Why service charges at restaurants should be scrapped

The government’s order on service charges at restaurants, making their payment a matter of discretion on the part of the consumer, is messy and should be withdrawn. What the order and much of the commentary on the subject fail to appreciate is the commercial logic behind the restaurant service charge. Does anyone expect a restaurant business not to recover employee cost from the consumer? Obviously not.

One option is to increase menu prices to cover the full cost of employee remuneration. The other is to build in an implicit variable component in restaurant staff compensation, one that depends on their collective efforts pulling in greater custom and a proportion of the turnover being distributed among the staff as variable pay.

In a system of levying a service charge on top of the cost of the food — which incorporates the rent, utility bills, the cost of producing the ambience that distinguishes the restaurant from others — this proportion is fixed at the service charge percentage rate. In a system of customers offering gratuities (tips) to reflect their appreciation, the proportion is variable, depending on consumer propensity to tip and fairness of the distribution of the collected gratuities among the entire staff including those at the backend.


The short point is that service charge/tip is not a bonus for the staff but a performance-linked component of their regular income. If the service charge is banned or made uncertain, as the government now has, the restaurant has no alternative but to raise menu prices to recover the full employee cost. This does not particularly help customers, particularly those who order takeaways and do not avail of on-premises service.

If at all the government wishes to meddle, it can cap the variable pay component in which the customer has no discretion, that is, in the service charge rate, while making it clear that customers are still expected to tip, these gratuities also forming a shareable pool for the staff, as another component of their variable pay. Competition for staff and custom should do the rest.