Tipping point? The government calls time on opaque service charges
Author: Katy Meves
Applies to: England, Wales and Scotland
The government has launched a consultation on tipping, gratuities, cover and service charges setting out proposals to make tipping fairer for both workers and customers.
Tipping is common in the hospitality and leisure sectors. It is estimated that these sectors employ around 2 million workers. Across relevant businesses there are a variety of practices as regards tipping and service charges which creates confusion for consumers and workers.
While tips and gratuities do not count towards an employer's obligation to pay the national minimum or national living wage, there is currently no legal requirement for all or a proportion of discretionary service payments to be paid to workers.
A voluntary code of practice providing guidance on the treatment of tips, gratuities, cover and service charges was published in October 2009. However, it is clear this is not widely used or understood.
In August 2015 the government launched a 'Call for Evidence' following media reports of alleged unfair practices, such as employers charging an administration fee for handling discretionary payments for service or even keeping the whole of such payments, to investigate these concerns.
The government has now published a consultation paper in response to its Call for Evidence which sets out proposals to make tipping fairer. The proposals are shaped by three policy objectives as regards discretionary payments for service:
- consumers should be clear they are voluntary
- they should be received by workers
- it should be clear and transparent to both workers and consumers how payments are treated.
The consultation paper sets out various types of voluntary payments in an attempt to clarify the extent of practices throughout the UK:
Tips and gratuities: Money freely given in recognition of an individual's service, over and above payment due for a core service (e.g. the price of items on a menu).
Service charge: Often a percentage amount which appears on a bill suggested by the business to the consumer. The Call for Evidence suggests consumers were unaware they were not obliged to pay such charge and were then put off leaving any other discretionary payments. There is currently no legal obligation for employers to pass on service charge to workers.
Cover charge: This is usually a price per head and is mandatory in addition to payments for core services. Workers will rarely benefit from this directly and its presence on a bill often puts diners off leaving any other discretionary payments.
Tax treatment of voluntary payments
Where the worker receives a cash tip direct from the consumer, no national insurance contributions are due but it is the individual's responsibility to inform HMRC for income tax purposes.
Tips paid by consumers on their cards go directly to the employer and it is for the employer to decide whether to pass an amount onto the worker. Any such payments will be made to the worker via the payroll with appropriate deductions.
A TRONC is a pooling system for tips and shared out between different staff (such as waiting staff and kitchen staff). The employer takes no part in deciding how amounts are divided up in the TRONC and monies received by workers under it are not regarded as remuneration.
Proposals in the consultation paper
The consultation paper asks for views on a number of proposals intended to achieve the three policy aims set out above, including:
- Ways in which businesses can make it clear that discretionary payments for services are voluntary.
- Whether businesses should be prevented from setting a level for service charge.
- Whether employers should be prevented from making any deduction from tips other than those required under tax law.
- Alternatively, whether there should be a limit on the deduction on discretionary payments which an employer can make to ensure there is no 'profit' element.
- Whether the voluntary code of practice should be put on a statutory basis.
The closing date for the consultation is 27 June 2016.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.