Look at your last restaurant receipt. You may have seen a line marked "Service Charge — 10%." But where does that money actually go? Is it a tip for the waiter? Is it part of the restaurant's revenue? Or does the law require it to be distributed to employees?

The answer matters. Under Philippine labor law, a service charge is different from a voluntary tip. And once a covered establishment collects a service charge, the law requires the amount collected to be distributed completely and equally among covered employees, subject to the rules on who is covered and how the distribution is made.

The Law: 100% of the Service Charge Goes to Covered Employees

Republic Act No. 11360 amended Article 96 of the Labor Code in 2019. Before the amendment, the law followed an 85/15 arrangement, under which 85% of service charges went to covered employees while the remaining 15% could be retained by management for losses and breakages, among other purposes allowed by the law.

RA 11360 changed that rule. Today, the service charges collected by covered establishments must be distributed completely and equally among covered employees, except managerial employees. The employer does not have a share that it may simply retain for business expenses, shortages, breakages, or other operating costs.

The current implementing rules are found in DOLE Department Order No. 242-24, which superseded the earlier Department Order No. 206-19. The revised rules also broadened the coverage of employees entitled to participate in the distribution.

What Does "Equally" Mean?

"Equally" does not necessarily mean that every covered employee receives exactly the same peso amount. The service charge pool is distributed based on the actual hours or days of work or service rendered by the covered employees.

The distribution must be made at least twice a month, at intervals not exceeding sixteen days. In other words, service-charge distribution is not an annual bonus that management can release whenever it chooses. It is a recurring employee entitlement subject to a prescribed distribution schedule.

Who's Covered — and Who Isn't?

The current rules cover employees of the establishment except managerial employees. This is broader than simply saying "rank-and-file employees." The revised rules removed the previous requirement that the employee must be directly employed by the establishment.

That means the coverage can include non-regular employees and workers deployed by contractors, subject to the requirements of the implementing rules. A restaurant cannot automatically exclude a worker from the service-charge distribution merely because the worker is not a regular employee or is deployed through a contractor.

Managerial employees are excluded. The test, however, is not merely the employee's job title. A managerial employee is one who is vested with the powers and prerogatives to lay down and execute management policies or to hire, transfer, suspend, lay off, recall, discharge, assign, or discipline employees, or effectively recommend such managerial actions, subject to the statutory definition.

There is also an important qualification. If managerial employees were already receiving a share in service charges as an existing benefit, the principle of non-diminution of benefits may prevent the employer from simply withdrawing that benefit because of the revised rules.

What Employers Cannot Do With the Service Charge

Several common practices can create legal problems. An establishment cannot retain part of the service charge as though the old 85/15 arrangement were still in effect. It also cannot reduce the amount available for distribution by treating the service-charge pool as a fund for business losses, breakages, shortages, or other operating expenses.

The distribution also cannot simply be based on management's personal preference. The rules provide a basis for distribution tied to the actual hours or days of work or service rendered. A system that gives larger shares to favored employees without a lawful basis can therefore raise compliance issues.

Service Charge Is Not a Substitute for Minimum Wage

Another important distinction is between service charges and wages. An employer cannot use an employee's share in service charges to satisfy its obligation to pay the applicable minimum wage. RA 11360 expressly provides that service charges paid to covered employees shall not be considered in determining an employer's compliance with an increased minimum wage arising from a law or wage order.

And if an establishment later abolishes or withdraws the collection of service charges, the employees' existing share cannot simply disappear. Under the implementing rules, the employee's share is considered integrated into wages, using the employee's average monthly share for the twelve months immediately preceding the abolition or withdrawal of the service charge.

But What About Tips?

A tip is different from a service charge. A tip is ordinarily a voluntary amount given by a customer in recognition of service. A service charge, on the other hand, is an amount collected by the establishment and is specifically regulated by Article 96 of the Labor Code and its implementing rules.

The distinction matters because the legal treatment is not automatically the same. An establishment should not assume that calling an amount a "tip," "service fee," or something similar changes its legal character. The substance of the arrangement and the applicable rules matter more than the label printed on the receipt.

What Employees Can Do If the Distribution Is Wrong

If an employee believes that service charges are being withheld, delayed, improperly reduced, or distributed contrary to the applicable rules, keeping records can be important. Useful documents may include payslips, schedules, time records, service-charge distribution statements, employment records, and other documents showing the employee's actual hours or days of work.

The concern may first be raised through the employer's grievance process. If it remains unresolved, the employee may seek assistance through the Department of Labor and Employment's Single Entry Approach (SEnA), which provides a conciliation-mediation mechanism for labor and employment disputes. Depending on the nature of the issue, the appropriate DOLE or labor dispute-resolution process may then be pursued.

The Bottom Line

A service charge is not simply another source of restaurant revenue, nor is it the same thing as a customer's voluntary tip. Once a covered establishment collects a service charge, Article 96 of the Labor Code and the current implementing rules require the amount to be distributed completely and equally among covered employees, subject to the rules on coverage and distribution.

For employers, the practical lesson is straightforward: do not treat the service-charge pool as company money. Have a clear and documented distribution system, identify who is legally covered, keep accurate records of hours or days worked, and make distributions within the required periods.

For employees, the important point is equally simple: a service charge is not a discretionary bonus that management may distribute whenever it chooses. It is an employee entitlement governed by law.