Nepali Times
Economic Sense
Service charged


The service charge debate threatens to close down hotels again. This is part of a larger issue of labour legislation, and should not be seen in isolation.

In a country where politicians and bureaucrats levy a service charge for being the servants of the people, it is quite natural for the hotel industry to join the fray. After all, it is not called a "service industry" for nothing. The government and the hotel industry woke up at the last minute and have been able to postpone the threatened hotel strike for a while. But the big question is: have they really understood the issues?

Tipping is to be institutionalised through the levy of service charges in the hotel trade. Tipping is natural in Nepal. You learn to keep loose change in your pocket at all times. The pujari at the temple, the taxi driver, the guy who comes to read your electricity meter or allows you to pass the gate at customs, they all need to be greased to smooth the way. If hotel employees feel that the service charges they presently receive as gratuity should be fixed through a legal framework, then what is the problem with that?

The Nepal Telecommunication Corporation already levies a 10 percent service charge on their bills, but they don't distribute it among their employees. Is the NTC ready to part with 10 percent of its Rs 5 billion revenue? Levying a service charge is one thing, but sharing it with employees is quite other. Even in nations where a service charge is levied on hotel bills, the entire amount is not handed over to employees.

There has been no serious effort to understand what the hotel employees' long-standing demand means or what its implications are. The industry and the government only got their heads out of the sand when the workers' action committee gave them an ultimatum: Resolve the issue by 19 November, or we strike. Neither the government nor the hotel industry has done its homework to counter the well-researched issues raised by the team of labour unions. For the FNCCI, the fact that the Hotel Association Nepal (HAN) is not a member took precedence over the impact a hotel strike would have on the overall economy. HAN leaders were repeatedly asked about the impact of a strike on the four- and five-star segments. Clearly, the unions have been much better organised than anyone they've argued with.

The issue of a mandatory service charge is linked to the entire gamut of labour legislation in the service industry. Performance- and profit-linked bonuses are governed by legislation, but labour feels that lack of transparency in financial disclosures by hotel owners makes this system ineffective although Nepal's labour laws are radically socialist. Of course, strong labour unions constantly add to their list of demands, and so the managements are cornered and the legal recourse is always pro-labour. A service charge may therefore have to be a trade-off between an organised legal system of compensation, and constant bargaining and negotiations.

The additional service charges will not be passed on to customers, as they are always quoted the net rate. As the tourism sector is strongly competitive, hotel companies will have to absorb the extra cost. For a five-star hotel with revenues of Rs 600 million, the impact on profits would be very high. The profitability of hotels is already eroding, and their situation will only get worse. Employees should have incentives linked to profits, not revenue. Any payments dependent upon the appreciation of service received should be left to the personal judgement of customers, and not be forced on them. Further, service charges should be limited to areas linked to food and beverage. The hotel industry and the government should look at the entire spectrum of labour-related legislation in the hotel industry. The service charge debate is only a part of this larger issue, and should not be seen in isolation.

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(11 JAN 2013 - 17 JAN 2013)