHG, 2019).

IHG therefore failed to live up to the promises set out in the Code, namely to be honest in

their communications and to see their decisions through (even if they are difficult). And this

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failure was not addressed in its reactive public statement as IHG said nothing about breaking

its promise to its London workers.

As part of its Annual Report, IHG publishes a report on its culture, responsible business

practices and its stakeholders (IHG, 2019). IHG’s culture report also says that IHG places

“great emphasis on aligning everyone to [its] business strategy, so that shareholders and

employees have a shared interest in the performance of the Group” (IHG, 2019:28). It further

specifies that in 2019, IHG launched an employee share plan to “encourage shared ownership

and align the interests of employees with [IHG’s] external stakeholders” (IHG, 2019:28).

These employee commitments are vague and therefore do not give a real sense as to how

much emphasis IHG places on its employees or the promises it makes to them. More

specifically, IHG focuses on its employee development programmes, including its Early

Careers programme, designed to help young people get work experience and permanent work

places and the IHG Academy which serves a similar function for people of all ages.

In its 2017 statement, IHG focused on these employee training programmes as evidence of

IHG’s goodwill towards employees as opposed to how many of its employees were paid the

LLW (Price, 2017).5 This appears to be in line with its vague guarantees on employee

remuneration and benefits.

In its strategy report, also published alongside its Annual Report, IHG highlights that its

strategy is to obtain value creation for shareholders (IHG, 2019). IHG goes on to say that it

measures its strategic success through selected key performance indicators. These KPI’s are

predominantly finance-based. Of the 12 KPIs, there is one KPI in relation to employees

which is ‘Employee Engagement survey scores.’ This KPI appears to be a score attached to

an internal employee survey which IHG calls its Colleague HeartBeat survey. The survey

only applies to employees in its managed hotels and there is not information as to whether

low paid staff are included. Employee retention is not included as a KPI.

b. Alternative perspectives

i. The Ethical Apology

In its statement, IHG said that it had decided not to pay its London employees the LLW

because the UK government had enacted new worker protections (i.e. the National Living

Wage which is less than the LLW and pension auto-enrolment) which increased the cost of

doing business thereby suggesting that IHG could not afford to pay the LLW. This amounted

to an anti-social or defensive crisis response tactic in which IHG attempted to minimise the

situation and deny responsibility (Diers-Lawson, 2020). Diers-Lawson states this is a “risky

way[] to respond to crises because [its] focus is to minimise blame attribution” (Diers-

Lawson, 2020:230). A more successful crisis response strategy is for a company to issue an

ethical apology (Ibid.). An effective ethical apology must be made in an appropriate manner

(e.g. made early on owned media and be consistent across all communications), be tailored to

the stakeholders and to be “effective in acknowledging the wrongdoing, being empathetic to

those affected, and demonstrating action to correct the situation” (Diers-Lawson, 2020: 232-

233).

5 The IHG spokesperson said that “through our IHG Academy programme we have . . . helped to train and upskill over 500 local people.” The spokesman gave no figures for how many IHG employees were paid the

LLW but instead said that 90% were paid more than the National Living Wage, which of course could be

anything between one pence more to several pounds more.

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An example of a company which successfully orchestrated an ethical apology is KFC, which

addressed a chicken shortage in its UK restaurants by taking out a humorous full page add in

London newspapers that showed an empty signature chicken bucket with a play on its logo as

“FCK” combined with a brief explanation of the problem and a promise that it wouldn’t

happen again (Morgan, 2018). Another example was PwC offering a timely and direct

apology for announcing the wrong movie for Best Picture at the 2017 Oscars in which PwC

took responsibility, apologised to all people involved and thanked those who stepped in to

remedy the situation (Ibid.).

ii. Benefits of paying employees a liveable wage

There are tangible benefits in compensating all employees with a liveable wage and at the

very least signalling to employees that they are a valued and important part of an

organisation. Research shows that employee satisfaction leads to customer satisfaction and

that for a service business to be successful, the employees interacting with the customers

must have a high regard for the company, the service they are providing and their workplace

environment, otherwise they will not convince the customer that the service they are

providing is valuable (Roper and Fill, 2012: 67).

An example of a company that has achieved this ‘service-profit chain’ is the UK firm John

Lewis Partnership where each employee is considered a ‘partner’ of the firm, receiving a

percentage of the business’s annual profit. The percentage is the same for every employee

from the management down and employees elect representatives to a Partnership Council to

represent their interests and are able to pick five out of seven company board members. This

approach has led to John Lewis being ranked as one of the best employers in the UK as well

as being considered to have some of the best customer service in the market (Roper and Fill,

2012:67).

An example from the hotel industry can be found by comparing the employment conditions

of New York and London hospitality workers. New York hospitality workers have high

union participation rates whereas despite ongoing efforts by unions, including Unite Union,

London hospitality workers are not strongly organised. Unionised New York hotel workers

(including housekeepers, cooks, dishwashers and others) were able to negotiate a

compensation agreement for a minimum of £16 an hour (in 2015) as well as health cover,

holidays and controlled hours with hotel chains representing 71% of the city’s hotel rooms

(Roberts, 2015). This has led to lower employer turnover and improved employer reputation

as New York hotels are ranked on a ‘Fair Hotels’ tracker which lists hotels with good

employment standards.

IV. Conclusion and Recommendations for Alterations to Practices

IHG failed to take any proactive response to the LLW controversy and in its reactive public

statement, IHG did not take responsibility for its actions or promise to do better. This

reaction caused IHG to appear to be an untrustworthy employer who does not value its

employees. The following recommendations are proposed to improve responses in future.

a. IHG should issue an ethical apology

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If IHG should break a promise to one of its stakeholders in future, including a promise made

to its employees, IHG should issue an apology on its website and through its other

communication channels, apologising to the stakeholders, promise to rectify the situation and

to not make the same mistake again.

b. Re-commit to paying its London employees the LLW and publicise this decision

IHG has a predominantly franchise business model, which means that it employs very few

people in comparison to its size. Worldwide, IHG employs 14,436 employees while its

franchised hotels employ over 400,000 people (IHG, 2019). A small fraction of these 14,436

employees would benefit from receiving the LLW and in 2019, IHG recorded an operating

profit of $630 million. These numbers suggest that IHG can afford to honour its promise to

pay its London employees the LLW. For employees, many customers and the city of

London, this would be seen as the right thing to do. Given that IHG makes a promise to do

the right thing in its Code, following through on this promise would likely enhance its

reputation. IHG could capitalise on this by advertising its decision, admitting it made a

mistake and promising to see it through.

c. Develop the employee share remuneration scheme and publicise this to attract and retain talent

As evidenced by John Lewis Partnership, sharing company profits with employees can lead

to improved job satisfaction and an improved customer service because employees feel more

invested in the company and its success. IHG would not need to go as far as John Lewis in

sharing the ownership of the company with employees, but its employee share plan seems to

be a good start. This could be more widely developed and publicised among employees and

the press so that employees can more fully participate in IHG’s success and IHG would

signal to its existing employees and future employees that they are valued and considered an

integral part of the business.

d. Consider including employee retention in managed hotels as a KPI

Another way that IHG could signal to its employees and other stakeholders that it is truly

invested in its employees (both for the sake of the employees themselves and for the service

they are providing to IHG’s customers), is that IHG could include staff turnover in its

managed hotels as a KPI. IHG says that it is committed to training and retaining staff to

enhance customer experience and this would be one way of achieving this while also

enhancing the company’s overall reputation as an excellent employer.

Luxury hospitality brands, like IHG’s managed London hotels, are at risk of damaging their

reputations by being seen to provide luxury services to wealthy individuals while treating

their staff poorly (e.g. by paying low wages) (Sieben, 2012). The IHG LLW controversy

opens IHG up to exactly this type of criticism but IHG has the ability to rebut such

accusations of untrustworthiness and insincerity by taking the steps outlined above.

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V. Reference List

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Dowling, G. (2006) ‘Reputation risk: it is the board’s ultimate responsibility’. Journal of

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Inman, P. (2017) ‘Sadiq Khan: Holiday Inn owner has broken vow to pay living wage’. The

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Management. 37(1) pp.153-185.

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Lopez-Andreu, M., Orestis, P. & Hamedani, M.J. (2019) How has the UK Hotel Sector Been

Affected by the Fissuring of the Worker-Employer Relationship in the Last 10 Years?.

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[Accessed: 15 April 2020].

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VI. Appendices

a. Appendix 1 – The RepTrak System