This is the new Service Charge Law in the Philippines!
The Service Charge Law has implications for employers and establishments across the Philippines who collect service charges as part of their work or service. Obvious examples include hotels and restaurants – however, there are many more!
If you are an employer in the Philippines with a business that collects service charges, you need to understand your obligations and responsibilities!
Our FAQ below explains all you need to know about the new Service Charge Law.
Q: What is the Service Charge Law?
It’s a new law that requires all service charges collected by hotels, restaurants and other similar establishments to be distributed completely and equally amongst relevant or “covered employees”.
So what does that mean? It means that 100% of the service charges collected by these businesses must now be divided up and paid out equally to their employees.
Before the Service Charge Law, 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. 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 employees and the intentions of their customers in mind.
According to Senator Joel Villanueva, the main supporter of the new law 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. How is the law being implemented?
Republic Act No. 11360 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 was the original basis for the 85%/15% sharing mechanism referenced above.
Section 3 of Republic Act No. 11360 required the Secretary of Labor and Employment to issue Implementing Rules and Regulations (IRRs). IRRs dictate how acts in the Philippines are to be interpreted and implemented. The IRRs for Republic Act No. 11360 were signed on 19 November 2019 and are effective 15 days after publication in at least one newspaper of general circulation.
Q. What’s a service charge?
A service charge is the amount that is added to a bill for any work or service performed. For example, when you eat at a restaurant in the Philippines, it is common to see “service charge” as an additional entry on the final bill.
Q. What type of employees are covered?
The Service Charge Law will cover all employees, except managerial employees, under direct employment of the establishment, regardless of their positions, designations or employment status and irrespective of the method by which their wages are paid.
So what’s a “managerial employee”? It is any person vested with powers or prerogatives to lay down and execute management policies or hire, transfer, suspend, lay-off, discharge, assign or discipline any employees or to recommend any of these actions.
It’s important to note that the Service Charge Law applies only to individuals under the direct employment of the establishment. So contract workers, who are not directly employed by the establishment collecting the service charge, would not be entitled to receive service charge payments.
Q. What type of employers are covered?
The Service Charge Law applies to all establishments that collect a service charge for work performed or services that they offer.
So what might this include? Hotels and restaurants are two obvious examples. The Service Charge law actually provides a few more:
- Lodging Houses
- Night Clubs
- Cocktail Lounges
- Massage Clinics
- Gambling Houses
- Sports Clubs
Q: How should employers disburse service charge payments to employees?
The Service Charge Law dictates how service charge payments should be made and when they should be made to employees.
All service charges collected by an employer must be distributed fully and equally, based on actual hours or days of work or service rendered, among all covered employees.
The service charges collected must be distributed and paid to such employees:
- Not less than once every two weeks; or
- Twice a month at intervals not exceeding 16 days.
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
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 new 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?
The Service Charge Law does include a type of grievance mechanism for labor disputes relating to service charges.
In the first instance, if there is a Collective Bargaining Agreement applicable to the place of work, the grievance mechanism in this agreement should be followed.
If no Collective Bargaining Agreement is in place or it is inadequate, the grievance can be referred to the DOLE Regional Office that has jurisdiction over the place of work.
Finally, if no resolution is achieved, the standard visitorial and enforcement powers of the Secretary of Labor and Employment may provide a resolution.
Q: So what now?
Employers in the Philippines should start making arrangements 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.
One such impact will be that employers will have to cover the cost of breakages or wastages themselves – they no longer have the 15% service charge fee income to absorb such costs!
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.
CloudCfo has significant experience advising clients operating across the F&B/hospitality industry in the Philippines. We advise on best practices for internal accounting, bookkeeping and finance 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.
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