Service charge – R.A. No. 11360, Department Order No. 242-24 | Conditions of Employment | LABOR STANDARDS

All There Is To Know on Service Charges under R.A. No. 11360 and Its Implementing Rules (Department Order No. 242-24)

Overview and Legislative Intent
Republic Act No. 11360, approved on August 7, 2019, amends Article 96 of the Labor Code of the Philippines. This legislative measure ensures that all service charges collected by hotels, restaurants, and similar establishments are fully distributed to their rank-and-file employees. Prior to this amendment, the law required that 85% of collected service charges be distributed to employees, with management retaining 15%. R.A. No. 11360 eliminates the management share, mandating a 100% distribution to covered employees. This reform is intended to strengthen workers’ rights and improve their income security, recognizing that service charges are a form of compensation stemming from customer appreciation of service quality.

Coverage and Applicability

1. Establishments Covered:

   • Hotels, restaurants, lodging houses, resorts, clubs, canteens, eateries, and other analogous enterprises that collect a service charge in addition to the cost of goods and services.
   • These establishments may include those operating within malls or commercial centers, provided they habitually collect a service charge from patrons.

2. Employees Entitled:

   • All rank-and-file employees, regardless of position, designation, or employment status (regular, probationary, casual, or contractual), are entitled to share in the service charge.
   • Managerial employees, as defined by the Labor Code (those who lay down and execute management policies or have the power to hire, dismiss, or effectively recommend such actions), are excluded from sharing in the service charges.

3. Nature of the Amount Collected:

   • Service charges refer to the fees charged by establishments on top of the cost of food, drinks, accommodations, or other services provided.
   • They do not include tips given directly by customers to individual employees. Only the pooled service charge imposed by the establishment is governed by this law.

Distribution of Service Charges

1. 100% Distribution to Employees:
   Under R.A. No. 11360, the total amount of service charges collected must be distributed in full (100%) to all covered rank-and-file employees. Management no longer retains any percentage.

2. Equitable Sharing Mechanism:

   • The law and its implementing rules encourage a fair and reasonable distribution scheme. All covered employees who contribute to the overall customer service experience are entitled to a share.
   • In the absence of an existing or collectively bargained agreement, the default method is to distribute the service charges proportionately to the number of hours worked or the basic wage structure, ensuring that all employees who had contributed to the operations during the period that the charges were collected receive a fair portion.
   • If there is an established agreement, such as a Collective Bargaining Agreement (CBA) or a company policy known to employees, that sets a specific distribution method, that agreement governs—provided it meets the full distribution requirement.

3. Frequency of Distribution:

   • Service charges must be distributed not less than once every two (2) weeks or twice a month at intervals not exceeding sixteen (16) days.
   • Employers must integrate the distribution schedule seamlessly into the payroll process, ensuring transparency and timely remuneration.

4. Transparency and Record-Keeping:

   • Employers are required to keep detailed records of the total service charges collected and the corresponding distribution to employees.
   • Establishments must make a full accounting of service charges received available to employees, ensuring transparency and preventing disputes.
   • Employees or their representatives may examine these records at reasonable times to verify accurate distribution.

Implementing Rules and Regulations (IRR) – Department Order No. 242-24
To operationalize R.A. No. 11360, the Department of Labor and Employment (DOLE) issued Department Order No. 242-24 (or its equivalent issuance) providing the guidelines for the law’s implementation:

1. Clarification of Terms:

   • The IRR precisely defines terms such as "service charge," "covered employees," and "managerial employees" to prevent ambiguity.
   • It also outlines examples of establishments and scenarios, leaving little room for misinterpretation.

2. Procedural Guidelines:

   • Employers must set up a reliable system or mechanism for the computation and distribution of service charges.
   • The Order may prescribe the format for records and a template for disclosure to employees.

3. Enforcement and Compliance Monitoring:

   • DOLE Regional Offices are mandated to inspect compliance during routine labor inspections.
   • Employers must present service charge distribution records, payroll, and related documents upon the request of labor inspectors.
   • Non-compliance with the IRR or withholding service charges due to employees may subject the employer to administrative sanctions, orders of compliance, and possible monetary awards to employees.

4. Dispute Resolution:

   • In case of disagreements or disputes over distribution, employees may lodge complaints before DOLE’s Regional Offices, where the matter will be subject to mediation, conciliation, or enforcement proceedings.
   • The IRR empowers DOLE’s labor inspectors and conciliators-meditors to ensure prompt resolution of issues, safeguarding employees’ entitlements.

5. Effect on Other Benefits and Wages:

   • The service charge shares form part of the employees’ income but are not considered part of the basic wage. Thus, while they increase overall compensation, they do not necessarily change the computation of statutory wage-based benefits such as overtime pay, holiday pay, or 13th month pay unless expressly provided by existing regulations or collective agreements.
   • Establishments are reminded that the non-diminution principle applies to service charge distributions. Employees cannot receive less than what they are entitled to under law and existing practice.

Key Points to Remember

• Before R.A. No. 11360: Management retained 15% of the service charges.
• After R.A. No. 11360: Employees receive 100% of the collected service charges.
• Ensuring Fairness: All rank-and-file employees directly benefit, regardless of their position, so long as they are not managerial.
• Legal Sanctions for Non-Compliance: Employers risk administrative penalties, potential civil liability, and enforcement actions if they fail to comply with the law and the implementing rules.

Practical Implications for Stakeholders

1. For Employers:

   • Must update internal policies and payroll systems to comply with full distribution and record-keeping requirements.
   • Provide orientation or training to managers and payroll staff to ensure correct application and compliance.

2. For Employees:

   • Gain enhanced income security and fairness in receiving their share of the service charge.
   • Are empowered with the right to inspect records and seek redress in case of non-compliance.

3. For Unions and Workers’ Representatives:

   • Opportunity to renegotiate existing CBAs or company policies to align with the new law.
   • Ensure that the distribution formula remains fair and transparent, and that any conflicts are promptly addressed.

Conclusion
R.A. No. 11360 and its implementing regulations under Department Order No. 242-24 have profoundly shifted the landscape of service charge distributions in the Philippines. By mandating full (100%) distribution to employees and providing clear guidelines for implementation, the law strengthens labor standards, promotes equity, transparency, and respect for workers’ rights, and ensures that employees are the ultimate beneficiaries of the service charges collected from patrons.