Service Charge Law: Populist and anti-entrepreneur

by Andrew J. Masigan (The Philippine Star) – Aug 28, 2019

President Rodrigo Duterte signed Republic Act No. 11360 or the Service Charge Law earlier this month. The law mandates hospitality establishments like hotels and restaurants to distribute 100 percent of service charges to its rank and file employees. The law is not clear whether supervisory employees are included in the distribution. However, what is clear is that middle management can no longer partake of the gratuity, neither can upper management retain 15 percent of the fund to cover for breakages of equipment, flatware, silverware and glassware.

Sen. Joel Villanueva, the proponent of the law, faced the press to claim credit for the statute’s passage. He presented himself as a champion of the working class, completely negating the damage the law will wreck on the hospitality industry and the entrepreneurs behind it. It was political posturing at its finest.

The senator’s premise is that majority of hotel and restaurant operators are laughing all the way to the bank with scandalous profits. Had the senator dug deeper, he would know that the hospitality industry is a cut throat business where only the mega-chains thrive due to their economies of scale. The smaller chains barely survive while single store entrepreneurs only have a 46 percent chance of making it to the third year. This is the reality.

While the law makes politicians look good and rank and file workers happy, it comes at the cost of the small entrepreneur. Lest we forget, micro and small enterprises are the backbone of the economy. They are the ones who provide jobs to the majority and business taxes to government.

I’ve had exposure in the restaurant business so I can speak from first hand experience. Food retail is one of the toughest businesses to survive in what with tremendous pressures on both the sales and cost sides.

On the sales side, the country’s lack of competitiveness in manufacturing and exports have made the restaurant business the entry point of most fledgling entrepreneurs. The field is crowded with hundreds of thousands of restaurants competing for a finite number of customers. Case in point, a certain mall in BGC has 82 food establishments in their premises fighting over 7,000 walk in customers a day. Some survive but the majority don’t. The point is, fierce competition has put tremendous pressure on sales.

Cost conditions have become increasingly inhospitable for restaurateurs too. Most lessors, especially malls operators, charge steep rentals that include a fixed rate on top of five percent of gross sales. Moreover, the restaurateur must also deal with expensive power costs which reach P15.22 per kilowatt hour, double the rates in Bangkok or Hanoi. There is also the cost of raw materials to deal with. Our weak agricultural sector and expensive inter-island shipping cost have made farm produce, meats and seafood more expensive then anywhere else in the region. Of course, the cost of labor is another factor. Minimum wage has increased seven times in the last decade, from P382/day in 2009 to P537/day today.

Survival, as a restaurateur, is hard enough. The enforcement of the service charge law only exacerbates the situation.

See, the of 15 percent retention of service charge not only covers the cost of breakages but also inventory and cash shortages. In the restaurant business, it is quite common for rank and file employees to occasionally consume the company’s inventories of foodstuff, if not bring them home. It also happens that some employees pocket portions of the sales by simply not punching the transaction on the cash register. These forms of theft are undetectable at first but will be revealed later when irregular disparities appear on the inventory reports. Schemes of pilferage go against every company’s code of conduct, yet, it happens more often than we care to admit.

Management’s 15 percent share of service charge covered these acts of theft. Remove the 15 percent retention and the restaurateur must absorb the cost of theft, breakage and negligence. This is not fair.

It has also become customary for restaurant owners to distribute the 85 percent share of the gratuity to supervisory and middle management employees like the restaurant manager, chefs, hosts and inventory clerks. True, they have no direct contact with customers, but they are equally instrumental in delivering good service. They are ones who ensure that quality standard are met, that the items on the menu are available and that service is fast and efficient. By virtue of their contributions, they deserve a share too.

Sen. Villanueva’s law says they are not entitled to a share. This brings about a conundrum for restaurant owners.

Following years of receiving a share of the service charge, supervisory and middle management have come to count on their share to cover certain household expenses. To yank it out will leave a hole on their budgets and inevitably affect their standard of living. It is not fair for them too.

Worse, because overall take-home pay for middle management will decrease while that of rank and file employees will increase, a pay scale disruption will occur. The business owner will have to fill the income gap of the middle managers if only to keep the pay scale properly stratified according to position.

Again, the restaurant owner must foot the bill for another round of salary increases for supervisory and middle management staff.

In one fell swoop, Sen. Villanueva’s law managed to make the restaurant business even more inhospitable for the struggling restaurateur. It is a shame since single store restaurateurs are the ones who innovate and push Philippine gastronomy to a higher level.

The implementing rules and regulations (IRR) of the law is still being written so it is not too late to make the plight lighter for hospitality establishments. The DOLE is tasked to write the IRR so industry insiders are hoping that Labor Secretary Silvestre Bello will be more reasonable. The industry hopes that the IRR will allow the service charge to be distributed to supervisory and middle management employees. That it will not be mandatory for business owner to fill the lost incomes of the management staff. That it will not be mandatory for seasonal or on-call employees to partake of the service charge.

The passage of the service charge law is a populist move that did not take into consideration the conditions of the small restaurateur and the welfare of the hospitality industry. Let us hope the executive branch, through Secretary Bello, can make it less damaging.