Tipping Point

Last week, 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. The guidelines stated that collection of service charge as a pre-condition to placing an order of food and beverages amounts to a restrictive trade practice as per Section 2 (41) of the Consumer Protection Act, 2019.

By virtue of Article 226 of the Constitution, the application of an order passed by the Delhi High Court ought to only be confined to the national capital territory (NCT) of Delhi. However, in view of the decision passed by the Supreme Court in Kusum Ingots and Alloys Ltd. v. Union of India (2004), any order passed by a High Court on the constitutionality of a central legislation, will have effect throughout the country. The Consumer Protection Act, being an enactment of the Parliament, it is safe to say that the order clears the way for hotels & restaurants all across the country to restore their practice of levying a service charge from their customers.

The practice of levying a service charge has been followed by the hospitality industry since independence. The first formal validation of levying service charge came in 1958, when the Hotel Standards and Rate Structure Committee under the chairmanship of Dewan Chaman Lal recommended that there be a uniform service charge of 10% on the customer’s bill throughout India. The committee condemned the practice of solicitation of tips calling it injurious to the dignity of the worker and causing harassment to the customer. It further called for the introduction of a comprehensive legislation, which would provide a minimum-wage structure, uniform rate of service charge and most importantly, the utilization and apportionment of the service charge for the benefit of the staff. The report emphasized the need for regulating the working conditions of the unskilled and semi-skilled staff working at hotels and restaurants and suggested that a portion of the service charge so collected, may be utilized to provide benefits such as provident funds, pensions and life insurance.

Thereafter in 1964, a Wage Board was constituted by the Chief Commissioner, Delhi which had accepted the practice of levying a service charge ranging between 5% to 10% on customer’s bills. It even provided for apportionment of the service charge collected, of which 45% was to be allocated for the staff working at the establishment.

Many decades and recommendations later, there still exists no legislative framework regulating the imposition and apportionment of service charge in India. That being said, the practice of levying service charge has been upheld by various decisions of the Supreme Court of India as well the National Consumer Disputes Redressal Commission. The National Restaurants Association of India argued that prohibiting hotels and restaurants from levying service charge, would lead to inequitable distribution of tips as the same are only likely to be pocketed by the staff which come into contact with the customer, leaving the back-end workers high and dry. This argument is inspired from the observations made by the Supreme Court in Wenger & Company and others vs. Their Workmen (1963) which deprecated the practice of tipping as it was not only a nuisance for the customer but was used by the management an excuse for justifying low-wages.

Notwithstanding the lack of uniformity in its application (for want of a legal framework), the question still arises - how did a longstanding practice of levying service charge suddenly become ‘unfair’ and ‘restrictive’?

Service charge on food bills is a regular feature in countries such as the UK, USA and Singapore. This is despite the fact that an establishment in the US spends over 37% of its total overheads on staff whereas in India, it ranges between 10% to 15%. In fact, in the US, some states allow a ‘tip credit’ to count as a part of the Federal Minimum Wage. Similarly in the UK, all staff in licensed hotels and restaurants are entitled to a statutory minimum wage, unlike in India, where the sector is largely unorganized and most workers a barely get their basic pay, let alone any other employment benefits.

Being only an interim order, the Delhi High Court has flagged and is expected to address the issue of whether the issue of levy of service charge comes within the ambit of ‘unfair trade practice’ under Section 2 (47) of the Consumer Protection Act. In the absence of a formal legislation regulating the concept, the issue relating to the application of service charge might be at the risk of being viewed from the lens of a consumer and not that of a worker. While the associations of restaurants and hotels make their case before the court, one can only hope that the Court, while finally deciding this issue, gives an audience to the concerns of the workers community and hopefully compel our lawmakers to come to their rescue.

By - Arush Khanna