Tips at Work

Tips at Work

On 1st October 2018, new measures were announced by Business Secretary, Greg Clark, as part of plans to strengthen the UK's business environment in accordance with the Government's modern Industrial Strategy.

As part of this, it is planned that new legislation will ensure that tips are to go to the workers providing the service. Although there is no confirmation as to when this will be implemented, it would be worth reviewing how you currently deal with tips at work to ensure you are meeting all obligations.

There are generally three ways in which tips can be dealt with:

  • Tips given straight to the worker by the customer, such as cash left on a table at a restaurant, which would be the property of the worker;
  • Tips which are passed to the employer and later distributed to staff, such as an additional amount on a bill which the customer pays directly to the employer; and
  • Tips which are dealt with under a tronc system.

Discretionary tips do not count towards meeting national minimum wage requirements, as this income is not guaranteed. Therefore, any tip given to the worker cannot be relied on for this purpose.

Depending on how the tips are dealt with, there are further considerations to make regarding any tax or National Insurance obligations.

Tips given straight to the worker

Tips may be paid directly to the worker and not involve the employer at all (such as leaving cash on a table at a restaurant). In this instance it is the responsibility of the employee to notify HMRC of tips and dealing with any tax payable on the tips. You should be notifying workers of this and advising them to contact HMRC.

If tips are pooled and shared out, the employer is still not involved and there is no one person directly responsible for sharing out the tips. Therefore, each worker is individually responsible for notifying HMRC and any taxation on their share of the tips.

As these tips are not paid by the employer to the worker, there are no National Income Contributions to be made and tips can be disregarded in the calculation of earnings for NIC purposes.

Tips passed to the employer and later distributed

Alternatively, tips may be paid to the employer as an additional amount on a bill paid via cheque or card, or the employer may require all cash tips to be pooled and distributed on a basis determined by the employer.

In this scenario, tips distributed by the employer form part of a worker's earnings and therefore the employer is responsible for operating PAYE tax in respect of this. NIC will also be chargeable because the tips are paid out by the employer.

Tronc systems

It may be that tips are pooled and distributed by a third party (the tronc). This third party could be an employee or an unconnected person, and the individual responsible for the system is known as a 'troncmaster'.

In this scenario, tips distributed by the troncmaster are treated as earnings and the troncmaster is responsible for operating PAYE tax on these. Any NI contributions will depend whether the tronc has its own rules for allocating the tips or whether it is acting in accordance with the rules of the employer. If the tronc is acting in accordance with the rules of the employer, the tips will not fall under the gratuities and offerings exclusions in the NIC legislation and Class 1 NICs will be payable.

Service Charges

A company may also operate a service charge, where a charge may be applied as a percentage of a customer's bill.

If the service charge is clear to be optional, the payment of the charge by the customer would be considered a voluntary gratuity and is therefore regarded as a tip (and should be dealt with as above in terms of the treatment for tax and NICs).

If the service charge is compulsory, the charge would be considered an integral part of the restaurants takings. Passing on a part of the service charge to the employee would then constitute normal payment of earnings for the purposes of income tax, NICS and national minimum wage, even if paid through a tronc system.

Code of Best Practice

The Department for Business, Innovation and Skills has previously published a Code of Best Practice in respect of service charges, tips, gratuities and cover charges. This is a voluntary code covering all tipping sectors, providing guidance on how to deal with tips and gratuities.

The four points which the Code makes clear are as follows:

  • Businesses should clearly display on premises their policy relating to mandatory and discretionary service charges, tips, gratuities and so on. The policy should be accessible to consumers.
  • Businesses should have a process in place to deal with requests from customers about how and to who all service charges, tips and so on are distributed.
  • Workers should fully understand and be able to explain to consumers the policy on service charges or know where to direct customers for further information, and should not suffer detriment for doing so.
  • Workers should be fully informed on the distribution and breakdown of service charges and tips.

Considerations to make moving forward

In light of proposed legislative change, it may be worth reviewing how you deal with tips currently to ensure compliance being maintained in line with HMRC requirement.

If you do not have a policy on how the company deals with and distributes tips, then it may be worth looking at getting one in place to clearly outline this information to workers. In the event of any dispute from the worker, the benefit of an already established policy on such would make any issue easier to resolve and should reduce the risk of any dispute from the outset.

Your policy could contain the following information:

  • How tips are collected and dealt with (such as if cash and card tips are treated differently)
  • How tips will be distributed between workers and how these are paid
  • Any information on the tronc system and tronc master, if applicable
  • If any deductions are made from tips (such as those made for NIC and PAYE)
  • What would happen to tips during a period of leave or sickness absence.

Any changes to the terms of the policy should be made with the agreement of the workers.

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