The New Law On Service Charges

Kycia Vanelie G. Cue

With the enactment of Republic Act No. 11360, rank-and-file employees of restaurants, hotels and similar establishments are now entitled to 100% of the service charges collected from customers.

R.A. No. 11360 — or “An Act Providing that Service Charges Collected by Hotels, Restaurants and other Similar Establishments be Distributed in Full to All Covered Employees” — amends Article 96 of the Labor Code of the Philippines, which previously provided that 85% of the total service charge collected by the establishments would be distributed to covered employees, while 15% would account for losses and breakages and be given to managerial employees, at the discretion of management in the latter case. Significantly, under R.A. No. 11360, “managerial employees” refers to those “who lay down and execute management policies or to effectively recommend such managerial actions,” and they are excluded from getting a share in the service charges collected under the new law. This definition is consistent with the definition of managerial employees under Section 2, Rule VI, Book III of the Implementing Rules and Regulations (IRR) of the Labor Code. Notably, these definitions under R.A. No. 11360 and the IRR are similar to the definition of supervisory employees under Article 219 (m) of the Labor Code or “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.” Thus, arguably, employees who fall under the definition of supervisory employees in the Labor Code are subsumed under the definition of managerial employees under R.A. No. 11360 and the IRR and they may, thus, likewise be excluded from the distribution of service charges. It appears then that only rank-and-file employees are entitled to the distribution of service charges under R.A. No. 11360.

With the new law, establishments which previously chose to allot the 15% or a portion thereof of the service charges collected to losses and breakages are no longer required to set aside an amount to account for such purposes, which may result in an increase in costs as management will be forced to fully absorb such losses and breakages. Furthermore, if the 15% was previously distributed to managerial employees, they will lose a significant amount of their income. This may likewise affect the quality of service they provide to their customers considering that the service charge distributed to them is a form of incentive for them to do well in their jobs. Without such an incentive, managerial employees may lose the motivation to perform their best in their work. Thus, management may need to formulate a scheme to incentivize management employees to ensure quality performance.

Prior to the enactment of R.A. No. 11360, the IRR on Service Charges provides that in case an establishment, which previously collected service charges, decides to discontinue such collection, the share of the affected employees shall be considered integrated in their wages, the basis of which will be the average monthly share of each employee for the past 12 months immediately preceding the abolition or withdrawal of such charges. This is to account for any possible diminution of benefits which is prohibited under Article 100 of the Labor Code. Assuming that the Department of Labor and Employment (DOLE) will issue an IRR which is consistent with the foregoing provision of the current IRR on service charges, establishments which discontinue the collection of service charges will need to comply with the provision on integration of wages.

Consequently, the integration of wages of covered employees would mean an increase in their basic pay. This will affect not only the salaries of the employees but also other wage-related benefits, such as overtime pay, holiday pay, 13th month pay, retirement pay, and leave benefits under the law. An increase in the basic pay of the covered employees means an increase in costs for establishments to be able to pay these government-mandated benefits. Furthermore, the integration may likewise lead to a distortion of salaries and benefits between rank-and-file employees and managerial employees, which may result in a scenario wherein the former earn close to or possibly even more than what the latter earn.

In this regard, if the law itself mandates the discontinuance of the grant of service charges to managerial employees, can the latter invoke the integration rule and claim that the amounts that they had previously been receiving as their share of the service charges should be integrated in their salaries? This appears to be the common concern of hotels, restaurants, and other covered establishments, which they conveyed to the DOLE Secretary. My considered opinion is that the integration rule does not apply to managerial employees under this scenario, since the discontinuance of the distribution of service charges as to them is mandated by law, not the unilateral decision of their employers. It can be argued that since establishments are merely complying with the provisions of R.A. No. 11360, then the rule on non-diminution of benefits will not be violated once establishments cease to distribute service charges to its managerial employees. RA No. 11360 was published on Aug. 19 and became effective 15 days after its publication or on Sept. 3 of this year. Correspondingly, DOLE is mandated to issue the corresponding IRR of the new law within 60 days from its effectivity, which as of date, has yet to be issued. Hopefully, the new IRR can make further clarifications of the new law.

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