When is a restaurant tip not a tip? When it’s a service charge

It’s been a lovely meal. Such a pleasure to be dining out again with friends or family. You ask for the bill. At the bottom, under the total, they’ve added a 12.5 per cent service charge. Ah, you think, there’s the tip sorted. Only slightly irritated by a gratuity imposed by someone else, you pay and leave, happy that staff are getting a substantial whack on top of their wages.

Think again.

But isn't a service charge a tip by another name?
That's what most of us assume, but legally a hotel or restaurant is fully entitled to keep that "service charge", which is deemed normal business revenue. Far from a bonus to staff, it can legitimately be used to pay – often minimum – wages, or presumably the vegetable or electricity bills.

Public awareness of tips and service charges was growing before Covid. Many, many decent employers treat staff fairly; but research shows some withhold or skim tips that customers think go to staff on top of wages.

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After campaigns to regulate this murky world, Tánaiste and Minister for Enterprise Leo Varadkar this week published Payment of Wages (Amendment) (Tips and Gratuities) Bill 2022, and it has already gone through the Seanad second stage.

It gives staff a legal entitlement to tips and gratuities paid by card, with a statement explaining payments. It doesn’t regulate cash tips (the department says employers don’t control them, and the Workplace Relations Commission says it would be unworkable; others disagree). The new Bill is a big advance and will make withholding card tips, or using them to pay wages, illegal. In a push for transparency, businesses will have to display their tips, gratuities and service charges policy.

The Bill was well received, and the Seanad debate had great additional suggestions, including more resources for WRC to police it, and a campaign so workers know their rights.

But there is a glaring omission when it comes to mandatory service charges. While discretionary or optional service charges appear to fall under “tips and gratuities”, the proposed law explicitly maintains the status quo on mandatory service charges: they are still business income.

“The big win is this Bill provides employees with a legal right of ownership of tips customers intended would go to them,” says Dr Deirdre Curran from NUI Galway, an expert on hospitality. But excluding mandatory service charges is “a big concession to employer representatives”. She argues “the term ‘service charge’ should be replaced with the more accurate term ‘additional employer charge’ ”.

Even the Minister acknowledged in the Seanad , “at the moment service charges are a grey area. Many customers believe that a service charge is a tip”. Offering hope, he also said “I am sure this Bill is not perfect and can be improved, and I am open to amendments that are workable, beneficial and constitutional”.

So how do service charges work?
Some restaurants – high-end, mid-range, lots of casual dining and chains too – add a 12.5 per cent, sometimes more, service charge on large tables (which can be as few as five diners), and occasionally on all tables. Some hotels add service charges for functions and parties. They effectively result in higher menu prices than those displayed. Then again, many don't add service charges at all, making the playing field pretty uneven.

Although consumers generally believe service charges to be tips, hospitality representatives are adamant they belong to businesses and they don’t want them covered by the tips Bill.

Irish Hotels Federation chief executive Tim Fenn is explicit: “Service charges levied by a business, as distinct from tips and gratuities, are part of business revenues and can be applied to meet all business costs, including salaries … A service charge is levied by the business on a customer, who does not have the right to determine the amount of the charge”, nor “how the employer treats this income stream”.

Robert Bourke says judging by his and friends' experiences, card tips in Ireland have only a 50-50 chance of going to staff

Including service charges in the law would “interfere in a contract between a business and a customer”. Restaurants Association of Ireland chief executive Adrian Cummins agrees. “It is not for me to tell a business what to do with the service charge.” They were speaking in October 2019 at an Oireachtas Joint Committee debating an earlier version of the Bill.

At the committee you could almost see jaws drop. TD John Brady said “customers rightly assume [service charges] go directly to the staff. Essentially, it is a hidden charge or a top-up. Why is it not included in the menu price in the first place?” TD Joan Collins: “No one will leave a tip on top of a service charge.”

Senator Paul Gavan, a strong campaigner on tips, said: “Those watching the debate will be shocked by what they have heard. At the risk of being rude … is a service charge not a complete con job?”

This week in the Seanad, Gavan explained service charges first came about after a 1951 Dublin hotel strike, leading to an agreement to service charges, owned by employees and distributed through unions. The original service charge was “to ensure justice and better pay for workers”.

Do all businesses agree with service charges?
An owner-manager of a mid-sized bar-restaurant in Connemara, says "the easiest, faster and fairest way is to divide tips among all staff working on a given day". Though she works the floor, she doesn't include herself in the split – "it's not right". But she was dismayed when another business owner told her he takes a percentage of the tips. "I was dumbfounded. That's no-go. And it leads to dissent in the ranks."

Some hotel staff she knows get some service charge, but without transparency in how it’s calculated. Hotels with B&B/dinner packages often add a service charge to wine and extras. “Different places do different things.”

One reason for service charges, she says, is that “three tables of four are faster to turn over than one table of 12. It takes longer to serve a bigger table. That’s the only justification for service charges, but I wouldn’t do it. They should be abolished, full stop. It causes more harm.”

Do staff get service charges?
Robert Bourke, with 15 years' experience, mainly in bars, says judging by his and friends' experiences, card tips in Ireland have only a 50-50 chance ("and that's optimistic") of going to staff.

He has worked in the UK, Canada and the US, where he found that with service charges on large tables, “100 per cent goes to staff”. Working in a large four-star Limerick city centre hotel in 2018, a service charge (he doesn’t know what percentage) was added for weddings, birthday parties and work functions, but staff never saw any of it. He was on minimum wage. The hotel had “three or four large function rooms, so they would make decent service charges, but we never got a penny. Most people in hospitality in Ireland are younger and you just get on with it. Nobody stays for long – it’s not sustainable.”

He worked at a large hotel on the Clare coast in summer 2020, also at (reduced capacity) functions. Guests paying for events often asked him and other staff if they received the service charges added to their bill. When he asked management, he was told they’d be added to his payslip, but he was fobbed off month after month and never received them. “You get very fed up very fast. They could have given it to staff. I don’t know if it’s greed or what, but it’s a way to overcharge guests and say they’ll pass it on to staff and not do it.”

Though he loves hospitality, he’s getting out of it. “I’ve felt more exploited in Ireland than anywhere else.”

Trade union Unite, which represents Irish hospitality workers, welcomes the Bill’s ring-fencing of tips, though it warns “mandatory service charges could reinforce profits while reducing customer tipping”. Hospitality co-ordinator Julia Marciniak says it’s a red herring not to include service charges because of fears they would be taxed. She says service charges should be deemed gifts, and fall under the small gift exemption.

Why do we accept a service charge on a meal?
Hospitality recruiter Maureen O'Brien says service charges are problematic. O'Brien, managing director of Sapphire Recruitment, says "Truth is, a service charge goes into the pocket of most employers and from there, God only knows where it ends up".

“There are some very good hospitality employers who really look after their staff but they are on the possible extinction list. I am fully convinced the hospitality lobby is so strong it’s almost untouchable, and because it’s a very low-paid industry, employees are forgotten about. No other industry had VAT reductions like hospitality, and it was not passed on to customers. Who benefits from the service charge? Not the employee or the customer.”

'If restaurants and bars want to recover after this pandemic, adding mandatory service charges is just going to piss off potential customers'

She observes “no other service industry has a service charge. What if 10 per cent was added to our grocery bill? Would we stay silent and accept it? So why do we accept a service charge on a meal? Service charges are definitely a very sneaky way of charging extra to patrons.”

What about consumers?
Social media yields responses of some consumers: "This automatic service charge craic is bulls**t. If it's mandatory then it should be part of the price. I don't know how they get away with it. And if it's discretionary why the hell is it an awkward hullabaloo to get it off?"

Another comments: “If restaurants and bars want to recover after this pandemic, adding mandatory service charges is just going to piss off potential customers. This pandemic has been tough on everyone, but you don’t keep your doors open by taking advantage of customers.”

There’s also resistance to service charges for large groups: “Apply that logic to any other industry and see how you get on. Every other industry prefers large orders, and filling large orders is always more strenuous on cost … It’s like we are taking crazy pills – can you handle a large group or not? Yes. Here’s our business. No? No worries, we’ll go somewhere else. How exactly does tacking on an extra 12.5 per cent make service easier? It doesn’t, it’s just a ploy to make more money.”