Workforce
Service charge
What Service charge means
A mandatory, fixed percentage added to a guest's bill for food, beverage, or banquet services, collected by the hotel and redistributed to front-of-house and back-of-house service staff to supplement base compensation.
Formula
Total Service Charge Amount = Gross Eligible Sales × Service Charge Percentage
How it is used
Operators use service charges to stabilize team wages, reduce turnover, and ensure equitable compensation across non-tipped departments like banquet setup or culinary teams. Unlike voluntary gratuities, service charges are controlled by management according to local labor laws, union contracts, and employment agreements. Revenue managers must account for these charges when structuring group catering minimums and banquet event orders (BEOs), as high administrative retainage by the hotel can trigger legal exposure or damage staff retention.
Worked example
A hotel hosts a corporate banquet generating $25,000 in food and beverage revenue with a mandatory 22% service charge. The total service charge collected is $5,500 ($25,000 × 0.22). If the property's policy retains 15% ($825) for administrative expenses, the remaining $4,675 is distributed to the banquet service team based on hours worked.
Common mistake
Misclassifying a service charge as a tip can lead to severe wage-and-hour compliance penalties if management retains a portion of funds that state or local law strictly reserves for hourly staff.
Service charge in our reporting
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