16th September 2015

Tips for Tipping: An Employment Lawyer’s Guide to Eating Out

I always tip.  Even if the service is rubbish and the food is horrible, I still feel strangely compelled to leave a tip.  In fact, even when I have specifically said “no” to mushrooms and then find mushrooms on my plate, I will still always calculate my 15%.  I suspect that this is a throwback to the many years I spent waiting tables as a student.

However the world of tipping also has some interesting employment law aspects.

Can an employer use tips to satisfy their national minimum wage obligations?

No.  The National Minimum Wage Regulations create obligations on employers to pay workers a basic hourly rate.  Prior to 2015, an employer could include tips and service charges which were “paid by the employer” through its payroll to count towards a worker’s wage.  However since the regulations were amended, such tips cannot count towards the employer’s national minimum wage obligations.

Should tips be taxed and, if so, who is liable for this?

Yes.  Tips should fall subject to tax and national insurance contributions.  Ordinarily the employer would fall liable for these.  Generally most restaurants are following the HMRC guidelines – tips are collected by the employer and then put through payroll.  However, if customers give cash tips directly to waiting staff who keep them without any involvement from the employer, the responsibility for tax on these payments will fall to these employees (although in such specific circumstances employees may be able to avoid having to pay national insurance contributions on these sums).

Can I choose to ignore a compulsory service charge?

No.  If the charge is clearly labelled as compulsory, it will be very difficult to avoid.  In such situations, the compulsory service charge is not a tip and therefore if the employer chooses to share this charge with its employees, this payment should be treated by the employer in the same way as wages (i.e. subject to tax and national insurance deductions).

Can I ensure that any tip which I leave is given to the person who served me?

No.  The only way to ensure that the person who served you gets the tip is to give it to them directly.  And even if you do this, that person may still be subject to internal procedures regarding the pooling of tips and may still have to declare your tip to the employer.

What is the impact of failing to deal with these issues correctly?

Workers who do not comply with these issues risk not only being prosecuted for tax avoidance but also potentially finding that they cannot rely on the terms of their contract in an employment tribunal.  If a contract is illegal or tainted with illegality, it cannot be relied upon.  Tribunals are frequently refusing to hear claims where parties have not complied with employment legislation.

So whilst all restauranteurs seek to have limitless reservations, they should ensure that they have no reservations about their treatment and taxation of tips.  Take professional advice about these issues now.  Otherwise you may find yourself in a pickle in future, having to mustard the strength to ketchup with your competitors and existing legislation.

Simon Allison
Partner – Head of Employment Law
@EmpLawyerSimon

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