The Service Charge Law and It's Implementing Rules

In the past, there has been ongoing discussion about the fairness and transparency of service charge distribution in the hospitality industry. For instance, customers often assume that the service charge they pay at restaurants or hotels directly goes to the service staff, but this is not always the case. Disputes have arisen when establishments do not communicate how service charges are distributed or when the allocated percentage for staff is perceived as insufficient.

In some cases, employees have advocated for clearer policies and a more equitable distribution of service charges. This has led to legal changes, as seen in the passing of R.A. 11360 or the Service Charge Law, which aims to ensure that service charges collected by covered establishments are distributed in full to the employees who provide the service. Prior to this law, service charges, under the Labor Code, are distributed to both management and the employees at the rate of 15:85.

In 2021, the Department of Labor and Employment (DOLE) crafted the Implementing Rules and Regulations of the Service Charge Law, outlining the rules on the distribution of service charges to all covered employees. More recently, DOLE passed Department Order No. 242, Series of 2024, expanding the coverage of the Service Charge Law to non-regular employees. Below are the salient points and legal discussions on the Revised Implementing Rules on Service Charge (the “Revised Rules”):

COVERAGE

The Revised Rules applies to all establishments that collect service charges such as hotels, restaurants, and other similar establishments including those entities operating primarily as private subsidiaries of the Government.

The employees who enjoy the benefits of the Revised Rules refer to all employees regardless of their position, designations, or employment status, and irrespective of the method by which their wages are paid. As earlier mentioned, the distinction between regular and non-regular employees have been erased. Hence, even casual or seasonal employees can reap the shares generated by service charges.

While the coverage of the Revised Rules is so expansive, to the point that it covers both regular and non-regular employees, managerial employees, however, are expressly excluded from receiving shares in the service charge. Under the Revised Rules, “Managerial Employees” are those that are vested with powers or prerogatives to lay down and execute management policies or hire, transfer, suspend, lay off, recall, discharge, assign or discipline employees or to effectively recommend such managerial actions.

It must be noted that not all employees in an establishment that holds the title of “manager” fall within the definition of a managerial employee under the Revised Rules. That is because managerial employees have a specific yet different legal definition than that of a supervisory employee. The latter term refers to those who, in the interest of the employer, effectively recommend such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment (Article 212[m] of the Labor Code).

Taking the above into a practical perspective, there may be “managers” in an establishment that are tasked to supervise the employees, and can only recommend (as opposed to execute) managerial actions to the employer. Accordingly, an employee is no manager within the contemplation of the law if the job description he or she bears does not include the power to lay down management policies, or he or she has no authority to hire, transfer, suspend, discharge or discipline employees. In effect, it’s reasonable to believe that they are merely supervisory employees and are therefore entitled to the shares in the service charge collected by the establishment.

DEFINITION OF SERVICE CHARGE; DISTINGUISHED FROM TIPS

“Service Charge”, under the Revised Rules, refers to the amount added to the bill for work or service rendered. In this regard, it’s important to distinguish service charges from tips. Tips are typically discretionary and are given directly to the service staff by the customers, while service charges are fees imposed by the establishment to the customers in addition to the bill. Apparently, what separates both terms is the voluntariness of the customer paying for them.

On one hand, service charges are incorporated in the bill and intentionally collected by the business establishment, giving the customer no other choice but to pay them on top of the value of the work or service rendered. On the other hand, tips are rewarded out of the customer’s free will, regardless of whether the bill requires it or not. There may be some instances where the customer gives a tip to the worker despite being already charged with a service fee in the bill.

Additionally, tips are not necessarily imposed or collected by the establishment. In contrast, the Revised Rules specifically defined covered establishments as “those that collect service charges for work or services”. Having said this, it is my humble opinion that tips, given directly and gratuitously by customers to the employee, should be excluded from the coverage of the Revised Rules. So long as the intention of the customer is to reward the tip specifically to an employee, the tip should not be treated as a service charge within the contemplation of the Revised Rules.

Accordingly, tips should not be collected by the establishment and subjected to the full and equal distribution of service charge to all the employees. Instead, tips can be kept exclusively by the employee who earned and received them. Hence, unless there is a prior internal arrangement among the employees in an establishment, the employee is under no obligation to surrender tips into the service charge pool for distribution to the other employees.

FULL AND EQUAL DISTRIBUTION OF SERVICE CHARGE

Pursuant to the Revised Rules, all service charges collected by covered establishments shall be distributed completely and equally among the covered employees. The basis of the distribution would depend on the actual hours or days of work or service rendered by the employee.

My understanding on the distribution rule is that an employee who incurred absence(s) without leave credits will not receive the full and equal amount of his service fee, similar to the regular payment of salaries.

Moreover, shares in the service charge must be distributed to the covered employees on a bi-monthly basis or twice a month at intervals not exceeding sixteen (16) days. Again, the method mirrors the typical disbursement of employee salaries.

NON-DIMINUTION OF BENEFITS

The Revised Rules reiterated the long-standing labor principle of non-diminution of benefits. In Limcoma Labor Organization vs. Limcoma Multi-Purpose Coop. (G.R. No. 239746, November 29, 2021), the Non-Diminution Rule under Article 100 of the Labor Code “mandates that benefits given to employees cannot be taken back or reduced unilaterally by the employer because the benefit has become part of the employment contract, written or unwritten.” According to the Revised Rules, the implementation of the Revised Rules cannot be construed to diminish any existing employee benefits.

In the same vein, when the minimum wage is increased, either by law or wage order, service charges paid to the covered employees shall not be considered in determining compliance with the said increase. In other words, the payment of the service charge to the employee cannot substitute the amount added to his or her increased minimum wage. To insist otherwise is technically assumed as a diminution of employee benefits.

ENTITY THAT HAS JURISDICTION OVER SERVICE CHARGE DISPUTES

Finally, disputes pertaining to the distribution of service charges shall be settled through grievance machinery or those provided by the Collective Bargaining Agreement, if any. This means that the establishment can settle this kind of dispute internally, utilizing established step-by-step procedures in processing complaints.

If, however, there is no grievance machinery within the covered establishment or there exists one but is nonetheless inadequate, the dispute on service charges can be settled with the DOLE Regional Office having jurisdiction over the workplace involved.

Under the Revised Rules, the mode of referring the complaint is the same as filing an initiatory labor complaint which is through the Single-Entry Approach (SEnA). This mode is typically initiated via conciliation before a formal complaint is lodged with the NLRC.

CLOSING REMARKS

The evolution of the Service Charge Law, particularly through R.A. 11360 and its subsequent implementing rules and regulations, reflects a significant step toward ensuring fairness and transparency in the distribution of service charges in the hospitality industry. The law ensures that employees directly involved in providing services receive a fair and just share of the service charge collected by establishments.

The establishment of clear guidelines, as outlined in the Revised Implementing Rules on Service Charges, aims to protect the rights of covered employees, and promote a more equitable distribution of service charges. This addresses the common misconception among customers that service charges automatically go to the service staff, clarifying the proper allocation and providing employees with a more just compensation for their efforts, further enhancing the overall well-being of employees within the hospitality sector and contributes to a more harmonious and equitable workplace.