The tipping point on service charges

Source: This post is based on the article “The tipping point on service charges” published in the Indian Express on 27th July 2022.

Syllabus: GS 3 – Changes in industrial policy and their effects on industrial growth.

Relevance: About recent restrictions on service charge.

News: Recently, the Delhi High Court stayed the operation of guidelines issued by the Central Consumer Protection Authority (CCPA), which prohibited hotels and restaurants from adding a component of service charge to their bills.

About the guidelines of CCPA

Does the Delhi High Court stay apply throughout India?

Under Article 226 of the Constitution, the application of an order passed by the Delhi HC ought to only be confined to the national capital territory (NCT) of Delhi.

However, according to the Supreme Court ruling in the Kusum Ingots and Alloys Ltd. v. Union of India (2004) case, any order passed by a high court on the constitutionality of central legislation will have effect throughout the country.

As the Consumer Protection Act was enacted by the Parliament, the HC order clears the way for hotels and restaurants across the country to restore their practice of levying a service charge.

What are the recommendations of the various committees on service charges?

The practice of levying a service charge has been followed by the hospitality industry since Independence.

Hotel Standards and Rate Structure Committee: The committee was formed under the chairmanship of Dewan Chaman Lal in 1958. The committee recognised the service charge and recommended the following,

a) There be a uniform charge of 10% on the customer’s bill throughout India, b) Condemned the practice of solicitation of tips, calling it injurious to the dignity of the worker and causing harassment to the customer, c) Demand for the introduction of comprehensive legislation to provide a minimum-wage structure, uniform rate of service charge and the utilisation and allocation of the service charge for the benefit of the staff, and d) A portion of the service charge so collected may be utilised to provide benefits such as provident funds, pensions and life insurance.

Wage Board: It was constituted by the Delhi Chief Commissioner in 1964. The major recommendations were, a) Accepted the practice of levying a service charge ranging between 5-10% on a customer’s bills, b) Asked the apportionment of the service charge collected, of which 45% was to be allocated for the staff working at the establishment.

Further, the levying of service charges has been upheld by various decisions of the Supreme Court as well as the National Consumer Disputes Redressal Commission.

What are the issues associated with prohibiting service charges?

Prohibiting hotels and restaurants from levying service charges would lead to inequitable distribution of tips. As the tips are only likely to be pocketed by the staff who come into contact with the customer, leaving the back-end workers high and dry.

Note: In Wenger & Company and others vs. Their Workmen case,1963, the Supreme Court observed that the practice of tipping is a nuisance for the customer and an excuse by the management to justify low wages.

What are the challenges faced by the workers in hotels and restaurants?

a) Despite various recommendations, there is no legislative framework regulating the imposition and apportionment of service charges in India, b) The sector is largely unorganised and most workers barely get their basic pay, let alone any other benefits.

What should be done?

In the absence of formal legislation regulating the concept, the issue relating to the application of service charges might be at the risk of being viewed from the lens of the consumer and not the worker. Hence, the government should frame comprehensive legislation.