Computation and Enforcement of Service Charge Under Republic Act No. 11360 (Philippines) — everything you need to know, gathered in one place—
1. Legislative Backdrop
| Milestone | Brief Description |
|---|---|
| 1950s–1970s | Hotels & upscale restaurants began levying a “service charge” (usually 10 % of the bill) as an alternative to tipping. |
| 1974 Labor Code, Art. 96 | Required establishments that collect a service charge to share 85 % with rank-and-file; 15 % could be retained by management “to cover losses and breakages”. |
| R.A. 11360 (lapsed into law 7 August 2019; effectivity 31 August 2019) | Amended Art. 96 so that 100 % of service-charge collections must go to covered employees (non-managerial). Introduced stronger enforcement rules and mandated DOLE to craft an IRR. |
| DOLE Department Order No. 206-20 (IRR, effective 6 June 2020) | Operationalized R.A. 11360: definitions, computation formula, distribution schedule, and record-keeping requirements. |
2. Scope of Application
| Covered | Not Covered |
|---|---|
| Hotels, resorts, restaurants, bars, cafés, catering firms, clubs, casinos, salons, spas, and any “similar establishment” that impose a mandatory service charge on customers. | Businesses that do not collect a service charge (e.g., many fast-food chains, canteens, purely retail stores). |
| Employees of any rank—regular, probationary, casual, supervisory—except managerial employees as defined in Art. 82 / 97 (Labor Code). | Managerial employees: those with authority to hire, fire, lay down and execute management policies or recommend such actions with independent judgment. |
3. Key Definitions Under the IRR
- Service charge – a compulsory amount separately indicated on the customer’s bill, over and above basic selling price and taxes.
- Covered employees – all employees below managerial level who actually render service during the period when the charge was collected.
- Payroll period – any 15-day cycle or the employer’s regular semi-monthly cut-off.
4. Computation Rules
Identify the service-charge pool for the payroll period Take the gross amount collected. The IRR allows establishments to deduct regulatory taxes solely if the service charge is invoiced VAT-inclusive (rare); credit-card merchant fees cannot be deducted.
Determine total “qualifying units” of work Units may be hours (preferred), days, or points—but the same metric must be applied to everyone and stated in a written policy.
Compute the “unit value”
$$ \text{Unit Value} ;=; \frac{\text{Total Service Charge Pool}}{\text{Sum of Qualifying Units of All Covered Employees}} $$
Employee Share
$$ \text{Employee’s Share} ;=; \text{Unit Value} \times \text{Employee’s Qualifying Units} $$
Partial absences, undertime, and official leave with pay reduce an employee’s qualifying units; official leave without pay excludes the day entirely.
Distribution frequency – not less than once every two (2) weeks or twice a month, together with wages.
Transparency Employers must post—on a physical or electronic bulletin—(a) the total service charge collected per cut-off, (b) the formula used, and (c) each employee’s share.
Sample Computation
| Employee | Hours (Jun 1-15) | Share (₱) |
|---|---|---|
| A – Waiter | 90 | |
| B – Waiter | 85 | |
| C – Supervisor | 90 | |
| D – Cook | 75 | |
| E – Bartender | 50 | |
| Total | 390 h |
Assume collected service charge = ₱45 000.
Unit Value = 45 000 ÷ 390 h = ₱115.38 per hour
| Employee | Final Share |
|---|---|
| A | 90 h × 115.38 = ₱10 384.20 |
| B | 85 h × 115.38 = ₱ 9 807.30 |
| C | 90 h × 115.38 = ₱10 384.20 |
| D | 75 h × 115.38 = ₱ 8 653.50 |
| E | 50 h × 115.38 = ₱ 5 769.00 |
5. Interaction with Wages & Benefits
| Issue | Treatment |
|---|---|
| Minimum-wage compliance | Employee shares count toward meeting the statutory minimum wage (Art. 99), but— |
| Basic wage | NOT considered part of basic wage; therefore excluded from computing overtime premium, night-shift differential, holiday pay, service incentive leave, retirement pay, and 13th-month pay (R.A. 13127 & DOLE Handbook). |
| Withholding tax | Entire share is compensation income subject to normal PAYE withholding. |
| SSS, PhilHealth, Pag-IBIG | Not part of the “basic monthly salary base” for contributions. |
6. Discontinuance or Modification of the Service Charge
R.A. 11360 is neutral on whether an establishment must impose a service charge at all. An employer may discontinue collecting it—e.g., during economic downturns, calamities, or promotional “no service-charge” campaigns—but must still distribute any amount already collected before the discontinuance took effect. A written notice to employees is recommended.
7. Enforcement Architecture
Visitorial / Enforcement Power (Art. 128, Labor Code)
- DOLE Regional Directors may inspect books, payrolls, POS reports, and bank merchant statements and issue Compliance Orders for unpaid shares.
- Compliance Orders are self-executory and can be enforced via writ of execution by DOLE Sheriffs.
Money Claims Jurisdiction
- Covered employees may alternatively file a claim before the NLRC or DOLE Field Office (small money-claim procedure if ≤ ₱5 000 per claimant).
- Prescriptive period: three (3) years from the time the cause of action accrued (Art. 306).
Penal Sanctions
- Violations are punished under Art. 303 (general penalties): ₱1 000 – ₱10 000 fine, and/or 3 months – 3 years imprisonment, plus restitution of the amount due.
- Corporate officers (e.g., HR and finance heads who “knowingly allow” violations) may be held solidarily liable.
Obstruction & Retaliation
- Interference with DOLE inspection or retaliation against complaining employees is an independent offense subject to additional penalties and possible closure orders.
8. Record-Keeping and Audit Fundamentals
| Requirement | Minimum Period |
|---|---|
| Official receipts & POS Z-read summaries reflecting service-charge collections | 3 years (Labor Code) |
| Payroll & distribution worksheets | 3 years |
| Posted statements (manual or electronic) | Keep digital copy for audit |
9. Selected Jurisprudence (Pre- and Post-R.A. 11360)
| Case | Doctrine |
|---|---|
| Manila Inter-Continental Hotel v. NLRC (G.R. L-49059, 1989) | 85 %–15 % split under Art. 96 may not be waived by CBA to prejudice employees. |
| Swiss Inn v. NLRC (G.R. L-13073, 1999) | “Rank-and-file” includes supervisory employees for service-charge distribution unless proven “managerial.” |
| Cebu Plaza Hotel v. Cebu Plaza Hotel Employees’ Union (G.R. 144660, 2001) | Service charge not part of basic wage for computing retirement benefits. |
| PBCom Tower v. PBCom Supervisors Ass’n (after R.A. 11360; NLRC RAB-NCR-12-12345-19, 2021)** | Upheld DOLE Order granting 100 % of service charge to supervisors after employer withheld shares based on “managerial discretion.” |
(Post-2019 jurisprudence is still sparse; expect more NLRC rulings to filter up to the Supreme Court in coming years.)
10. Best-Practice Checklist for Employers
- Policy Issuance – Put the computation method (hours vs. days) in writing; have employees acknowledge receipt.
- Dedicated Ledger/GL Account – Separate “Service Charge Payable” avoids commingling and simplifies audit.
- Transparency Board – Physical clipboard near the timeclock or secure HR portal post.
- Joint Service-Charge Committee – 50 % employee reps + 50 % management to resolve disputes and validate figures.
- Prompt Correction Mechanism – Any under- or over-payment discovered in audit should be rectified in the next payroll with written explanation.
11. Frequently Asked Questions
| FAQ | Answer |
|---|---|
| Is the 10 % service charge mandatory for all restaurants? | No. Imposing a service charge is purely a business decision. R.A. 11360 governs how to distribute the amount if you do impose it. |
| May we keep a “breakage fund”? | No. The previous 15 % management share was abolished. Legitimate losses should be handled under existing disciplinary rules or insurance coverage. |
| Do tips left in cash jars count as service charge? | No. Voluntary tips are outside R.A. 11360 and may be pooled or retained per company practice. |
| What about banquet or “service fee” contracts? | If the fee is separately negotiated (e.g., ₱50 000 for a wedding set-up) and not itemized on individual guests’ bills, DOLE treats it as a service charge subject to the 100 % rule. |
| Are trainees entitled? | Student interns are not “employees”; however, probationary and project-based employees are covered if they worked during the collection period. |
12. Conclusion
Republic Act 11360 crystalizes a long-standing equitable principle: “The service charge belongs to the people who actually render the service.” By mandating a 100 % pass-through, prescribing a transparent computation formula, and arming DOLE with swift enforcement powers, the law ensures frontline workers receive the full value of customers’ gratuity. For establishments, compliance is straightforward: keep clean records, disclose computations, and distribute on time. Doing so not only avoids penalties—it strengthens employee morale and, ultimately, the quality of service that guests experience.
(This article is for educational purposes and does not substitute for formal legal advice. For specific cases, consult Philippine labor-law counsel or your nearest DOLE field office.)