Service Charge Mandatory from New Year

On New Year’s day, the law will make service charge a mandatory levy in the Maldives tourism sector.As many resorts and other tourism establishments prepare to implement the legal imposition, challenges are emerging in understanding what the law essentially says or what it precisely means.The difficulty is multiplied by the absence of rules and regulations which ought to provide flesh to the skeleton of law.The legal provision An amendment was brought to the Employment Act on 22 September 2020. Some of its provisions were staggered to take effect. One of the provisions that was parked for delayed effect was the one on service charge. The provision is scheduled to come to life on 1 January 2021.The relevant provision is s52 of the updated Employment Act. It substantially says the following:

1. Every service provided by businesses operating in the tourism industry shall levy a service charge in an amount not less than 10%.
2. The service charge collected shall be distributed equally among all employees of the employer and in accordance with the provisions of the section.
3. The service charge collected for the previous month shall be fully distributed by the end of the current month.
4. In the distribution of the service charge at any place (presumably a business outlet), there shall be no discrimination between staff involved in the provision of services by that place (presumably that business outlet).
5. Various services (provided as separate businesses) within a business shall for the purposes of the section be interpreted on an equal footing (probably meaning to say as “one whole” and therefore integral parts of the same business).
6. The term “all employees” is to mean all staff involved either directly or indirectly, by reason of their employment, in the provision of a service to a consumer.
7. An amount equivalent to 1% of the total collection made as service charge maybe retained by the employer as an administrative fee. An employer shall not at any time retain a sum larger than that 1%.
8. The employer shall maintain regular records for each month consisting of the: (i) total amount collected as service charge, (ii) number of employees to whom they were paid, (iii) amount accruing to each employee as service charge, and (iv) amount paid to each of them.
9. These records shall be submitted to the Labor Relations Authority and Maldives Inland Revenue Authority in accordance with regulations to be published by the Labor Relations Authority. They should be submitted within deadlines to be mentioned in those regulations.
10. If the Labor Relations Authority asks, the employer shall share those details with that authority, as and when a request is made by the authority.
11. The Labor Relations Authority is empowered to impose a financial penalty not exceeding MVR50,000 on an employer for defaulting either on regular maintenance of records, submission of those records to the two designated authorities, or refusing to share records as and when asked for them.
12. The Labor Relations Authority is equally empowered to impose a financial penalty not exceeding MVR100,000 on any business within the tourism industry which fails to levy the service charge or distributes it unequally between staff. The authority is mandated further to provide in its regulations the manner in which the fine would be imposed or if and how other actions may be sanctioned against a defaulting business.
13. MIRA is asked, based on income tax returns filed by various tourism sector businesses, to assist in verifying service charge related details of a business as and when such request is made by the Labor Relations Authority.

A parliamentary addition  The proposal to amend the employment law originally came from the government. However, the amending bill proposed by the government did not have the same flavor. The version that subsequently became law was re-written by parliament, in its review of the bill.The government draft did carry a provision on service charge but left the decision of levying a charge to the discretion of the employer and provided provisions to deal with a situation where it is ultimately collected.In doing so, it simply said that if an employer levies a service charge from a consumer the proceeds must be distributed equally subject to certain exceptions specified in the section.The section provided a few exceptions: senior management may be exempted from payment of service charge; the employer may exercise its discretion over days the employees were absent from work, reporting late to work and the like and may make an appropriate reduction in the amount of service charge paid to those employees.The erstwhile practiceThe tourism establishments have developed and sustained a certain ecosystem of their own. The senior staff are generally paid well and for that reason are usually excluded from being supplemented by a service charge distribution. The rank and file are not paid a healthy salary but are presumed to have a decent take home when supplemented by service charge distributions.The diving school, water sports center, spa and jewelry shop are usually outsourced to third party contractors often on a fixed rental basis or a revenue sharing model. The security and recruitment are also often handled by independent contractors for a fee.Often almost all tourism establishments maintain a storefront presence in Male’. Sometimes exclusive to a property or sometimes in partnership with another property. The officers working from those offices attend to and serve the requirements of the properties in Male’. The staff are generally identified as resort staff but are paid comparatively less in service charge as the bulk of the collection is paid to those working on the frontline (attending to guests).Some resorts operated by international or regional operators (often having more than one resort property in the Maldives) may have a dedicated corporate set up either working remotely or attached to the storefront office in Male’ with a focus on sales and marketing and revenue management functions. The corporate staff are for practical reasons considered as resort staff and are therefore included in the distributions.Delay in regulationsThe law came into effect on 22 September 2020. It required the rules and regulations to be created within 6 months – the long stop date being 21 March 2021. The rules remain under development.It is unfortunate that the legal provision is coming into effect without the benefit of rules and regulations to provide the context of the legal and regulatory framework envisaged by the legal requirement.Lawyers, accountants and other consultants advising tourism establishments on the subject are hamstrung by the absence of regulations (and therefore much needed detail) to aid in their advice to clients on the effective implementation of this mandatory requirement – at least from the perspective of regulatory compliance.The challenge is multiplied by the fact that certain elements of the provision need coherence and clarity to assess the true ambit of the provision or the scope of its application.Just by way of an example, all tour operator contracts are settled way before a season arrives – generally 6 months to a year in advance. When service charge becomes mandatory mid season, what would happen to existing contracts and settled rates, and should the new cost be absorbed as business expense?In another example, some general managers and other senior or executive staff on resorts are compensated rather handsomely. Should the more mortal staff on lesser pay slips share their distributions in equal measure with the blessed as well? Should the executive staff be considered within the meaning of all staff of the employer for non-discriminatory and equal distribution of the distributions?Should the service charge collected by outsourced outlets such as dive centers, spas, water sports facilities and the like share their distributions with the resort employees? The question may be considered answered when the test of all ‘employees’ is applied since those outlets may not necessary have staff recruited directly by the resort and may well be direct recruits of these outlets. However, this conclusion becomes a little unsettling when the other provision on considering all services as one whole of the same business is taken in to account.It is obvious that regulations to come may not be able to override the express provisions of the law. However, it is quite possible for regulations (as and when they come) to fill the current gaps in law by providing sufficient detail clarity and coherence.In conclusion, until such clarity is achieved, the tourism establishments affected by this new policy may have to advisedly pursue a cautious practice that is as near to law as practicable.Note: The summary of the legal provision is a functional translation to capture its essence. Words in parenthesis are our own. Words in bold are to identify key messages.   By MN