What is a service charge in a restaurant bill, how to distribute it

Matthew Wyatt FCA on the need for more transparency about what is a service charge and how its handled.

The hospitality trade is being let down by some of its most prestigious establishments - just at a time when it needs to promote its career profile and image to British youngsters. Given how Brexit could proceed, it appears there will inevitably be a reduction in migrant labour in the future. This has clear implications.

Consequently the industry is faced with the challenge of changing focus and relying on recruiting more British based workers. There’s little chance of getting them on your payroll however, if some employers continue to (illegally) pay staff below the National Living Wage. This is further accentuated by others (legally) regarding most, or all, the proceeds of the service charge as company revenue without explaining it to customers.

How widespread is underpayment of staff?

It’s doubtful if the two high profile examples of these practices, Roux restaurants and Harrods, are exceptional. Might they be the tip of the iceberg? Given there are over 200,000 employees in the industry and the low wages paid, underpayment could be prevalent.

Furthermore the rules and practices about the service charge are complex and misunderstood. Very little information is given to the customer about the distribution of monies raised which has resulted in some hospitality businesses earning the reputation as rip-off merchants.

Michel Roux’s decision to abandon the service charge altogether and increase prices by 13% may be the right move. That said, it won’t stop customers from paying a tip or leaving a voluntary service charge. This just highlights the grip this issue has on the industry.

What is a service charge in a restaurant bill, who is it for?

Back in 2009, the British Hospitality Association (BHA) urged businesses to abide by a code of conduct, something we also partly covered in how to administer staff tips and run the tronc scheme. The BHA set out to explain to customers:

• How any service charge raised was distributed to staff
• Which members of staff received it
• Whether some of it was retained by the business
• How much was retained by the business and for what purpose

Some major and smaller employers accepted this new code, in full or, part measure. Unfortunately this still leaves a large number of businesses who raise considerable sums (12.5% service charge is now common) as additional house revenue without any intention of distributing much of it to staff.

Of course businesses that retain the proceeds of the service are acting within the law but it raises significant moral questions about how they conduct their operations. That’s because the clear intention of the service charge, in the eyes of the public, is for those proceeds to go to the employees who provided the service and not the business itself. Otherwise, why not introduce a surcharge?

No business would dare call it that but retaining the service charge in the business without all or most of it being distributed to the staff is subterfuge in that it deliberately leads the customer to believe something that the business knows to not be true.   

Bad practices that need to stop

For a modern day industry, this isn’t a sustainable position. Public confusion over the treatment of the service charge and the underpayment of minimum wages lead to valid criticisms of the industry’s employment practices. There are of course, many good and honest hospitality employers but the industry retains a poor employment image.

This image issue is the result of many years of bad practice and management indifference as to the harmful effect this has on recruitment and employee retention. Sadly, such practices continuing into the 21^st century bodes ill for the industry’s chances of recruiting more British-based youngsters to replace the thousands of migrant workers that might be prevented from working in the UK post Brexit negotiations.

Moving forward, the hospitality sector needs to work to ensure it's seen as both a fair employer and a viable option for young people to develop a rewarding career.

The content of this post is up to date and relevant as at 30/01/2017.

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