Tips about tips

Payment of tips and gratuities in the restaurant industry is perhaps more common than in any other sector.

These are spontaneous amounts paid voluntarily by the customer. Set out below are some pointers on dealing with these sums from an employment law perspective:

1) If a tip or gratuity is paid directly to your employee by the customer, it will not usually count as part of their remuneration for employment law purposes as it is the property of the employee. However, this is likely to only be applicable to cash tips and gratuities as other payments methods (such as debit card payments) are unlikely to be directly received by the employee.

2) If tips and gratuities are paid to you as the employer and you in turn pay them over to your employees (for example, if a tip is added to a credit card payment or you collect all such sums in and then account for them at a later time), this is likely to count as part of their remuneration.

3) If such sums are instead pooled together and then distributed out by someone other than the employer (say, the Head Waiter), the arrangement is likely to be considered as a “tronc” and the person who runs it is called the “troncmaster”. (This term is derived from the French phrase for “poor box” or “collecting box”.) Whether these sums are classified as remuneration or not will depend on the specific circumstances of the arrangements.

4) Whether tips and gratuities are treated as remuneration or not can be important for a number of reasons, from the calculation of redundancy and maternity pay to Employment Tribunal compensation in the event of a successful claim.

5) Since 2009, tips and gratuities should not form part of your calculations for the purposes of ensuring you meet your national minimum wage obligations. By way of a reminder, the current hourly rates are £6.50 for those aged 21 or over, £5.13 for those who are 18 to 20 and £3.79 for 16 and 17 year olds. These rates will rise in October.

6) Whether tips and gratuities need to be taken into account for the purposes of calculating holiday pay will depend on whether the sums are remuneration or not. As you may recall, there has been a lot of recent case law developments in the area of holiday pay but the basic rule is that holiday pay should reflect the normal remuneration that the individual would have received had they been at work.

7) There are complicated rules on whether income tax and national insurance contributions must be paid on tips and gratuities. The tax treatment is usually determined by reference to how the sums are actually received by the employee. Your accountant or tax adviser should be able to advise you further about this.

8) It is sensible to ensure that your employees understand exactly how the distribution system works within your organisation. This can often help avoid disputes arising in the first place. The best way to do this is by way of a written communication to each of the employees, ideally at the outset of the employment relationship.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice.  If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.