Service Charges REF#6483

26 Sep 2023 | Tourism & Hospitality Issue Tackled

Last modified date: 26 Sep 2023

Issue Description

For certain client-facing professions, particularly in the tourism and hospitality sectors, non-regular remuneration constitutes a higher-than-average share of a worker’s income. Defined as tips, or service charge, this money is usually collected from clients on behalf of workers from company management, at the moment of charging clients with receipts, and then redistributed to workers.

Cambodian law has the following to say about the service charge.

Under Article 134 of the Labour Law, tips are remuneration made by clients to personnel of certain establishments such as hotels, restaurants, cafes, bar, and hair salons, and received by the employer as a percentage added to the client’s bill with a note “service charge”. If an employer chooses to collect such a charge, the tips must be collected by the employer and distributed in full to the personnel in contact with the clientele.

Also, the employer must clearly justify the receipt and the payment to his staff of the amount of tips (Article 135, Labour Law). The method of dividing tips and determining the categories of personnel who should receive them are established by the Customs of the occupation or, if not applicable, by a Prakas from the Ministry in charge of Labour (Article 136, Labour Law).

It is important to note that in Cambodia, employers are given the choice of whether to collect and distribute such service charge, meaning it is not mandatory. The Labour Law does not stipulate specifically on the percentage and the implementation of Service charge. Thus, it is applied based on the company’s discretion.

The private sector has adapted organically to this lack of regulatory oversight. Some companies have started offering service charge distribution to front line workers as an integrated benefit when recruiting new staff. In Cambodia, it is seen as attractive for such workers to be able to integrate the base salary with such extras. However, this system has limitations.

Firstly, the lack of clear legal guidance for collecting and distributing the service charge led to some companies abusing the system. In recent years, some Cambodian hospitality establishments have faced protests from their staff, who claimed the hotel management was collecting the service charge from clients but not distributing it back to workers. The staff went on strike. Management and worker representatives then worked together to define the terms of service charges and include them in collective bargaining agreements. These agreements are internal, non-compulsory documents regulating relations between employers and employees in economic sectors in the country. Based on bargaining agreement, employers must define service charge. Employers are free to implement it or not, at whatever terms they want, as long as they pay it fully to employees as stated in Article 134.

These incidents highlighted the first challenge of an unclear legal framework concerning the implementation of service charges.

Secondly, as there is no provision on how to do so, it has become customary for Cambodian tax authorities to interpret company tax records showing service charge collection as a voice of corporate income, meaning such budget lines not only are not tax deductible according to the General Department of Taxation, they also contribute to increasing a company’s tax liability. This means service charges are currently being double taxed in Cambodia, in contravention of established international practices.

Impact on business

The unclear regulatory framework around service charges raises two concerns.

Firstly, it contributes to lowering performance incentives for workers in the industry. When service charges are not distributed in a fair and transparent manner, workers are often demotivated and may stop providing good service to customers. This can ultimately lead to lower standards in the industry, which can have a negative impact on the country’s reputation and its ability to attract tourists. Evidence seems to suggest several compliant companies would be quite happy to collect and distribute service charges, since they have become an established practice and are considered to be a reward for hard work and good performance.

Furthermore, the lack of regulatory clarity on service charges can also lead to disputes between employers and employees. When workers feel that they are not being compensated fairly for their work, they may become dissatisfied and take unilateral measures, which can cause significant disruptions to the industry and the wider economy.

Recommendation

  • Clarify service charges’ regime.

We therefore respectfully recommend that the Royal Government of Cambodia clarify the implementation of service charge provisions, including by:

  • Defining the scope and percentage range of application of service charges, based on criteria including, possibly, workforce and revenue of the company that collects it. There is no need to define a single percentage value for companies to adhere to;
  • Ensuring service charges are not double taxed, and ensure they are 100% tax deductible for companies;
  • Clarifying which authority/body is responsible for inspecting venues to ensure a fair distribution of service charges among workers, possibly a specially-appointed inspection team from the Ministry of Labour and Vocational Training.

The expected benefits of such actions would be to ensure a fairer business environment, increase tax accountability of companies, add incentives for operators to distribute higher service charges to workers and, ultimately, encourage workers in the industry to be more productive and produce better client satisfaction.

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