Tripping up over tips

Posted by Matthew Smith on

Following high-profile media attention earlier this year, the government is reviewing practices on the distribution of gratuities within the hospitality sector.  How much of your customers’ tips are you passing on to your staff?  Have you been caught up in the adverse publicity, or wish to avoid future headlines, and are now reconsidering your practices?   Do you want to influence the debate? If so, the deadline for responses to the Department for Business Innovation and Skills (BIS) publication Tips, gratuities, cover and service charge: call for evidence, issued on 30 August is 10 November 2015. This is the first step of an investigation into how restaurants treat tips, gratuities and service charges left by customers.

The call for evidence comes after concerns were raised regarding the treatment of tips in the hospitality sector, particularly in relation to the percentage of each payment that goes directly to the employee.  The investigation will gather information on tipping and look at whether the government should intervene to ensure greater transparency in the current practices of employers regarding the handling of gratuities. 

 Business Secretary Sajid Navid said that the government wanted a "fair deal" on pay for working people and that this included "taking action on tipping abuse".

 At present, tips paid in cash to the employee belong to the employee, whereas tips paid by card are the property of the employer, and the handling of these is governed by any existing agreement between the employer and employee. 

 There is no obligation on employers under the national minimum wage legislation to ensure that employees receive the full value of any tips paid by the customers they serve. While a voluntary Code of Practice has been in place since 2009 (the Code), overseen by the British Hospitality Association, restaurants can choose to ignore it.  However, since 1 October 2009, employers are not able to use tips towards their obligation to pay the national minimum wage. 

 The Code calls for transparency from businesses regarding the taking and allocation of any service charges, tips, gratuities or cover charges. In setting out best practice principles, the Code recommends that businesses have a process in place to deal with requests from customers about how, and to whom, all service charges are distributed, and the level and purpose of any deductions. 

 The BIS investigation has been launched against the backdrop of recent public protests against the alleged behaviour of several large restaurant chains in the UK in which the restaurants were accused of deducting administration fees of between 8-10% from service charges paid by card in their branches. 

This has led to a focus on the running of the tronc system – the method used to process and distribute card tips through the payroll.  Whether as a result of the spotlight on these issues or otherwise, some restaurants have since changed their policy so that (for example) tips made by card will now be fully distributed among restaurant staff according to a formula agreed by its tronc committee, or they have stopped deducting an administration fee from tips paid by card.  

A different practice was reportedly being adopted by other restaurant chains. This included an alleged requirement that staff pay back between 2-5.5% of all table sales to their employer. This meant that the waiting staff would have to pay £20-55 out of their card tips for every £1000 of food and drinks sold.  This fixed figure did not reflect how much a waiter took in tips and (it was suggested) could result in an employee’s entire night’s gratuities being used to pay the required amount. Changes in policies of this sort have recently been announced by some of those involved. 

The government will examine the evidence received before deciding whether any measures are necessary to ensure fair and transparent practices in relation to tips, gratuities, cover and service charges. Possible conclusions include strengthening the Code or action being taken to stop employers withholding anything other than credit card administration and payroll charges from tips.

We will keep you updated on developments.

Potential changes to tipping practices are not the only challenges that employers in the retail and hospitality sector may face in the coming months. On 1 October we saw the National Minimum Wage (NMW) rates increase to £6.70 per hour for the adult rate, £5.30 for the development rate (18-20 year-olds) and £3.87 for the youth rate (16-17 year-olds). Whilst these changes are important, employers will no doubt be more keenly aware of the new National Living Wage (NLW) due to be introduced in April 2016. The NLW will be introduced effectively as a new rate of the NMW, initially set at £7.20 but only applying to workers aged 25 and over. The government has also announced plans to double penalties for failure to comply with the NMW and NLW to 200% of any arrears as well as increasing HMRC enforcement resources and ensuring that anyone found guilty of deliberate non-compliance could be disqualified as a company director for up to 15 years.

It is important to remember that the NLW is quite distinct from the Living Wage which is put at £9.15 an hour in London and £7.85 in the rest of the UK and employers choose to pay the Living Wage (as distinct from the NLW) on a voluntary basis. Recent announcements by a number of retail sector employers that they intend to pay the Living Wage have attracted a great deal of positive media interest and may lead other employers in the sector to do the same.

If you have any questions about pay or tips or if you need a hand in reviewing your pay or tipping arrangements, please don’t hesitate to contact one of our specialist Retail & Leisure team - we’ll be delighted to help

About the Authors

Matthew heads the firm's Education Sector and also has extensive experience of both contentious and non-contentious employment work, in particular Employment Tribunal cases.

Matthew Smith
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029 2068 6165

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Rebecca is a highly experienced employment lawyer, having specialised in the area over 21 years ago, and is also a qualified mediator.

Rebecca Ireland
Email Rebecca
0118 955 3012

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