Industry reacts: Zero service charge is bad news for restaurant customers

With the Indian government’s guidelines making service charges voluntary rather than a mandatory part of the bill, the restaurant industry says customers will end up paying more while the restaurant staff stands to lose their incentives.

The food and drink business is a people business. The industry revolves around people, their culinary preferences, their preferred location of a restaurant/bar, ambience, décor, music, and more. To deliver these efficiently calls for service excellence.

Service charge
From being merely customer-focused, the restaurant industry today has become customer-committed.

Decades ago, when upscale bars and restaurants were far and few between in India, excellent service was the hallmark of a luxury experience. Today, service excellence is a key aspect that’s desired and demanded by customers.

The pandemic, with its emphasis on safety and hygiene, has only fuelled this demand, transforming the way bars and restaurants meet their customer expectations. From being merely customer-focused, the industry today has become customer-committed. This commitment comes with a price—in the form of service charges. However, the recent guidelines imposed by the Central Consumer Protection Authority (CCPA) are posing a threat to both the industry and the consumer.

Blanket bans are a bad idea

While the CCPA considers the service charge as an ‘unfair trade practice and violation of consumer rights,’ the industry stakeholders emphasise that mandatory removal of the service charge from the bills will only hurt the consumer.

Restaurant owners say that service charges or gratuity, given by customers to appreciate the good services extended, have long been an important incentive for the staff to look at joining this industry that otherwise involves long and strenuous hours of work with minimal work-life balance.

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Restaurateurs say that offering a separate service charge on a bill act in favour of transparency.

“While I agree that service charge must not be imposed on customers to pay services charges, it needs to be also left to them as an option to do so. A blanket ban is certainly going to prove counter-productive, especially when the industry is reeling under a severe manpower crisis with mounting attrition rates. I believe that the option for the guest to willingly leave an appreciation amount for the good services rendered by the staff, should be always available,” says Vineet Verma, Executive Director & CEO, Brigade Hospitality, which runs Glass Kitchen & Bar.

Restaurateurs say that offering a separate service charge on a bill act in favour of transparency. Customers can see the amount being charged and are free to opt out of it, which restaurants will never deny them.

“To take away service charge is not beneficial to anyone. Most places will revise menu pricing instead to absorb the cost, with customers eventually paying the same, if not more. It’s a policy that is disproportionately unfair to restaurant staff and to the industry at large. You’d rather just mandate that restaurants must specify that the charge is entirely optional so that guests are aware they can ask for it to be waived,” says Aditi Dugar, CEO and owner of Masque restaurant and Sage Saffron in Mumbai.

How legal is CCPA’s advisory?

The stakeholders of the bar and restaurant industry say that there is a huge misconception regarding the legality of CCPA’s advisory. Customers have been misled about the difference between guidelines and laws, they say.

Service charge
Restaurant stakeholders emphasise that mandatory removal of the service charge from the bills will only hurt the customer.

“Till it is a law, how can an entire industry and millions of employees be penalised for not following a guideline?” asks Rachel Goenka, CEO & Founder of The Chocolate Spoon Company, which runs a series of award-winning restaurants, patisseries, and bakeries.

“If the government has its way, the customer will end up paying far higher service charge than before amidst the worst inflationary cycle in decades. It is also saddening that the government first felicitates restaurant workers as Covid warriors for all their hard work throughout the pandemic, and now goes directly after employee’s earning capacity. It is now incumbent upon restaurateurs to sensitise customers about the need for service charge,” she says.

Industry stakeholders point out that the legality of levying service charge has been considered and addressed by the Supreme Court of India, high courts, the National Consumer Disputes Redressal Commission, the erstwhile Monopolies and Restrictive Trade Practices Commission, and the Income Tax Appellate Tribunal and has been upheld in various judicial pronouncements.

“Service charge is legal and an additional part of the wages we pay our teams. Removing service charge is very worrying for the huge labour force the industry employs and their families. With our help, they’re slowly recovering from the impact of Covid-19, and now this will be a crippling direction for them,” says AD Singh, Founder & MD, Olive Group of Restaurants.

In her recent Instagram post, Gauri Devidayal, Founder and CEO, Food Matters Group, clarified things from a legal perspective on the service charge matter.  “There is a lot of misunderstanding about this subject thanks to the interchangeable use of tips/service charge/what’s optional and what’s not etc. Just to clarify from a legal perspective, the CCPA has issued guidelines. There is no change in the law as it stands. If a consumer files a complaint, it will be adjudicated based on the law, not guidelines,” she says.

Restaurateurs say that the CCPA’s decision of removing the service charge has only highlighted the fact that the service charge exists.

“Our team has always informed the guest that we levy a service charge and that it is completely at the discretion of the customer on whether they would like to pay for it or not. What is the service charge to a team member? An incentive, a motivator, is a fixed way of saying ‘We appreciated your service.’ When a team member works harder, the better the service, the higher his incentive. The impact that it has on the restaurant industry is 0, but the impact that it has on the team member working on the floor at a restaurant is 100%,” says Ranbir Nagpal, Founder, Maai, Goa.

Radical transparency

Before GST was introduced, customers were charged for both components: Food and service. Now, organised restaurants are trying to hold onto the service charge because it is in the best interest of the customer as well as the staff.

“Let’s say we price a dish at Rs100 and levy 10% service charge on it when customers dine in. This is the same cost that is counted as a delivery cost whenever they order from aggregators like Swiggy and Zomato. This system ensures that you’re paying the right amount for food and service. However, it should be noted that if we weren’t pricing our F&B in this way, the easiest way for any restaurant to deal with this issue is to raise our prices across the board. This means that when customers order from Swiggy or Zomato, they end up paying Rs110 and delivery charges. In that scenario, customers end up paying much more service charge. We are being portrayed as cheating the customer when that is the exact opposite of our intention. We are not trying to cheat our customers, we’re trying to practice radical transparency,” says Ranveer Sabhani, Business Head, Impressario South.

Service charge is a motivator

For Rahul Bajaj, Director, Le Sutra Hospitality Group, service charge is like a lifeline of the restaurant.

“It’s a motivational tool that helps you bind your restaurant and keep it alive. A 10% service charge helps the restaurant manage its miscellaneous expenses for the benefit of the staff. Service charge is an inspirational, motivational, and survival tool for the staff so we would definitely not want it to be removed. There are a lot of groups that have come together to stand up for this cause and we agree with them,” he says.

Not a win-win

Darshan Desai, Partner, Zenmai, explains that one of the primary misconceptions is that the service charge is a source of extra profit for the restaurant owners.

Many restaurants have a points system of redistributing service charges to their employees. The points are allotted according to the hierarchy. If the service charge model is removed, restaurateurs will have to increase the staff salaries. This puts more strain on the restaurant’s financials as it increases costs in an already overhead-heavy business model. If the restaurant doesn’t perform well in a down season (monsoons), the owner still has to pay increased high salaries to the staff. Conversely, if the restaurant performs well, the employees may not be able to demand a higher salary as the owner might marginally increase the salaries and cap it off.

In a service charge model, the employees get a base salary, and the extra service charge gets redistributed to them according to the performance of the restaurant.

“The money collected in the service charge tab gets redistributed back to the restaurant employees. This is different from directly tipping the waiter because these direct tips are difficult to keep track of. In the service charge model, we get an accurate amount that has to be redistributed to the employees as it’s calculated on the bill, which is recorded on the system. Tipping the waiter directly may only benefit that particular waiter. It doesn’t benefit the housekeeping, utility, and other staff,” he says.

The service charge model motivates staff to perform at their best. The higher the sales, the more service charges they get. This also motivates staff to work in harmony and improve teamwork.

Now with the new guidelines imposed by CCPA, it remains to be seen how the menu price revisions will have a negative impact on customer spending.

Read more:

Innovations, consolidations in the pandemic’s wake make India’s F&B industry more resilient

F&B will be the pivot around which the hospitality economy will increasingly evolve

(With inputs from Caroline Felicia D’Almeida)