UK: Tips: What Is Going On?

Last Updated: 30 June 2016
Article by Stephanie Creed

According to reports, there are around 150,000 businesses, employing some 2 million workers, who operate in sectors where tipping is a common feature of their working life.

Following press and consumer interest, the government launched a Call for Evidence in August 2015; it recently published a consultation paper in May 2016.

The government's 'soundbite' around the consultation has been (to paraphrase) 'all tips should go to the people you intended it to go to'. But what does this mean? And is this such a change?

Why did this become such an issue?

The press focus and union activity around tips last summer, and in particular targeting the restaurant sector, took some by surprise; unions have not previously found a foothold in the restaurant sector, but several have potentially gained traction following their high-profile campaigns (possibly a result of the changes to the Trade Union Act and increasing restrictions on recruitment and union activities).

But what was interesting was the consumer response – and governmental follow-up. As pointed out by several of the chains targeted, they were not necessarily breaking the law or acting improperly. Given the stress the government has placed on the National Minimum Wage ("NMW") and new National Living Wage ("NLW"), perhaps their interest was unsurprising. But the strength of the consumer response correlates with the general lack of understanding as to what happens with tips, who it goes to and what a service charge is, and perhaps reflects the moral standpoint of consumers.

What are we talking about?

As a starting point, the following terms commonly have the following meanings:

  • tip / gratuity: an uncalled for and spontaneous sum offered by a consumer either in cash, as part of a payment, or as a specific gratuity in a credit or debit card.
  • service charge: an amount added to a bill before it is presented to the consumer. If it is made clear to a consumer that it is purely discretionary and there is no obligation to pay, this is voluntary / discretionary service charge, otherwise this will be treated as a mandatory service charge.
  • cover charge: a fixed charge per consumer (often for entry or a seat), usually mandatory.
    For the purpose of this article, the collective term "tips" will be used unless stated otherwise.

Although a plethora of terms has been used, what the government is looking at is payments made by consumers in addition to a fixed fee or bill, which includes tips, service charges, gratuities and cover charges. These payments may be made as:

  • cash: these are usually paid directly by the consumer to the worker. They belong to the worker and it is the worker's responsibility to inform HMRC for tax purposes and to pay any tax due; no NICs are due on such payments ("cash tips"); or
  • card: card payments are paid directly to and belong to the business ("card tips"). The employer must include any sum passed on to the worker from these in PAYE calculations for both income tax and NICs. These may be distributed using a tronc.

A tronc (it means "collecting box" in French) is an arrangement for pooling and distributing tips to workers, principally in the hospitality sector. The "troncmaster" (rather than the employer) distributes monies from the tronc and may be responsible for operating PAYE on the distribution. This is usually the most tax-efficient way to distribute tips, as tronc payments are exempt from NICS if they are either:

  • not paid, directly or indirectly, to the worker, and do not comprise or represent monies previously paid to the employer (e.g. by consumers); or
  • not allocated, directly or indirectly, by the employer.

Are there any rules?

In short, not really. There is currently no statute or law regulating the treatment of discretionary tips. There is no legal requirement for employers to pass on tips to workers.

There is plenty of law (and HMRC guidance) around the tax treatment of tips, but this tends to focus on the form of and the way in which a tip is paid. And this does not often correspond with the understanding of those dealing with tips in practice, or with what is actually either happening or is practicable.

The 'Code of Best Practice on Service Charges, Tips, Gratuities and Cover Charges' dated October 2009 is the nearest thing to a set of rules on tips, but this is a voluntary code and therefore not binding or policed by a regulatory body, and without any real teeth for violations.

This Code coincided with changes to the NMW legislation prohibiting employers using tips and gratuities to make up NMW payments to their workers; in effect, all workers must receive NMW or NLW (as applicable) in base pay, and any tips they receive must be on top of this.

What obligations currently apply to employers?

  • Employers are not obliged to hand over any card tips to workers.
  • Employers are permitted to deduct an admin fee from any tronc payments, but there is no limit or clear guidelines what this should be.
  • Employers are responsible for deducting tax and NICs where tips are processed through a company tronc, although the tronc master themselves is also responsible (and this is a real problem where there are unofficial troncs, or where staff agree between themselves to divide up tips without the employer knowing or being involved). Workers are technically only responsible for tax and NICs on tips that they receive directly from the consumer, without interference from the employer or any other workers.
  • Employers must ensure that workers receive NMW / NLW (and that they do not use tips and gratuities to make up these payments).

Some complexities

Some of the key areas of discussion are as follows:

  • Is a payment discretionary or mandatory?
  • Are cash and card tips treated in a different way?
  • Is an admin fee applied, and what is this used for?
  • How are any tip payments shared, if at all?

There is evidence to suggest that the mandatory / discretionary distinction has not been made clear (if a mandatory service or cover charge is imposed, NICs will be due on the payment of any of this amount to workers, no matter how it is paid out).

The presence of a service charge or cover charge on a bill commonly deters consumers from leaving an extra tip, and consumers often think that they are leaving a tip by paying the service charge (where this may not actually be the case).

Because so much of the regulation focuses on tax treatment and the form of the payment, cash and card tips are routinely treated in a different way but consumers are often not aware of this distinction. Service charge payments are also often seen by employers as business payments rather than a form of gratuity or tip paid to staff, meaning many business often treat service charge payments in a different way to other forms of tip. Traditionally, consumers have not been aware that admin fees may be applied to tronc payments or what an admin fee may be used for.

Workers often decide to pool and/or share tips amongst themselves on a casual basis, and therefore tips can divided up, handled or managed either without an employer really knowing or being involved. This is a grey area, as it is not always clear who is responsible for the deduction of tips – technically, the person actually orchestrating the pooling or allocation (in effect, the tronc master) should be responsible, but the employer may be deemed ultimately responsible despite not being aware of, or having any involvement with, the pooling or allocation.

There are also operational difficulties. Commonly, restaurant till systems will print a service charge (discretionary or mandatory) on bills; any tip, whether cash or card, left by consumers may be automatically put towards the service charge rather than treated as a tip.

The focus to-date has been mostly on restaurants, but there are other sectors who will be watching this debate with interest – hotels and the hospitality and services industry more widely, but perhaps less obviously businesses such as hairdressers, and taxi and transport.

What did the responses to the Call to Evidence reveal?

The responses showed awareness of the Code of Practice for tipping varies at present, and the majority of consumers were either completely or at least in part unaware as to where their tip would go.

The response showed concern that the voluntary Code of Practice does not go far enough, is not sufficiently used and does not have sufficient impact.

The report indicated that workers largely believed troncs were predominantly management controlled and manipulated, whether directly or not, whilst employers said that the current guidance on troncs is too complex and places unfair requirements on them.

The report concluded that, respondents had different opinions about what change was required, they generally agreed that the government should intervene to improve the treatment and transparency of discretionary service payments. We would therefore expect to see some developments in this area following the consultation.

What does the consultation say?

The consultation paper sets out the Government's policy objectives with regard to these charges and payments, set out below and seeks view on various proposals for achieving those objectives:

1. it should be clear to consumers that such payments are voluntary, "discretionary" payments, by:

a) making clear on bills that that these payments are optional or discretionary (including two separate prices);
b) prohibiting a suggested service charge (appearing on the bill or elsewhere); or
c) clarifying mandatory cover charges,

2. it should ensure that workers receive a fair share of consumers' discretionary payments for service, by:

a) making clear on bills that that these payments are optional or discretionary (including two separate a) prohibiting employer deductions other than as required for tax (i.e. prohibiting admin charges);
b) limit any such deductions to ensure the employer does not profit;
c) banning or restricting the levying of table sales charges on workers; or
d) improving tronc systems, and

3. the process should be clear and transparent to consumers and workers in terms of how the payments are treated, by:

a) making clear on bills that that these payments are optional or discretionary (including two separate a) updating the voluntary Code of Practice; or
b) applying a statutory Code of Practice.

What next?

The consultation closes on 27 June and details of how to respond are available here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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