I. Introduction

In the Philippines, service charges and restaurant service fees are not just pricing strategies or “extra” income for businesses. Once collected from customers, they become a matter of labor rights and statutory wage benefits.

This article explains, in a Philippine context:

What “service charge” and “service fees” legally mean
Why service charges belong to employees
When withholding or “confiscating” them is unlawful
How they must be shared among employees
How service charges interact with wages, benefits, and labor standards
What remedies employees have when employers violate the rules

II. Legal Framework

A. Labor Code Provision on Service Charges

The central rule is found in the Labor Code provision on Service Charges (originally Article 96, renumbered under later amendments), as amended by Republic Act No. 11360 (Service Charge Law).

In essence, the law provides that:

Service charges collected by hotels, restaurants, and similar establishments must be distributed 100% to covered employees.
Management is no longer entitled to any share in the service charges.
The share of each employee is determined through:
- A collective bargaining agreement (CBA), or
- An internal established and agreed distribution mechanism.
After one (1) year of continuous and unbroken practice of giving service charges at a certain rate, the average service charge becomes part of the employees’ basic wage for purposes of computing benefits (e.g., overtime, leave pay, etc.)—subject to the details in the amendment and implementing rules.

B. Nature of Service Charges as “Wage”

The Labor Code and jurisprudence treat service charges as a form of wage or wage supplement, because:

They are regular or quasi-regular payments arising out of the employment relationship;
They are mandated by law to be distributed to employees; and
They are intended as compensation for services rendered, reflecting customer payment for service.

By classifying them as wage:

Non-payment or underpayment of service charges is treated like non-payment or underpayment of wages.
Employees can file money claims for unpaid service charges, subject to the three-year prescriptive period for money claims under the Labor Code and Civil Code.

C. Implementing Rules and DOLE Issuances

The Department of Labor and Employment (DOLE) has issued:

Implementing rules and/or labor advisories to clarify how service charges are:
- Distributed (frequency, transparency, coverage);
- Integrated into wages; and
- Treated when no service charges are collected (e.g., low season, pandemic).

While the specifics of each issuance differ, they generally reaffirm the principles that:

Employers cannot keep or divert service charges once collected;
All covered employees must benefit; and
Documentation and payroll transparency are crucial.

III. What Counts as “Service Charge”?

A. Definition

In practice, service charge usually refers to the percentage (commonly 5–10%) automatically added to a customer’s bill, labelled as “service charge” on the official receipt or invoice.

Key elements:

It is mandatory, not voluntary (unlike tips).
It is expressly indicated as a charge for “service,” distinct from the price of food, goods, or room.
It is collected by the establishment, not directly by the employee.

B. Distinction from Tips and Gratuities

Tips/gratuities are voluntary payments given directly by customers to employees (sometimes left in a tip jar or handed personally).
By default, tips belong to the employees who receive them, unless they voluntarily agree to a pooling and sharing arrangement.
If an establishment pools tips and controls distribution as if it were a mandatory charge, those pooled tips may be treated like service charges, making them subject to the rules on service charges and employee entitlement.

C. Difference from Other Charges

Not all extra charges are service charges:

Cover charges / entrance fees – fees for entry, often part of the establishment’s revenue with no statutory employee share (unless treated as service charge by policy/CBA).
Delivery fees / booking fees – often paid to third-party platforms or logistics providers; employees’ entitlement depends on whether:
- It is collected by the restaurant itself and clearly earmarked as a “service charge”; and
- The business voluntarily treats it as shareable income for employees under company policy or CBA.

IV. Coverage: Who Must Share Service Charges?

A. Covered Establishments

The law explicitly covers:

Hotels
Restaurants
Similar establishments (e.g., bars, cafés, resorts, catering operations) that collect service charges from customers.

The test is functional:

Does the establishment render personal services (food service, hospitality) to customers?
Does it collect a mandatory service charge?

If yes, it is likely covered.

B. Covered Employees

Generally:

Rank-and-file employees directly engaged in the operation or serving customers (waiters, bartenders, busboys, kitchen staff, housekeeping, front office, bell service, etc.) are covered.
Supervisory employees may also be covered under RA 11360, except managerial employees, based on the wording of the law.

Managerial employees are normally excluded, as they:

Primarily manage a department or the enterprise,
Have the authority to hire, fire, or effectively recommend such actions, and
Exercise independent judgment in management decisions.

If an employee formally labelled “supervisor” is actually performing rank-and-file functions (no real supervisory powers), he or she may claim to be a de facto rank-and-file employee and thus covered.

V. Distribution of Service Charges

A. 100% Employee Distribution Rule

Under RA 11360:

100% of service charges collected must be distributed to covered employees.
The previous rule allowing a management share (commonly 15%) is abolished.

Therefore, any policy like:

“Management gets 15% of service charges for administrative expenses”

is no longer lawful after RA 11360 took effect, unless the law is amended again.

B. Method of Sharing

The law allows flexibility, but subject to fairness and agreement:

Collective Bargaining Agreement (CBA) – In unionized establishments, the CBA usually prescribes:
- Percentage allocation among departments or job classifications
- Distribution formula (equal share or proportionate to days worked/hours worked)
Company Policy / Established Practice – In non-unionized establishments, the employer may set a distribution formula, but:
- It must not exclude any covered employee without valid reason;
- It must be transparent;
- It must not be unilateral and arbitrary to the point of becoming a denial of statutory rights.

Common schemes include:

Equal shares for all covered employees who actually worked during a given cutoff; or
Pro-rated shares based on days or hours worked in the period when service charges were collected.

C. Frequency of Distribution

Service charges are typically distributed:

Along with regular payroll (e.g., every 15 days or monthly), or
On a fixed cutoff schedule (e.g., monthly or twice a month) based on company practice or CBA.

Undue delay in distribution (e.g., withholding for months) can be challenged as:

Unjustified withholding of wages, and
A potential labor standards violation.

D. Integration into Basic Wage

RA 11360 retained or clarified the rule that:

After one (1) year of continuous and unbroken practice of including service charges at a certain level, the average service charge may be integrated into the employees’ basic wage for purposes of calculating statutory benefits.

Implications:

The integrated amount becomes part of basic wage for:
- Overtime pay
- Night shift differential
- Premium pay for holidays and rest days
- 13th month pay (subject to statutory rules)
- Separation pay and retirement pay computations (where applicable)
If integrated, future removal of service charges or substantial reduction may require:
- Adjustment of basic wages,
- Or may be challenged as a diminution of benefits if it effectively lowers total compensation that has ripened into a company practice.

VI. Confiscation and Unlawful Withholding of Service Charges

“Confiscation” in this context usually refers to any employer act of taking, retaining, diverting, or not distributing service charges in violation of law.

A. Forms of Unlawful Confiscation

Management Share or “House Share”
- Any policy where management retains a percentage (e.g., 10–15%) of service charges for “administration,” “breakages,” or “company operational expenses” is inconsistent with the 100% rule.
Using Service Charges to Pay for Losses and Breakages
- Deductions for alleged shortages, breakages, or pilferages charged against the pooled service charge are highly suspect.
- Deductions from wages for losses are allowed only under strict conditions (proof of fault, written authorization, hearing, reasonable amount). Applying these automatically to service charge pools can be unlawful.
Using Service Charges for Uniforms or Tools
- If the law or DOLE rules do not allow passing certain costs to employees, the employer cannot indirectly transfer these costs by dipping into service charges.
Conditional Distribution (e.g., Forfeiture for Tardiness or Performance)
- Systems that entirely forfeit an employee’s share in service charges for minor infractions may be considered an unlawful penalty if:
  - The penalty is disproportionate; and
  - The service charges are a statutory wage benefit, not a discretionary bonus.
Non-Disclosure and Non-Accounting of Service Charge Collections
- Failure to show service charge collections and distribution in payroll or financial records, combined with refusal to explain to employees, raises a strong presumption of withholding or misappropriation.
Rebranding Service Charges
- Renaming a clearly labeled “service charge” as “miscellaneous fee,” “amenities fee,” or similar for the purpose of avoiding distribution can be challenged as a subterfuge.

B. Allowable Deductions or Reductions

Certain deductions are still allowed:

Government-mandated deductions on wages (tax withholding, SSS, PhilHealth, Pag-IBIG contributions) may apply to service charges once treated as wages.
Deductions authorized by law, CBA, or written consent of the employee, provided they do not defeat the employee’s right to the bulk of his/her service charge share.

But any deduction that essentially uses service charges to fund business or management costs (capital, repairs, overhead) is generally not allowed.

VII. Employee Share in Other Restaurant Service Fees

A. Banquet and Function Service Charges

Hotels and restaurants often impose service charges for:

Banquets
Wedding receptions
Corporate events
Large group functions

If these are collected by the establishment and indicated (or understood) as “service charges,” the same rule applies:

100% must be distributed to covered employees who contributed to those services (often including banquet staff, kitchen, cleaning, etc.).
The specific distribution formula can differ, but employees must share, and management cannot keep a permanent cut.

B. Delivery and Online Platform Fees

Modern restaurant operations often involve:

Delivery fees
Booking/service fees charged by or through apps

General principles:

If the fee is collected purely by a third-party app and not passed on to the restaurant, the Labor Code on service charges typically does not directly apply.
If the restaurant itself imposes a clearly identified service charge on delivery orders, and this is income of the restaurant, then employees may argue they are entitled to a share under the same rules.
Company policy or CBA may voluntarily extend service charge sharing to such fees even if not strictly mandated by statute.

C. Tips Collected Through Electronic Payments

Where customers leave tips via:

Credit/debit card “tip line”
E-wallet tip functions

Issues arise if:

The employer receives these amounts and does not pass them to employees, or
Pools them but withholds a management share.

If the employer has control and treats such amounts similarly to mandatory service charges, they can be argued to fall under:

The service charge rule, or
At minimum, the general principles that these amounts are intended by the customer for the employees, not the employer.

VIII. Interaction with Minimum Wage and Other Benefits

A. Minimum Wage Compliance

Service charges do not substitute compliance with minimum wage laws. Employers must:

Pay the basic minimum wage as required by the applicable Wage Order;
Treat service charges as an additional benefit on top of minimum wage;
Avoid schemes where the basic wage is lowered or kept artificially low because employees receive service charges.

Any attempt to offset basic wage obligations with service charges may be challenged as a circumvention of minimum wage laws.

B. Overtime, Holiday Pay, and Premiums

If service charges (or their average) have been integrated into the basic wage, then:

They increase the base amount used to calculate:
- Overtime pay
- Night shift differential
- Premium for work on rest days or holidays

Even before integration, frequent and regular service charge receipts may be considered in determining overall compensation, but the technical treatment depends on DOLE rules and jurisprudence.

C. 13th Month Pay

Service charges legally classified as wages can affect computation of 13th month pay, which is based on basic salary earned within the calendar year, subject to further legal interpretations and DOLE rules.

D. Retirement and Separation Pay

Where service charges have effectively been regularized and integrated, they may form part of the basis for:

Retirement pay under the Retirement Pay Law (RA 7641, as incorporated in the Labor Code);
Separation pay for authorized cause termination.

IX. Remedies for Employees

When employees believe their service charges have been confiscated or improperly withheld, they may pursue:

A. Internal Grievance and Dialogue

Raise the issue through:
- Department heads or HR;
- Grievance mechanisms in the CBA (if unionized);
- Written inquiries requesting detailed accounting of service charge collections and distributions.

B. DOLE Labor Standards Complaints

Employees can file a complaint with the DOLE Regional Office, which can:

Conduct a labor inspection;
Require the employer to produce:
- Payrolls
- Official receipts
- Sales and accounting records showing service charge collections
Order payment of underpaid or unpaid service charges.

C. Labor Arbiter Money Claims

For claims exceeding DOLE’s simple money claims threshold, or where issues involve illegal dismissal plus unpaid service charges, employees can file a case before the Labor Arbiter of the National Labor Relations Commission (NLRC), seeking:

Payment of unpaid service charges (with possible damages and attorney’s fees);
Recognition of integrated service charge as part of wage for benefits computation;
Relief from illegal deductions.

D. Prescriptive Period

Generally, money claims arising from employer-employee relations (including service charge claims) must be filed within three (3) years from the time the cause of action accrued. Delay beyond this may bar recovery.

X. Best Practices

A. For Employers

Clear and Written Policy
- Draft a transparent service charge policy consistent with RA 11360 and the Labor Code.
- Coordinate with unions and employees before implementation.
No Management Share
- Ensure that 100% of collected service charges go to the employees’ pool.
Accurate Recording and Transparency
- Record all service charge collections and distributions.
- Reflect them clearly in payroll slips and financial statements.
- Be prepared to explain and show computations to employees and DOLE.
Fair Distribution Scheme
- Avoid arbitrary exclusion of certain employees or departments.
- Consider objective bases like days/hours worked or actual participation in service delivery.
Compliance in Banquets and Special Events
- Apply service charge sharing rules consistently in all revenue centers where service charges are collected (banquets, catering, outlet restaurants).

B. For Employees

Keep Personal Records
- Retain payslips, schedules, and any written policies or memos regarding service charges.
- Note regularity and amount of service charge shares.
Ask Questions Early
- If distribution seems irregular or amounts decline sharply without explanation, raise the issue early with HR or supervisors.
Collective Action
- Where possible, work collectively (through a workers’ organization or union) to negotiate clearer and fairer service charge schemes.
Seek Legal or DOLE Assistance
- For unresolved disputes, consult DOLE or legal counsel to decide on filing a complaint or case.

XI. Conclusion and Practical Takeaways

In Philippine labor law, service charges belong to the employees, not to management. Once a restaurant, hotel, or similar establishment chooses to impose a service charge, it assumes statutory obligations:

To distribute 100% of the service charge to covered employees;
To do so in a fair, transparent, and timely manner;
To recognize service charges as part of employees’ wage structure, potentially affecting benefits and computations; and
To refrain from confiscating, diverting, or misusing service charges for business expenses or managerial profit.

For employees, understanding the rules on service charges is essential to protect their share in this legally recognized benefit. For employers, careful compliance and open communication help avoid disputes, liabilities, and reputational harm.

Because labor laws and DOLE interpretations can evolve, anyone facing a concrete dispute over service charges or restaurant service fees should seek specific legal advice or guidance from DOLE to ensure that the most current rules and jurisprudence are properly applied to their situation.