Restaurant patrons may soon see a “staff contribution” charge on their food and drinks bills. This is due to an interim order of the Delhi High Court on September 5 that, among other things, mandated that the “service charge” on bills be renamed a “staff contribution” at 3,300 restaurants and hotels.
The order and the litigation from which it stems bring into sharp relief the divide between restaurateurs and consumer rights advocates on the subject of a service charge. Restaurant associations argue that as part of their right to freedom of trade and business, they should be able to charge any amount of service charge they see fit. But consumer law experts advocate that a service charge be voluntary and not levied by default.
Litigation over service charge
The Delhi High Court judgment comes after a history of litigation over restaurants charging a service charge.
In July last year, the Central Consumer Protection Authority, a Union-government appointed body to oversee consumer rights, issued guidelines “to prevent unfair trade practices and protection of consumer interest with regard to levy of service charge in hotels and restaurants”. These guidelines, among other things, prescribed that restaurants could not automatically add a service charge to bills, collect it from customers under a different name or restrict their services depending on a service charge being paid.
These guidelines were challenged in the Delhi High Court by the two largest hospitality industry representatives in the country, the National Restaurant Association of India and the Federation of Hotel and Restaurant Associations of India.
The High Court put an interim stay on the guidelines later that month on the condition that restaurants prominently display on their menu and elsewhere the fact that they levy a mandatory service charge.
In this month’s hearing, the court was informed by the Federation of Hotel and Restaurant Associations that its members would agree to the service charge being redesignated as a staff contribution, as the court suggested earlier in the proceedings.
Consequently, in its interim order, the High Court directed members of the Federation of Hotel and Restaurant Associations to start using “staff contribution” instead of “service charge”. It also ordered that the amount charged by establishments could not exceed 10% of the total bill and that the federation’s member hotels and restaurants must highlight on their menus the fact that tipping was not necessary since a staff contribution was being paid.
No such direction was given to the National Restaurant Association, though. As a result, its members can continue to levy a service charge of any amount, pending the resolution of this case.
Freedom of business
Scroll spoke with representatives of both the National Restaurant Association of India and the Federation of Hotel and Restaurant Associations of India to understand why they wish to preserve the ability of their members to levy a service charge.
Riyaaz Amlani, President of the National Restaurant Association, described service charge as a “labour friendly mechanism” and an “internationally recognised best practice”.
“It allows our earnings to be shared evenly with all of our employees, including the backroom staff,” he said.
He added: “It should not be up to the government to decide our prices. That is part of the contract between the restaurant and the customer.”
Pradeep Shetty, Vice President of the Federation of Hotel and Restaurant Associations, agreed. “There shouldn’t be any government guidelines on how we manage our business,” he said.
Both Amlani and Shetty backed transparency in a service charge being levied.
“Surreptitiously charging anything in the bill is a malpractice,” said Amlani.
Said Shetty, “As long as the customer is informed in advance” of all charges, there is no problem of consumer rights being violated.
Amlani dismissed the concern that the term “service charge” may confuse customers. “Since there is no mention of ‘tax’ or ‘levy’ in the name, there is no room for ambiguity,” he said.
On the National Restaurant Association’ opposition to renaming “service charge” as “staff contribution”, he contended that “service charge” is a part of common parlance but that “staff contribution” gives the incorrect impression that the restaurant or hotel pay their staff only out of the money collected under that head.
Service charge should be voluntary: Consumer law experts
Consumer law specialists that Scroll spoke with stressed that customers should not be compelled to pay a service charge, especially if service at the restaurant is not up to their expectations.
Ashok R Patil, Vice-Chancellor at the National University of Study and Research in Law, Ranchi and an internationally-recognised expert on consumer law and practice, said that levying a service charge has no statutory backing. He referred to several recent cases in which District Consumer Disputes Redressal Commissions have held this to be an unfair trade practice.
Making a service charge compulsory is akin to forcing customers to pay tips, said Sushila, Associate Professor at the National Law University Delhi, where she is also Research Director, Centre for Study of Consumer Law & Policy and Project Director, Chair on Consumer Law.
“If a consumer is not happy with the service, they should not be charged for the bad service,” said Suresh Misra, Chair Professor (Consumer Affairs) and Coordinator, Centre for Consumer Studies at the Indian Institute of Public Administration.
He said that because of the High Court’s latest order, every restaurant will now compulsorily demand a 10% service charge.
Sushila underscored that customers cannot be considered to have given their informed consent if the menu states a certain price but the customer is billed more after service charge has been added. “The menu should provide the actual expenses so that there is clear information,” she said. “Customers have the right to know real prices up front.”
Misra questioned the need for service charge in the first place. “Food charges are inclusive of the service offered, so why charge for it separately?” he asked.
According to Patil, the Goods and Services Tax framework already covers service charges. Therefore, he said, it should not be charged separately.
Vipul Shukla, a Delhi-based lawyer with experience in consumer law matters, said, “Consumers don’t know whether the service charge they are paying is even being received completely by the staff.”
Misra agreed. “How do we know that this amount goes to employee welfare and is not being pocketed by the restaurant owner?” he said.
Patil pointed out that the Union government has previously flagged the problem of many restaurants not actually paying service charge collections to the staff.
Anshul Gupta, a Delhi-based lawyer and partner at law firm, ANG Partners, emphasised that it is the duty of restaurant owners to pay their staff well. “You can raise your prices for that but don’t put the onus on customers by charging ‘staff contribution’,” Gupta said.
Patil said that any unreasonable charge on consumers that they are forced to pay, irrespective of how good they considered the service to be, is an “unfair contract” under the Consumer Protection Act.
Gupta estimated that the customer ends up paying about 28% over the menu price at most restaurants due to the Goods and Services Taxes, in addition to the service charge. He called this “preposterous”.
It must be up to the customer to decide what level of service charge, if any, to pay, Shukla emphasised.
Sushila suggested that the customer should be specifically checked with if service charge should be added to their bill.