The Service Charge Law has Now been Signed – Here’s What You Need to Know

PLEASE NOTE: This article was updated on 12 December 2019 to take into account subsequent changes in the law. Click here to view the updated article.

On 7 August 2019, Republic Act No. 11360, or the Service Charge Law was signed by President Duterte.

The Act will have implications for all hotels, restaurants and similar establishments that collect service charges across the Philippines.

When the Act comes into effect, 100% of all service charges collected by such businesses must now go to the workers. Under previous law, it was just 85%!

Our FAQ below explains the main provisions of the Act and identifies the key implications this new law will have for employers in the hospitality industry across the Philippines.

Q: What is the Service Charge Law?

It’s a new law that requires all service charges collected by hotels, restaurants and similar establishments to be distributed completely and equally “among covered workers except managerial employees”.

So what does that mean? It means that 100% of the service charges collected by these businesses must now be divided and paid out equally to their workers.

Before this Act, rank and file workers were entitled to receive only 85% of service charges collected. The remaining 15% would go to management. This was required under Section 14 of Presidential Decree 850 –  a law from 1975!

Q.  How is the law being implemented?

The Act amends Article 96 of the Labor Code of the Philippines. The Labor Code contains the laws governing employment practices and labor relations in the Philippines. Article 96 currently provides for the 85%/15% sharing mechanism referenced above.

Q.     When does the Act take effect?

The Act takes effect 15 days after publication in the Official Gazette of the Republic of the Philippines or in at least 2 national newspapers of general circulation in the Philippines. The Act was published online across various media publications on 13 August and in the Official Gazette on 14 August.

So the Act will come into effect before the end of August!

However – Section 3 of the Act requires the Secretary of Labor and Employment to issue Implementing Rules and Regulations (IRRs) within 60 days of the Act’s effective date. IRRs dictate how acts in the Philippines should be interpreted and implemented.

Labor Secretary Silvestre H. Bello III is reported as saying that labor inspectors from the Department of Labor and Employment, commonly known as DOLE, will check the law’s implementation after the publication of the IRRs.

So, while the Act comes into effect in the coming weeks, it will not be until the IRRs are published that employers will have a clear understanding of exactly how the Act should be implemented.

Q.     What’s the background to this new law?

The historic 85%/15% sharing mechanism was originally intended so management could compensate for any breakage or wastage by their staff.

However, this new Service Charge Law has the workers and the intentions of their customers in mind. 

According to Senator Joel Villanueva, the main supporter of the Act and Chair of the Senate Committee on Labor, Employment and Human Resources Development,, when customers pay a service charge, their intention is to give credit to the people who are actually providing the service to the customers. Senator Villanueva said that this new law “allows our frontline service workers to enjoy the fruits of their labor, the reward for providing good, quality service..”

Q.     What categories of employees are covered?

The level or position of worker to be covered is yet to be fully determined by DOLE.

The Act states that service charges will be divided among all “covered workers except managerial employees”.

The Act defines a “managerial employee” as any person that has the power to lay down and execute management policies or hire, transfer, suspend, lay-off, discharge, assign or discipline any employees or recommend any of these actions.

The term “covered employees” is not defined in the Act.

Labor Secretary Silvestre H. Bello III is reported as having said that the category of employee covered will be contained in the IRRs. He also indicated that supervisors and managers may not be covered as the law is intended for minimum wage and lower paid workers. So we’ll have to wait for the IRRs to clarify exactly which categories of workers are covered.

Q.     What type of employers are covered?

The Act applies to service charges collected by hotels, restaurants and “similar establishments”. While there is no definition of “similar establishments” in the Act, it is likely to include other types of businesses that collect service charges such as nightclubs, lounges and bars for example.

It may be the case that the IRRs, once published, will include a definition of “similar establishments”. 

Q:     What does this mean for businesses in practice? 

For employees, it will mean an increase in take-home pay.

For employers, it will mean a reduction in income.

Below is a basic working example.

Suppose the total service charge collected from a customer is P1,000.

Under the old law, the scenario would be as follows:

To the workers (for equal distribution):

P850 – income for workers

To the management:

P150 – income for management

Under the new Service Charge Law, a company’s income will be impacted as follows:

To the workers (for equal distribution):

P1000 – 100% service charge goes to the workers

To management:

P0 – P150 reduction in income for management

So, in this case, the business will lose P150 income that it would usually have received before the implementation of the Service Charge Law. Workers will stand to gain from an additional P150 to be distributed equally among them.

Business owners and managers should be aware that service charges paid out to employees form part of an employee’s taxable income. As such, payroll computations may have to be adjusted to align with the implementation of this new law.

Q:     What if a company fails to comply with this new law?

Labor Secretary Silvestre H. Bello III has noted that there is no penalty provision contained in the Act. As a result, DOLE may not be able to impose any fines for a violation of the law. They may only be able to issue a compliance order requesting employers to distribute the service charges.

The Act does include a grievance mechanism for labor disputes relating to service charges.

Q:     So what now?

Under the Act, the IRRs should be published within 60 days from the end of August 2019. 

We recommend that employers in the Philippines start preparing for changes to their payroll, accounting and bookkeeping processes in light of this new law. Consideration should also be given to the impact that this new law may have on a company’s cash flow planning and financial forecasts.

For some hospitality businesses, the implications of the new law could be quite significant. Service charges are usually in or around 10% of sales. Under the previous law, 15% of that 10% would go back to management. So technically, this will result in a reduction of 1.5% in total income for such affected establishments.

We will be sure to provide a further update once the IRRs have been published. So stay tuned!

CloudCfo

CloudCfo has significant experience advising clients operating across the hospitality industry in the Philippines. We advise on best practices for internal accounting, bookkeeping and finances processes for restaurants, hotels and other hospitality businesses. We also assist with the implementation of new protocols. We understand where the pain points are for companies and we know how they can be resolved!

Check out our previous article on the key financial controls and processes for businesses in the F&B industry.

We were also published in F&B Report!

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