The industry escaped regulation of tips and service charges just a few years ago, but the issue has been back in the headlines over the summer, with accusations of operators apparently abusing the tips system by automatically keeping service charges, or making deductions when tips are paid by credit card – rather than passing them in full to staff. One example cited is Pizza Express taking 8% of tips. On the other hand Cote Brasserie uses its 12.5% service charge to pay staff over £1 per hour in excess of the national minimum wage, in addition to providing other staff benefits.
The Business Secretary, Sajid Javid, has now launched an investigation into how restaurants treat tips left by customers, following which the Government will consider whether to impose a limit on the proportion of tips that restaurants can keep for administrative costs.
So what is legal and what is good practice?
Distribution of tips – the law
Whilst an unfair tip system is likely to de-motivate staff and damage your reputation with customers operators should also be aware of what is legal and what isn’t.
Cash tips given directly to staff belong to those staff. Some operators ask staff to pool cash tips but you cannot insist on this or discipline a member of staff who refuses to hand over or share cash tips.
Non-cash tips/discretionary service charges
Non-cash tips and discretionary service charges belong to the restaurant and there is no legal obligation to pass these on to staff. Employers may deduct amounts from non-cash tips and discretionary service charges to cover administrative expenses, for example, payroll costs, breakages, till shortages etc. Time will tell whether as a result of the investigation by the Government a cap is imposed on the amount that can be deducted by employers to cover administrative expenses.
National Minimum Wage
On 1 October 2009 the law was changed to make it clear that service charges, tips, gratuities and cover charges paid to a worker do not count towards the national minimum wage or national living wage. This applies to all tips whether paid in cash or by card and whether given direct to the worker or paid through payroll. All workers must receive the national living/minimum wage with tips paid on top. The National Minimum Wage is currently £6.95 per hour for those aged 21-24. The National Living Wage for those over 25 is £7.20 per hour.
Taxation of tips
How tips and service charges are taxed will depend on whether they are compulsory or not, and whether they are given directly to staff by customers or distributed by you as employer or through a Tronc system. In brief, taxation of tips is as follows:
Compulsory service charge If you impose a compulsory service charge then you must deduct PAYE and Class 1 NICs even if this money is then distributed through a Tronc (see below).
Tips given direct to staff If one of your waitresses or barmen is given a cash tip directly by a customer and they are allowed to keep this then you do not need to make any deductions from this money. There is no NIC payable and it is the employee’s responsibility to declare income received in this way to HMRC and to pay the tax due.
Tips distributed by you If you share out tips collected by staff or tips given to you voluntarily by customers either in cash or added to a credit card payment then you, as employer, are required to deduct PAYE and NICs before you distribute money to staff.
Tips distributed via a Tronc system A Tronc is an arrangement used to pool and distribute tips, run independently of the employer by a Troncmaster and the system is used extensively throughout the catering industry. PAYE is due on any gratuities distributed and the Troncmaster is responsible for calculating and deducting this. However, NICs are only due on payments from the Tronc if the employer directly or indirectly allocates the payments.
HMRC Guidance HMRC Guidance E24 covers “Tips, Gratuities, Service Charges and Troncs”. It sets out clear principles and rules for operating a Tronc account and includes many helpful examples and flowcharts.
You should check that your Tronc is operated in accordance with this guidance. You should also check that your employment contracts are properly drafted to ensure that the NIC exemption will apply i.e. there must be no contractual entitlement to tips or a minimum level of tips.
Voluntary code and transparency
Customers quite rightly like to know what is going to happen to the tip or service charge that they leave. In a bid to ward off legislation on the use and distribution of tips the Department for Business, Innovation and Skills published a voluntary code of practice in 2009 which urges operators to give customers and workers information on how they distribute tips so that customers can make an informed choice before leaving a tip. The Code (which can be accessed here) applies to all hotels, restaurants, bars, gambling and betting outlets.
The Code states that businesses should:
- clearly display their policy relating to mandatory and discretionary service charges and tips. This should cover whether service charges are discretionary or mandatory; whether an admin fee is deducted to cover credit card and banking charges, whether cash and card tips are treated differently and how the money is shared between the business and the workers; and
- have a process in place to deal with information requests from customers.
Information should be available before a customer decides whether to leave a tip or service charge – so it could be printed on the menu, on a wall notice, on the bill or inserted into the bill folder. Workers should also know where to direct customers to the businesses’ full written policy on tips.
The code sets out some useful examples of acceptable ways to distribute discretionary service charges and cash tips.
The Code states that:
- workers should understand the businesses’ policy on service charges and tips, be able to confidently explain it to customers and know where to direct them for further information. Workers will need to know how much is deducted by the business and for what (e.g breakages, no shows etc) and whether a tronc system operates; and
- workers should be fully informed about how tips and service charges are distributed and any deductions that are made;
- businesses should seek to reach agreement with workers on any changes in policy.
Information should be given to workers in a written statement and should cover the position during holidays, sick leave etc and on national insurance.
BHA Code of Practice
The BHA has also published a short code of practice for restaurants covering the distribution of tips and service charges.
The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.