Hotel employees are the link between the customer and the organization and that successful hotel depends on its teamwork and relationship between individual and his team members. Interestingly, little research has attempted to connect team identification, team member positive affect to psychological health by taking team-member exchange (TMX) into consideration. In the present study, the constructs of organizational identification and positive affect have been extended and examined in the work team setting. Identification, reflecting the degree to which individual team members experience a sense of oneness with a particular organizationally based team. Recently, scholars have also begun to investigate affective processes in teams and through emotional contagion, emotions are induced and transferred to other team members. With this background, the major objective of the present study to explore the mediating role of team-member exchange quality in the relationship between team identification, team member positive affect and psychological health among hotel employees. Data were collected from 279 managers and employees of different star hotels of Varanasi. The results indicated that team identification, team member positive affect was significantly positively predicted team-member exchange quality and psychological health of employees, after controlling the effect of socio-demographic variables. The results of mediated regression analysis revealed that team-member exchange quality significantly partially mediated the relationship between team identification, team member positive affect and psychological health. The Sobel test confirmed the statistically significance of this relationship. The findings of the present study indicated the importance of team-member exchange quality for enhancing mental health of the employees. This will give employees the feeling the organization cares for their well-being and fosters positive emotions among them. Furthermore, organization/managers should promote an affective climate to make employees aware they are not isolated from team members.