Letters - Clean wage answer to service charge issue

THE service charge issue refers. The issue surfaced in March when there was a statement that was reported saying consumers were not obliged to pay the service charge if they were not happy with the service provided by hotels and food and beverage establishments. Furthermore, all advertisements on the implementation of GST, emphasised that from April 1, that there will one be one charge applicable to all goods and services which is the Goods and Services Tax (GST). To the consumer, it implies that there will be no other charges including the service charge.
There should have been engagement with all stakeholders before the implementation of the GST. The issue should have been addressed when drawing up the criteria and guidelines of the GST.
The history of service charge goes back some 50 years and used to be globally practised within the hospitality industry as an incentive scheme. The amount collected is divided among employees in a point system. Depending on position and seniority, one will be accorded a number of service points. In some countries service points are distributed to every employee including the general manager. However, in Malaysia, the general practice is that the service charge is distributed to non-management level employees.
I always wondered why, must one have to pay a service charge on top of the service that one pays for? In simple terms, when one pays for a hotel stay, we assume the charge includes the room and other services that come with the room. The same goes for ordering food and beverage. One assumes that the price of the food and beverage comes with the service. If one has to pay service charge, in layman terms it means that one has to pay for those who are involved in the preparation and service of the food and beverage, as well as the cleaning up after that. If all service industries opt for this argument, then what stops banks from implementing a service charge?
Over the years and with the development of the hospitality industry, countries have started to do away with the service charge model and this amount has been incorporated into the selling prices. As such bills/invoices will only show a fixed price, with an add-on of only GST or a similar tax, depending on the country. In Switzerland, all bills have a remark "Service Included".
Locally, various parties have tried to justify why service charge is necessary as it provides an incentive to employees to improve productivity and increase revenue as it has a direct impact on their remuneration. However from a personal view and from the industry myself and someone who was part of the service charge model in my early days, I beg to differ due to the following;
» The Employees Provident (EPF) contribution does NOT cover the service charge component and only the basic salary.
» Previously Socso deductions/contributions were also similar to that of EPF but the Act was amended to include service charge and has been implemented.
» Individuals under the service charge model have more difficulty in applying to financial institutions for loans as these institutions in general look at basic salary in applications rather than the gross salary unless it is a fixed allowance.
» Overtime is calculated based on the basic salary excluding service charge. Same for bonuses.
What is the way forward? Adopt the clean wage model. What is the clean wage? A fixed wage cannot be lower than the average gross take home salary of an employee over a minimum of the past 12 months for those under the service charge model.
I was very much involved in the implementation of the minimum wage for the hotel industry in 2013 in which the hotel industry obtained a deferment of 10 months due to the complexity of the wage structure with the service charge component. A fair number of hotels used the implementation of the minimum wage to convert to a clean wage system. The clean wage system is beneficial to both employers and employees in the long run. It has been adopted successfully in Singapore.
Malaysia has developed as well and it is time for the industry to change its mind set and it includes both the workforce and the employers. It is a tedious process, but if done meticulously all parties will see its benefits.
I had the privilege of some hotels sharing information with me on the benefits when implementing the clean wage during the minimum wage exercise.
There will be obstacles and teething problems just like the GST but this can be addressed along the way. One major stumbling block will be the establishments with collective agreements (7% of hotels) and this is where the relevant government agencies should mediate. The parties concerned should negotiate and come to an amicable situation.
It's time for change and the time may have come for the industry to move to a clean wage system.
So as not to disrupt the livelihood of those effected by the service charge saga, allow the industry to continue collecting the service charge until this is resolved within a specific period, say by Jan 1, 2016. Remember the minimum wage is also up for review and again there will be issues relating to service charge again.
Reginald T. Pereira
President and CEO
Aariana Hospitality International