The iceberg of the tip

Are you like me, increasingly confused about leaving tips when you eat out? Do you interrogate the waiting staff about who benefits from the ‘service charge’ that’s appeared on your bill? Do you find yourself fuming because you gave the waiter a cash tip only to spot, subsequently, that a service charge had already been added?

The swing to a cashless society, accelerated by the Covid-19 pandemic, reflects a significant lifestyle change. The practice of adding a service charge to bills, mainly in the hospitality sector, has become commonplace. But where does that service charge go, and does it replace the need to tip?

A recent government survey identified that over 50% of people are concerned that staff may not benefit from service charges routinely appearing on their bills. The same survey revealed we now settle over 80% of such bills by card or phone app. Cash is no longer king.

We may not be quite as addicted to tipping as the USA (where a hotel concierge opening your taxi door prompts the expectation of at least a $2 tip). However, even in the UK, tipping has operated since the days of Henry VIII and Elizabeth I. And while you would insult a worker in Japan by offering a tip, here it’s a routine expectation for taxi drivers, hairdressers, bar staff, waiters, beauticians, delivery drivers and various others (but never offer one to police officers!)

Where did tips go before?

In most restaurants, some or all of the service charge finds its way to those who prepared and served your excellent meal. Strictly though, payment of the service charge is a matter between you and the business owner. Until now, they had no obligation to pass it on. They could deduct for breakages, bank charges, ‘runners’ who don’t pay their bill etc. The only legal obligation was not to use it to discharge their responsibility to pay at least the National Minimum Wage.

Conversely, when you give a waiter a cash tip, that’s between you and that individual. Legally, it’s theirs. Whether they share it with others is up to them.

What’s changed?

Now things are about to change. Concern about what’s been happening to service charge payments prompted new legislation. The new law requires 100% of service charges to be distributed fairly, transparently, and consistently to staff. Even agency workers are included.

The legislation does not cover those who are in business for themselves. Some, but not all, hairdressers, beauticians, taxi drivers etc. may well be self-employed. However, there have been a number of successful legal challenges regarding self-employed status, resulting in their re-designation as ‘workers’.

Issues of detail like this mean that a statutory Code of Practice is needed to breathe life into this fairly complex piece of legislation. The Government intends to consult stakeholders and it will probably take another twelve months before everything is clear.

Which brings me to the subject of the equally complex ‘tronc’ (from the French ‘tronc des pauvres’ or poor box) provisions. This is a system already widely used in the hospitality sector to distribute tips and service charges among staff. The legislation does not envisage tronc provisions necessarily being disturbed.

However, under the new legislation, tips and service charges cannot be shared beyond each individual establishment. 100% must be distributed fairly to the staff at that location. Owners cannot even offset the cost of operating a tronc from the tronc itself.

If tips, service charges and/or a tronc are features within your business, don’t struggle alone with the new legislation. Moorepay can help.

Business requirements

Businesses will also be required to publish tips and service charge policies prominently – both for staff and for customers. Plus, they must account to each member of staff personally for their share. There will be strict deadlines to do this and significant penalties for breaches. Staff will be able to pursue claims in the employment tribunal. Potentially, life becomes even more complicated, bureaucratic and expensive for businesses dealing with tips and tronc.

Typically quirky HMRC regulations already prescribe that a tronc that’s independent of an employer doesn’t have to account for national insurance – just tax. Whereas, if the employer even indirectly influences how the tronc is distributed, national insurance becomes deductible.

And, where you tip in cash, it’s the waiter and not the business owner who accounts for tax due. Many businesses struggle with the complexities implicit in current HMRC rules. When the new legislation is fully operational, it certainly won’t get any easier.

Nevertheless, and hopefully by this time next year, you’ll know exactly how that smiley face service charge on your restaurant bill is being distributed.

Our HR and Payroll experts are continually monitoring developments in the Employment (Allocation of Tips) Act 2023. We can help you create the necessary policies and understand the implications of the Code of Practice when it emerges. We already offer support to clients to steer them through the ‘tronc’ minefield.

Similar legislation was introduced in the Republic of Ireland, last December. So, if you already operate there, or are planning to do so, book a consultation.