LET’S be realistic. Abolishing the service charge is not going to bring prices down, and if consumers did save any money at all, it would largely be at the expense of workers in the service industry who are already poorly paid.

So, why is service charge suddenly an issue for consumers when it has been imposed by the industry for over 50 years? After all, the net impact of the Goods and Services Tax (GST) on service charges will only increase restaurant and hotel bills by a mere 0.6% at most.

For starters, the issue has been politicised by both sides of the political divide although service charge is not regulated by the government and has never been. In fact, without proper legislation in place, the authorities have little say in the matter.

“Service charge is a private arrangement between employers and employees, and it should be left that way. The actual impact of GST is small — 0.6%,” says Datuk Phillip Siew, chairman of the Oriental Group of Restaurants.

Nonetheless, the hue and cry about the matter points to deep-rooted problems in the service industry and consumer mindset — that service charge is just as much a labour issue as it is a consumer problem.

“You have to understand why service charge is imposed in the first place — it began with hotels over 50 years ago. Malaysians do not have a tipping culture and the service charge was a way for management to incentivise its staff. It is part of their remuneration. Since then, it has become standard practice in the hotel industry, and many restaurants have adopted it as well,” says Malaysian Association of Hotels president Cheah Swee Hee.

Unfortunately, many consumers do not view the fee as a form of profit-sharing between business owners and their staff but as a way to increase profits at their expense.

This is not helped by the fact that many customers see restaurants staffed by foreigners who are likely earning minimum wages due to their poor command of English and Bahasa Malaysia.

There are businesses that adopt good practices that reward employees with the service charge on top of their basic salary. At the same time, there are also businesses that use the service charge to defray their basic wage costs.

“Service charge means that if the restaurant does well, its employees will be rewarded, so they work harder and the customer has a better experience,” says Siew.

He points out that during peak months like Chinese New Year, some of his staff can get up to RM3,000 each from the service charge distribution.

Siew and Cheah, however, acknowledge that there is no stopping businesses from abusing the service charge. As long as it goes to paying their employees’ wages, even if it is just the basic pay, these businesses have not done anything wrong.

According to Cheah, the Ministry of Human Resources, following discussions with industry players, has allowed the service charge to be used by businesses to help meet the new minimum wage requirement.

In a nutshell, employees who were paid below RM900 saw their basic pay increased to that level in exchange for an equivalent reduction in incentives.

Meanwhile, many consumers are challenging the service charge at restaurants following statements from the government alluding that consumers do not have to pay the 10% fee and that businesses should not charge it.

Recall that Deputy Finance Minister Datuk Seri Ahmad Maslan opened the Pandora’s box when he told the public that service charge is not compulsory and need not be paid if service is not satisfactory, “as it is a tip”.

DAP’s Member of Parliament for Tanjong Ng Wei Aik made matters worse when he publicly declined to pay the 10% service charge at a café after a meal with reporters and even urged other patrons to do the same.

Many restaurants, already under huge cost pressure and facing slowing business, have opted to quietly remove the service charge from their bills altogether, although most had to raise prices to offset the effect.

Other eateries have taken a bolder step — equipping themselves with signs informing customers that “if you refuse to pay the service charge, we reserve the right not to serve you” — which resulted in a social media backlash.

Interestingly, with GST in place, separating the service charge on the bill may no longer matter. The government service tax of 6% that GST replaced, previously applied to the selling price listed, but not service charges that were deemed as a payment from the customer to the staff. However, GST applies to service charges since incentives are recognised as taxable supply.

But even if service charges disappear from the bill, restaurants will likely have to raise prices by the same quantum as only an estimated 5% of eateries boast a profit margin of more than 10%, says Siew.

Furthermore, many employers are contractually bound to distribute service charges collected among eligible staff even if there is no collective agreement, says Cheah.

One way to increase customer confidence in how businesses are handling service charges is for the government to regulate it — ensuring employers distribute the collection to their staff as incentives.

That said, Siew and Cheah are opposed to government regulation on service charges, preferring to leave it to market forces.

“If I offer my staff good incentives, I will attract the best people in the industry. Customers are able to recognise this and the restaurant will do well and everybody benefits,” says Siew.

Likewise, if a restaurant does not pay well and does not incentivise its staff, it cannot retain good workers and the quality of the food and service goes down. Malaysians are spoilt for choice when it comes to food and they can always take their business elsewhere, Siew says, adding that such eateries will eventually go out of business.

Nonetheless, the industry is still struggling to attract local workers, and is forced to rely on foreigners. In a way, it comes back to the consumers who are not willing to pay more for better service. But as Malaysia moves towards becoming a high income nation, the wages of the service workers will also have to go up.

Coupled with the highly competitive nature of the food and beverage business, consumers will likely see a shift towards more no-frills self-service eateries, not unlike in developed countries. Meanwhile, table service will become an increasingly expensive treat to enjoy.

Until then, perhaps it is best to appreciate the 24-hour table service that is available at the nearest mamak stall that does not even charge extra for that service.

This article first appeared in The Edge Malaysia Weekly, on April 20 - 26, 2015.

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