DISCLAIMER: This article does not create an attorney-client relationship between the author and the reader.  The answer of the author on the issue is just an expression of his general opinion based on Philippine law and hence does not constitute legal advice.

To recap, the hotels, restaurants, and similar establishments are allowed by law to collect service charge from customers.  In turn, the service charge by provision of law, must be distributed in full and equally to the covered workers.

There are two issues frequently raised when it comes to service charge.  Who are the covered workers entitled to receive share in the service charge? And is the share taxable?

R.A. 11360, an Act amending the provision of the Labor Code on service charge collected by hotels, restaurants, and similar establishments, provides “x x x All service charges collected by hotels, restaurants and similar establishments shall be distributed completely and equally among the covered workers except managerial employees x x x”

By the express prohibition of R.A. 11360, managers of hotels, restaurants, and similar establishments are excluded in the distribution of the service charge.  Who are then these covered workers entitled to receive as mentioned in R.A. 11360?

The revised Implementing Rules and Regulations (IRR) of Article 96 of the Labor Code as amended by R.A. 11360 (DOLE Department Order No. 242 Series of 2024) provides that those entitled to receive share in the distribution of service charge are covered employees which refers to all employees, except managerial employees, regardless of their position, designation, or employment status, and irrespective of the method by which their wages are paid.

At this point, we define “employee” within the contemplation of law to determine who are those covered by the IRR to receive share in the distribution.  Article 97 of the Labor Code defines “employee” as any individual employed by an employer.  Following this definition, it appears that only those non-managerial workers directly hired are entitled to receive share in the distribution of service charge because only them are considered employed by these hotels, restaurants, and similar establishments.

By implication, the agency-based workers are not entitled to receive because they are workers employed by the agencies or contractors unless they have been recruited and placed to perform activities which are directly related to the main business operation of these hotels, restaurants, and similar establishments in patent violation of the prohibition of law against labor-only contracting.   In that case, their deemed employers are not the agencies or the contractors but the hotels, restaurants, and similar establishments.  Hence, they are equally entitled to receive share in the distribution of the service charge.

On the second issue on whether the share in the service charge is taxable, the answer is in the affirmative.  It is taxable following this general principle in taxation.  “Unless there is a clear provision in law exempting service charge from income tax too plain to be mistaken, the doubt is always resolved liberally in favor of the government and strictly construed against the taxpayer following the life-blood doctrine that taxes are essential to the government for it to function and operate.”

(March 30, 2024)