Ask the Experts: How can I distribute tips fairly?

In the first instalment of our new feature Ask the Experts we put one reader's problem regarding his tipping policy to the British Hospitality Association's deputy chief executive Martin Couchman for his solution.​

Problem:​ "As a restaurant manager I've been following all the news and changes around service charges, but I must confess I'm feeling a little confused over recent claims that restaurants are not being open enough about how they distribute tips to staff. I'm well aware of the new law around tipping and that it's illegal to use tips to make up wages to the minimum wage, which, I hasten to add, we've never done here. However, I would really like to know what is considered the fairest way to distribute tips and what is the best way in which to communicate our policy to our customers." Steve, Hertfordshire.

Solution: ​There’s no ‘fairest’ way to distribute tips. How they are distributed depends entirely on the business – and its staff. The aim, however, is always to be transparent about how the proceeds are distributed. Past criticism of the service charge has been based on the fact that customers have not been made aware of who receives the proceeds of the service charge.

But first, what is a service charge?​ A discretionary service charge is a payment suggested by the restaurant, which the customer is totally free to make or not. The payment is made to the restaurant by cash, card or cheque and is legally the property of the restaurant. There are four different ways of collecting the service charge and/or tips and each is treated differently for income tax purposes:

- A discretionary service charge is collected and distributed by the business;

- Instead of a service charge, the customer leaves a cash tip, which is then kept by the waiter;

- Instead of a service charge, the customer leaves a cash tip which is pooled into a tronc, which is informally shared out by the staff each day;

- Instead of a service charge, the customer leaves a cash tip or adds a cash payment to the bill, which is then pooled and shared among a given number of staff on a more formal basis by an independent troncmaster, who will be a member of staff but who must not be a director of the business.

There is no legal requirement for the restaurant to allocate a particular proportion of the service charge or tip income to employees. It normally, however, allocates all or some of the proceeds to the staff but may deduct a proportion for costs incurred in handling these sums. This would cover credit card and banking charges, payroll processing costs, and the average costs of credit card fraud.

Where a discretionary service charge is paid to employees, it is most commonly paid to employees from the restaurant’s bank account via the PAYE system. A cash tip is an additional payment given by the customer over and above the amount of the bill and any discretionary service charge, or instead of a service charge. They are payments given directly by customers to individual employees and are thus the property of the waiter. not of the restaurant.

It is the responsibility of the employees receiving cash tips to make proper disclosure to HM Revenue and Customs and to account for income tax in respect of these earnings. The broad process for distribution of these amounts should be disclosed to customers as part of the disclosure process and under the British Hospitality Association's (BHA) code of practice, customers should be made aware of the level of costs deducted. The BHA’s code of practice states that the restaurant should explain what system it employs to customers through a written note available for inspection at each restaurant, or on the menu, or on restaurant’s website, if there is one.

This explanation should include:​

- Whether an amount is deducted for handling costs (and how much);

- How the remainder is shared between the restaurant and the employees;

- The broad process for distribution, for example, that they are shared between the employees in the restaurant through a troncmaster.

In summary, whether a restaurant introduces a service charge or prefers to let staff collect their own tips is entirely a matter for the business and its staff.

Many customers prefer to leave a service charge because it obviates any possible embarrassment in leaving a cash tip. In either case, however, the customer should be told which system is in operation, how the proceeds are distributed, and whether any deductions are made before distribution.

Martin Couchman, deputy chief executive of the British Hospitality Association.​​

Do you have a problem you'd like solving? Need advice on a particular area of your business? Our panel of industry experts are on hand to give you the help you need. Email your problem to arjf@ovtubfcvgnyvgl.pb.hx​ with Ask the Experts in the subject line and we'll endeavour to get it answered.