Service Charge: Its Definition and Types


Key Takeaway:

  • Service charge is a predetermined amount added to a customer s bill for the service provided by a business establishment.
  • There are three types of service charges: Automatic, which is added to every customer s bill; Compulsory, which is a pre-stated amount charged for groups larger than 6; and Discretionary, which allows customers to decide whether or not they want to provide an extra service charge on top of their bill.
  • The main differences between service charge and tip are the legal obligations and payment distribution. Service charge is an obligatory payment required by the establishment and is subject to tax, while tips are voluntary payments made by customers directly to the service staff and are not taxed as income.
  • Service charge is company revenue, and may not necessarily go to the service staff. It can be used to cover overhead expenses, business costs, and may be distributed at the discretion of the establishment s management.
  • Service charge is taxable and it is important for consumers to take note that paying for service charge does not guarantee that the amount paid goes directly to the staff who provided the service.

Are you unsure about the service charge you receive when dining out? This article will provide a comprehensive understanding of service charge, the different types, and why it's not a tip. You'll be equipped with the knowledge of service fees and why not all the money is kept by your server.

Service Charge Definition

In the hospitality industry, a mandatory fee imposed by an establishment for services rendered to the customer, is known as a compulsory charge. Customers may confuse this as a gratuity, but the establishment usually retains a portion or the entirety of the fee as revenue, and it's not always distributed amongst the staff.

When a service charge is imposed, it replaces the discretionary act of tipping. Although this reinforces the quality of service, customers may feel restricted in their ability to reward exceptional service or punish a poor dining experience.

It's important to note that service charges aren't regulated by law and can vary in percentage or flat rate levels based on the establishment, time of day, group size, or dining category. Hotel charges can also include amenities, cleaning fees, or resort fees and are often legally binding.

Many establishments include information about the charge, on their menu or point of sale, while others disclose the fee only upon payment. Communication is key, and customers should always inquire about the service charge to avoid any misunderstandings.

In one instance, a customer dining at a restaurant learned of a 20% mandatory service charge which was not mentioned when the reservation was made or on the menu. The customer disputed the charge with management as they felt the service did not live up to the added fee. The establishment, however, defended the charge and did not make any adjustments. It's important to be aware of the potential for service charges and to review all terms and policies before dining out.

Types of Service Charges

In the world of hospitality, various forms of charges are levied for services provided. Here are some different forms of fees and charges that are commonly seen in service-oriented businesses.

  • Automatic service charge - An amount that is added to the customer s bill for the services provided by the staff such as waiters, cleaners, and other hospitality staff. This fee may be a fixed or variable amount and is generally non-negotiable.
  • Incidental service charge - An additional fee that may be levied by the business for incidental expenses such as printing a receipt, packing a parcel, or other small services rendered.
  • Mandatory service charge - An amount that is mandatory and usually non-negotiable. This is a fee that is typically added to the total bill and is linked to a specific occasion or event.
  • Optional service charge - This is a fee that is not mandatory and is generally at the discretion of the customer. This fee is usually added to the customer s bill and may include the tip for the staff, depending on the establishment s policy.

It s worth noting that these charges are distinct from tipping, which is a gratuity given by the customer on top of the bill amount for good service. Some businesses may add a service charge that may be mistaken as a tip, but it s important to understand that the charge is not a substitute for tipping. Instead, it is a fee that is added to the customer s bill for the various services provided.

In some regions, such as the UK, it is mandatory for hospitality businesses to make customers aware of any automatic or mandatory service charges. It is important to read the fine print when offered any service or package deal to understand these charges more fully.

A survey by payments provider Square showed that diners in the US left an average tip of 16% of the total bill.

Differences between Service Charge and Tip

When it comes to paying your restaurant bill, it's essential to understand the Differences between Service Charge and Tip. Service charge is a fee added to your bill by the restaurant, whereas a tip is an amount paid directly by a customer to show appreciation for good service.

To illustrate the differences, consider the following table:

Service ChargeTipDefinitionFee added by the restaurantAmount paid directly by customerAmountFixed percentage of the billDiscretionary, usually 15-20% of the billDistributionTypically pooled among employeesGiven directly to the serverTaxationSubject to sales taxExempt from sales taxControlRestaurant decides how to useCustomer has control over giving amount

It's important to note that service charges are not considered tips and are not distributed to servers directly. Additionally, service charges are subject to sales tax, whereas a tip is not.

Another key detail to note is that while service charges are added to the bill automatically, customers have control over the amount they give for a tip.

According to a survey conducted by the National Restaurant Association, in 2019, 78% of restaurant customers favored tipping over a service charge.

Understanding the differences between service charges and tips is crucial to providing fair compensation to restaurant employees and ensuring a positive dining experience for everyone involved.

Reasons Why Service Charge is Not a Tip

Service Charge: Understanding the Difference between Service Charge and Tip

The term "Service Charge" is often used interchangeably with a tip, but there are important differences between the two. First, service charges are mandatory fees added to a customer's bill by a business, whereas tips are voluntary payments made by a customer in recognition of good service. Second, service charges are usually distributed among employees, such as waitstaff and bartenders, whereas tips are typically received by individual employees.

So, why is it not a tip? One reason is that businesses are required to pay taxes on service charges, whereas tips are the personal property of the employee who receives them. Additionally, service charges do not necessarily go directly to the employee who provided the service, and there is no expectation that the service charge will be divided among the staff who provided the service.

It is important for customers to understand the difference between service charges and tips, as it can affect how they choose to compensate their server. Some customers may choose to tip on top of a service charge if they believe it was well-deserved, while others may choose not to tip at all if they believe the service charge was sufficient.

In the past, some businesses have been accused of misleading customers by including service charges on their bills and then not distributing the money to their employees. This has led to legal action in some cases, as customers have claimed that they were deceived into paying a mandatory fee that did not go towards the service they received.

Five Facts About Service Charge Definition, Types, and Why It's Not a Tip:

  • ✅ A service charge is a fee added to a customer's total bill to compensate for the services rendered. (Source: Investopedia)
  • ✅ Service charges are common in industries like hospitality, food service, and event planning. (Source: The Balance Small Business)
  • ✅ Service charge is different from a tip, which is discretionary, whereas a service charge is mandatory. (Source: The New York Times)
  • ✅ While tips go directly to the service staff, service charges may be split among the entire staff or go to the business owner. (Source: US News & World Report)
  • ✅ Some states in the US require businesses to clearly disclose the percentage and distribution of any service charges added to a customer's bill. (Source: National Restaurant Association)

FAQs about Service Charge Definition, Types, And Why It'S Not A Tip

What is a service charge?

A service charge is a fee that is added to a customer's bill to cover the cost of the service. It is often added to bills in restaurants and hotels and can vary in amount.

What are the types of service charges?

There are two types of service charges: mandatory and discretionary. Mandatory service charges are added to the bill and are non-negotiable. Discretionary service charges are at the discretion of the customer and are optional.

Why is a service charge not the same as a tip?

A service charge is not the same as a tip because it is not optional. It is a fixed fee that the establishment adds to the customer's bill to compensate for the service provided. A tip, on the other hand, is a voluntary payment made by the customer.

Why do some establishments have a service charge?

Establishments have a service charge to cover the cost of providing service to customers. This includes paying for staff, training, and other related expenses.

Is it legal for an establishment to charge both a service charge and a tip?

Yes, it is legal for an establishment to charge both a service charge and a tip. However, if the service charge is mandatory, the establishment must clearly disclose the charge to customers.

Can customers dispute a service charge?

Customers can dispute a service charge if they believe it was not properly disclosed or if they did not receive adequate service. However, discretionary service charges cannot be disputed as they are optional.