Five tips for managing tips

A protest by union Unite outside a London branch of PizzaExpress earlier this month thrust restaurant tipping policies​ into the headlines with restaurant groups forced to reveal how tips and service charges are distributed to staff. 

Some restaurant groups have come under fire from the press and diners for policies which include taking a percentage of staff tips before their distribution, making staff pay a percentage of money from tables served and retention by the business of the entire service charge.  

As Christie says, unpopular tips policies can demotivate staff and create a reputational damage risk for businesses, but how do you know what is legal and what isn't? 

Cash tips vs. service charges​

Before reading on, note the difference between cash tips and non-cash tips.

Cash tips are payments given by customers directly to individual employees and so belong to those employees. Therefore businesses should not ask workers to hand over cash tips or otherwise dictate how cash tips should be shared.     

Optional or discretionary service charges or non-cash tips are treated differently. Once paid by a customer they belong to the restaurant. Unless a worker’s contract of employment says otherwise, there is no legal requirement for businesses to allocate a specific proportion of its service charge or non-cash tip income to staff.

The following five tips give general guidance to ensure compliance with recommended practice and employment law. 

Tip 1: Be clear about how discretionary service charges and non-cash tips are managed​

Deductions from service charges and non-cash tips to cover administrative costs incurred in handling these charges are permitted. Tell staff about the distribution and breakdown of service charges, tips, gratuities and cover charges and the level and purpose of any deductions; for example for banking charges, payroll processing costs, breakages, till shortages and/or walk-outs. To maintain good employee relations, consult with staff about the proposed level and purpose of deductions and any subsequent policy changes. 

Voluntary Codes of Practice published by the Labour government in 2009 and the British Hospitality Association​ set out voluntary measures businesses can take to improve the information available to customers and staff about service charges, tips, gratuities and cover charges. 

Tip 2: Do not make deductions from wages without workers’ prior written consent ​

Without the express prior written agreement of staff, businesses risk breach of contract and unlawful deductions from wages claims if deductions are made from workers’ pay.  This risk is avoided if a specific right to make deductions is included in contracts of employment. 

The law provides further protection for retail workers, which includes restaurant staff.  Employers are prohibited from deducting more than 10 per cent from these workers’ gross pay (pay before tax and National Insurance) each pay period to cover cash shortages or stock deficiencies. 

Tip 3:​ Remember National​ Minimum Wage compliance​

Since 1 October 2009, amounts paid by employers to workers which represent tips, gratuities, service charges or cover charges paid by customers do not count​ towards National Minimum Wage pay.  This is the case whether the customer paid in cash, by cheque or by debit or credit card and whether such tips are paid through the employer’s payroll, given directly to workers by customers or by a tronc master through a tronc system.  Basic pay rates must always be at least the National Minimum Wage level, soon to change to the National Living Wage with staged rate increases due from April 2016. 

Tip 4: Employer-distributed tips may still be payable when workers are on holiday ​

Holiday pay must now include all of a worker’s normal remuneration​.  For retail workers whose pay comprises basic pay and tips, restaurant businesses need to consider whether tips should be taken into account when calculating holiday pay. 

A Court of Appeal decision in 1996 found that tips received by an employer, which were transferred to a troncmaster’s bank account before distribution by the troncmaster to participating employees, were not paid by the employer. Payments made into a genuine qualifying tronc arrangement are therefore unlikely to be regarded as part of a worker’s normal remuneration by their employer and so would not need to be included when calculating holiday pay.  The position is different where an employer routinely pays its employees an amount to reflect service charge and non-cash tips it receives.  Based on the current legal position, it is likely that such payments should be taken into account when calculating holiday pay.    

Tip 5: Taxing tips: who is responsible?​

All tips are taxable income.  The question for businesses is whether they have responsibility to tax the money at source or whether this tax is the employee’s responsibility.  Employees must declare their cash tips income for tax purposes. 

PAYE must be operated on all tips paid by an employer to an employee.  Responsibility for operating PAYE rests with the employer even if the employer delegates this task to an employee, where there is a tronc operating.  For qualifying tronc schemes which satisfy HMRC’s conditions, businesses do not have to pay employer’s national insurance contributions on tips paid into a tronc. HMRC’s booklet E24(2015) provides guidance on income tax, national insurance and VAT for employers and those responsible for sharing tips, gratuities and service charges among employees.