Restaurant associations have challenged the Delhi High Court’s March 28 order prohibiting imposition of service charges -- typically in the range of 5-20% -- on top of the consumer’s pre-tax bill. The Delhi HC, and before that, several advisories by the Union government and several state governments, underlined the voluntary nature of such payment, made as a gratuity for services. The restaurant business doubling down on making it compulsory indicates a coercive approach.

At the heart of the matter are three issues. The first is consumer rights. A “compulsory” gratuity goes against the principle of basic fairness. Consumers, as individuals and even as a class, have no bargaining power against restaurants -- something that the Delhi HC took note of -- and there is little recourse for them when a service charge is made compulsory. The second issue is competition and free market principles. In an ideal free-market scenario, restaurants would be free to charge or not charge a fee for service and perhaps even use the latter status to their competitive advantage. However, with restaurant associations representing the bulk of the organised sector diner business, the legal challenge is, in spirit, a cartelisation around the charge. The third issue -- one that merits discussion outside the present debate -- is the payment of adequate salaries to restaurant staff. The restaurant associations argue that the compulsory service charge is central to agreements and settlements entered into with the staff. Salary agreements have to be made on the basis of the revenue the restaurants generate or expect to generate, not on the basis of passing on a part of the burden to the consumer through an extra charge. That is a problem that can be easily resolved by having menu prices reflect establishment costs rather than a coercive “gratuity” becoming the norm.

Restaurant associations have challenged the Delhi High Court’s March 28 order prohibiting imposition of service charges -- typically in the range of 5-20% -- on top of the consumer’s pre-tax bill. The Delhi HC, and before that, several advisories by the Union government and several state governments, underlined the voluntary nature of such payment, made as a gratuity for services. The restaurant business doubling down on making it compulsory indicates a coercive approach.

At the heart of the matter are three issues. The first is consumer rights. A “compulsory” gratuity goes against the principle of basic fairness. Consumers, as individuals and even as a class, have no bargaining power against restaurants -- something that the Delhi HC took note of -- and there is little recourse for them when a service charge is made compulsory. The second issue is competition and free market principles. In an ideal free-market scenario, restaurants would be free to charge or not charge a fee for service and perhaps even use the latter status to their competitive advantage. However, with restaurant associations representing the bulk of the organised sector diner business, the legal challenge is, in spirit, a cartelisation around the charge. The third issue -- one that merits discussion outside the present debate -- is the payment of adequate salaries to restaurant staff. The restaurant associations argue that the compulsory service charge is central to agreements and settlements entered into with the staff. Salary agreements have to be made on the basis of the revenue the restaurants generate or expect to generate, not on the basis of passing on a part of the burden to the consumer through an extra charge. That is a problem that can be easily resolved by having menu prices reflect establishment costs rather than a coercive “gratuity” becoming the norm.

Restaurants must rethink their stand.