Service Charge and employees of Hotel, Bar and Restaurants - Brief Introduction

Many of us are not really aware about 'service charge', in particular with reference Hotel, Bar and Restaurant Workers of Malaysia. It is a revelation to know how employers in this industry have been paying their workers such low wages, and depending a lot on payments that come from customers in the form of 'service charges'. It is shocking how employers are not giving workers 100% of the service charge, but are taking 10% (and even demanding more) for their themselves 'to defray administrative cost' for collecting and distributing.

The courts have determined that when it comes to determining overtime rates and rates for work on rest days/public holidays, service charge is to taken to be as part of wages for the purpose of  calculation/computation of  ordinary rate of pay. Same also for the purpose of calculating retrenchment and lay-off benefits.

In Malaysia, employers contribute 13% of wage amount, this being over and above wages paid to employees, to the Employees Provident Fund. Employees pay 11% of their wages, which is deducted from their wages into this fund. Now, the relevant Act was amended to exclude service charges, so employees Hotel, Bar and Restaurant sector are prejudiced.

When the minimum wages law came into being, it was suggested in the Guideline by the Wages Consultative Council, that 'service charge' be included in the computation of minimum wages that the worker is entitled to. [i.e. all that employers need to do is to fulfill their obligation of paying minimum wages of RM900, is to ensure that the basic wage plus service charge is equal to or more than RM900) The National Union of Hotel, Bar and Restaurant Workers (NUHBRW) opposed this stating that minimum wages should not include 'service charges', and that their basic wages be increased to RM900, the amount of minimum wages that workers are entitled as of January 2013.  This position is consistent with the intention, i.e. the increment of basic wages to RM900 without affecting any other allowances, payments or benefits workers are getting.

However, according to Bro. Rusli Affandi, it seems that the former Secretary General of the Malaysian Trade Union Congress, without consultation with NUHBRW, seem to have agreed to this proposal. The NUHBRW is firm on its stand, and there is tension between MTUC and the Union, and the hope is that the newly appointed Secretary General of MTUC will undo the wrong done by his predecessor.

I am pleased to share 2 write ups about Service Charges, that I obtained from Bro. Rusli Affandi and NUHBRW, so that we too may get a better understanding of service charge. Service charge, as one will figure out, varies from month to month. Effective 10/5/2013, Bro. Rusli Affandi will be the General Secretary of NUHBRW.

 

SERVICE CHARGE

1. Service charge was introduced in the 1960’s in the hotel industry and was not imposed specifically to replace tipping. The amount of service charge varies monthly depending upon the volume of business of the Hotel. At all material times, employees are not allowed to request for tips from the Hotel’s customers. To do so would constitute a misconduct. Tipping was given by the Hotel’s customers on a voluntary basis till today.

2. Under the Collective Agreement, service charge is collected by the Hotel on behalf of its employees from the Hotel’s customer when the bill is presented. It is then distributed to the Hotel’s employees in accordance to the Service Charge Point allocation under the Collective Agreement. The objective is to ensure that all levels of employees are given the opportunity to share the service charge given by the Hotel’s customers.

3. The service charge belongs to the employees of the Hotel and is not the Hotel’s money or resources. The Hotel does not contribute to the Service Charge Fund. Once the service charge is in the hands of the Hotel, it is due by the Hotel to the employees under the terms of Article 11 of the Collective Agreement.

4. As agreed with the Union, the Hotel is only given 10% of the total Service Charge collected from the customers for that month to defray the administrative cost incurred in the maintenance of the service charge amount, collection and distribution of the service charge, which is done on behalf of the Union.

5. The Collective Agreement obligates the Hotel to provide a monthly statement to the Union with a monthly statement of the account of the gross service charge collected. The monthly statement must be very specific in its details, such as the total gross service charge, names and individual service charge points, net increase or decrease of the points and the value per point for that month. The Union also has a right to inspect all documents pertaining to the service charge kept by the Hotel upon notice.

6. In 1986, the Privy Council in the case of P.A. Pereira & Anor v. Hotel Jayapuri Berhad & Anor (Privy Council Appeal No. 29 of 1984) ruled that service charge is part and parcel of wages within the meaning of s.2, Employees’ Provident Fund Act 1951 and therefore, the Hotel was required to pay contributions on the payment of service charge.

7. Pursuant to aforesaid decision, the Parliament passed the Employees’ Provident Fund (Amendment) Act 1986 (A642) to exclude service charge from the definition of wages under the EPF Act 1951. There was, however, no corresponding amendment made to the definition of wages under s.2, Employment Act 1955 to address the issue of service charge.

8. It has never been the practice and understanding to exclude service charge from the definition of wages under Section 2 of the Employment Act or to exclude it from the computation of the ordinary rate of pay on overtime, public holidays and rest days as contracting out is illegal, even though there was no changes in the collective agreement.

9. Further there does not exist any type of practice or understanding whatsoever and it was factually an afterthought after the Hotel’s appeal was dismissed by the Court of Appeal in Hotel Equatorial (M) Sdn. Bhd. v. Thomas George a/l M.J. George on 15.9.2003 vide Civil Appeal No: W-04-24-97 where it affirmed the Labour Court’s decision and the High Court’s judgment that service charge is wages under the definition of wages under the Employment Act for the computation of the ordinary rate of pay for working on Agong’s Birthday, a public holiday in June 1993.

10. As contacting out is illegal and save that 90% service charge collected by the Hotel is to be distributed to the employees and 10% retained by the Hotel to defray administration expenses for managing the service charge funds on its behalf and further that there was no claim made against the Hotel from 1976 till 1994, the Union states that there does not exist any type of practice or understanding whatsoever not to compute the service charge for the ordinary rate of pay for overtime, public holidays and rest days in this Hotel or the entire hotel industry in Peninsular Malaysia.

11. The Union further states that as far back as in 1981 the Union has initiated a case before the Industrial Court that service charge is wages and ought to be computed in the ordinary rate of pay for overtime, public holidays and rest days in National Union of Hotel, Bar & Restaurant Workers v. Holiday Inn, Kuala Lumpur and in its Award No: 33/81, Harun J., the Learned President of the Industrial Court held in favour of the Union’s contention.

12. In 1994, a claim was filed by one Thomas George against Hotel Equatorial (Thomas George v Hotel Equatorial Sdn Bhd (Labour Court Case No: 813/94) for the shortfall of his pay in respect of work done on a public holiday in June 1993 amounting to RM59.42. This claim was made under the Section 69(1) of the Employment Act 1955 (as amended by Act 716/89) at the Labour Department.

13. One of the main issue before the Labour Court was whether service charge fell within the meaning of wages under s.2 of the Employment Act 1955 for the computation of Ordinary Rate of Pay to determine the payment for work done of public holiday.

14. The Labour Court answered the said question in the affirmative and directed the Appellant to pay the shortfall in payment. The said decision was endorsed by the Court of Appeal on 15-9-2003 vide Civil Appeal No. W-04-24-97. Although the Court of Appeal affirmed the Labour Court decision that service charge is part of wages under section 2 of the Employment Act 1955, it did not deal with the issue as to whether the shortfall of payment done on public holiday should come from the service charge pool or the funds of the hotel as this was not raised at all by the Hotel. The Court of Appeal did not hand down any written judgment for its decision.

15. On 15th October 2003, the Hotel filed an application under section 33(1) of the Industrial Relations Act 1967 at the Industrial Court for the following question to be determined:-

“ In respect of the computation of Ordinary Rate of Pay to calculate pay for overtime and work done on public holidays and rest-days, should the element of service charge in respect of such payments be payable from the Service Charge Pool collected under article 11 of the Collective Agreement?”

16. The Hotel averred in its Application For Interpretation of Award/Collective Agreement dated 15th October 2003 that when computing Ordinary Rate of Pay for the purpose of computing pay for overtime and work done on public holidays and rest-days, the service charge element in respect of such payment should be paid from the Service Charge pool collected by the Hotel on behalf of the employees within the scope of the collective agreement and not from the Hotel’s funds. The application for interpretation was registered as Industrial Court Case No. 1/6-699/03.

17. The Union then filed its Statement in Reply dated 10-1-2004 to contest the Section 33(1) Application . One of the main points of objection was that there were various disputes of fact arising from the said application and therefore, the application was premature and should be dismissed.

18. Due to various disputes of fact that arose from the Section 33(1) Application, the Hotel withdrew the aforesaid application on 2-4-2004. The Hotel also informed the Industrial Court that in light of the various disputes of fact, the Hotel will be pursuing the matter as a trade dispute under sections 18 and 26 of the Industrial Relations Act 1967. The Union did not object to the said withdrawal.

19. Thereafter, the Hotel issued a letter dated 8-4-2004 to the Director General of Industrial Relations to report the service charge issue as a trade dispute. In the said letter, the Hotel reported the issue of whether the element of service charge in respect of such payments be payable from the Service Charge Pool collected under article 11 of the Collective Agreement in respect of the computation of Ordinary Rate of Pay to calculate pay for overtime and work done on public holidays and rest-days, to the Director General as a trade dispute. The letter was filed pursuant to section 18(1) of the Industrial Relations Act 1967.

20. The Union avers that on 29.11.2003 the Hotel graciously paid to Thomas George RM59.42 by cheque from the 90% service charge pool of November 2003.

21. The Union further avers that it lodged a complaint under section 56(1) of the Industrial Relations Act 1967 with the Industrial Court on 4.6.2005 as Industrial Court Case No: 1/1-878/2004 and the said Court in Award No: 1681 of 2005 dated 30.8.2005 subsequently ruled in favour of the Union that the Hotel cannot use the 90% service charge pool to discharge its own liabilities.

22. The Union avers that the Minister’s reference directly refers to Article 11 on Service Charge of the Collective for the period 2001 to 2004.

23. The Union state that Article 11 is specific as to the mode of distribution or payment of service charge on the points system in accordance with Appendix C of the Collective Agreement.

24. The Union further avers that the Hotel’s claim is an afterthought and done in bad faith having its appeal dismissed by the Court of Appeal in Hotel Equatorial (M) Sdn. Bhd. v. Thomas George a/l M.J. George on 15.9.2003 vide Civil Appeal No: W-40-24-97.

25. The Union states that although service charge belongs to the employees, the Hotel is acting in a fiduciary capacity and is not entitled to utilize the 90% service charge to pay the employees for the ordinary rate of pay for overtime, public holidays and rest days but from its own funds.

26. The Union states that the Hotel’s claim which is without merit or basis be dismissed by the Honourable Court and that the Union’s contention be upheld that the payment for the ordinary rate of pay for overtime, public holidays and rest days be made from the Hotel’s own fund.

 

SERVICE CHARGE

HISTORY OF SERVICE CHARGE IN MALAYSIA

The service charge system is unique in the Hotel industry and it is intertwined with the remuneration system of its employees. A ten per cent (10 %) service charge is imposed on all bills and this amount is incorporated in the same bill which the customer is required to settle. The basis for such an imposition of service charge is for services rendered. Out of the 10 %, the Hotels keep 1 % for the administrative charges and 9 % goes to the employees. This standard has been affirmed by the Industrial Court continuously.

A point allocation is used to distribute the service charge among the employees, depending on the Hotel and the provisions of the collective agreement.

The absolute distribution would be dependent on the business of the hotel and the number of employees covered within the scope of the collective agreement.

LOW MONTHLY SALARY

The service charge had been intended to complement the low monthly salaries paid to the employees.

On the average, the monthly salaries for the category of gardener, telephone operator, steward, dishwasher, chambermaid, linen maid, public area cleaner, etc. will be in the range of RM180.00 to RM250.00 depending on the hotels. This is way below the subsistence levels, applying any reasonable standard.

At the higher range the monthly salaries range between RM190.00 to RM280.00 which is applicable to the category of cashier, waiter, waitress, front office assistance and bell captain.

The said service charge is paid in addition to this paltry salary. A chambermaid which will usually receive 2 service charge points at an average of RM200.00 per point will take home a salary of RM580.00 per month.

At the top end of the business, a 5-star hotel will pay a chambermaid a monthly basic salary of RM250.00 and coupled with the service charge points (2 @ RM250.00), the same chambermaid will take home a salary of RM750.00 per month.

With such low basic salaries, it is impossible for any employee to survive in any area of the country and cover for the basic necessities such as room rent, bus fares, subsistence, clothing etc. It is even unfair to expect foreign workers to rely on such low salaries as they would be exposed to such inhumane conditions.

EMPLOYER SAVINGS

As service charge is paid by customers, employers have saved substantially in terms of payment of monthly salaries as compared to other industries.

For example, all things equal :

Hotel Industry Commercial Industry
RM180 a month RM750
200 employees 200 employees
RM36,000 RM150,000
======== =========

A saving in monthly salary of RM114,000 a month and RM1,368,000 a year.

Even with the incorporation of the service charges, the employees employed in the hotel industry are much worst off than their counterparts in other sectors.

The hotels pay one third of the monthly salaries with the rest coming from the customers and the hotels cannot be allowed to squeeze the employees any further by disregarding service charge as “wages”.

The employees have suffered sub silentio under the nose of the employers who had saved such a substantial amount from their pockets that they are clamouring for more. The hotels also save on EPF contributions.

THE LAW

The Employment Act 1955 does not exclude service charge from the definition of wages. This is abundantly demonstrated by the following court decisions.

In Kes Saman Ketua Pengarah Buruh No: KBKL/813/94, Thomas George a/l M.J.George v. Hotel Equatorial (M) Sdn. Bhd., the Labour Court held that service charge is wages under Section 2 of the Employment Act for the computation of the ordinary rate of pay for working on the Di Pertuan Agong’s Birthday.

Being dissatisfied with the decision, the Hotel appealed to the High Court and on 19.5.1997 His Lordship, Dato’ Azmel J. in Kuala Lumpur Civil Appeal No: R2-16-6-95 dismissed the Hotel’s appeal with costs.

His Lordship’s judgment is clear that under section 2 on wages, the service charge was not in the items (a) to (f), and as such it is wages.

For ease of reference, I reproduce the definition of wages:

“wages” means basic wages and all other payments in cash payable to an employee for work done in respect of his contract of service but does not include :

(a) the value of any house accommodation or the supply of any food, fuel, light or water or medical attendance, or of any approved amenity or approved service;

(b) any contribution paid by the employer on his own account to any pension fund, provident fund, superannuation scheme, retrenchment, termination, lay-off or retirement scheme, thrift scheme or any other fund or scheme established for the benefit or welfare of the employee:

(c) any travelling allowance or the value of any travelling concession;

(d) any sum payable to the employee to defray special expenses entailed on him by the nature of his employment;

(e) any gratuity payable on discharge or retirement; or

(f) any annual bonus or any part of any annual bonus

The Hotel has filed an appeal against the judgment of the High Court Judge in the Court of Appeal and the Court of Appeal had dismissed the appeal with costs after hearing submissions, thus affirming the judgment that service charge is wages.

In Award Nos: 361/2000 and 362/2000 the Industrial Chairman, Pn Siti Saleha held the service charge to be wages for the computation of retrenchment and retirement benefits in the case of Hotel Fortuna Management Services Sdn. Bhd.

In Award No: 707/2000, the Industrial Court Chairman, En. Abu Hashim held that service charge is wages for the computation of retrenchment benefits in the case of Rits Garden Hotel Sdn. Bhd.

In Award No: 241/2002, the Industrial Court President, En. Yussof Ahmad held that service charge is wages for computing retrenchment benefit in the case of Pudu Sinar Sdn. Bhd. (Melia Kuala Lumpur) and he cited the case of Tsoukka & Others v. Potomac Restaurants Limited where His Lordship Sir Diarmaid Conroy, Q.C. held as follows:

“Once the money has come into the hands of the restaurant proprietor, it is part of the income of the restaurant, and he can deal with that money as he pleases, subject to any contract he may have with his employees. If the contract with the employees, i.e. the waiters, provides either expressly, or by custom, or by implication, that some or all of the surcharge shall be distributed in a certain way among the waiters, then in our view that is wages or remuneration paid by the restaurant from its own money to the waiter. It is different from a tip, which never becomes the property of the restaurant. The service charge is the restaurant’s own money when it receives it.”

HOTELS ATTITUDE

The hotels attitude towards service charge has not changed at all and in fact they are clamouring for retaining a higher percentage as in a recent case in 2006 where Hotel Equatorial in Penang is demanding a percentage from 90:10 to 70:30 and 30 % being their demand as opposed to 10 % held previously.

Previously the 10 % is for administrative purposes such as collecting the service charge and distributing it to the employees. Now the hotel is demanding 30 % for administrative, overtime, rest day and public holidays to be included in the terms of the collective agreement.

After hearing extensive argument, evidence and submission, the Industrial Court held in the Union’s favour of retaining 90:10 %.

The Union’s submission is that the list as argued by the hotel will keeping on expanding to include later on other items such as uniforms, shoes, food allowance and it goes into infinity which the hotel might later demand for even 50 %. The Court agrees with the Union’s submission.

It has to be borne in mind as adumbrated earlier that service charge is for service rendered as intended by the customers and not for any other purposes.

Customers do not pay service charge for employees overtime which has to be paid out from the funds of the hotel.

Again being dissatisfied with the decision of the Industrial Court, the hotel brought the case to the High Court for judicial review and on 29.1.2008 after hearing submission, the High Court Judge dismissed the Hotel’s application with costs, thus affirming the decision of the Industrial Court.

CONCLUSION

The Management of hotels are understood to be seeking to vary the definition of “wages” under section 2 of the Employment Act 1955 in order to exclude the service charge as part of the definition of what constitutes “wages”. They have made representations to the Ministry of Human Resources over this matter. This would go against the very grain of the very intention of the remuneration system applicable to hotels in the country which has been in existence for decades.

National Union of Hotel, Bar and Restaurant Workers (NUHBRW) of Malaysia have also put up our Memorandum that no amendments be made to the definition on wages to exclude service charge from it and we have overcome the issue at the moment and hopefully it will remain so for a long, long time.