New legislation announced to prevent tip deductions

9/11/2018

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Government reveals new law is set to be introduced, to prevent unfair tipping practices by organisations.

Recent press focus on the payment of staff earning the National Minimum Wage (NMW) and National Living Wage (NLW) has highlighted that many organisations within hospitality and other sectors may operate unfair practices relating to ‘tips’.  Campaigners focusing on the issue have found organisations are making deductions from tips and service charges to cover business charges, such as credit card administration fees.

As far back as 2016, proposals were announced which were aimed at preventing deductions being made from tips, however, there was no legislation put in place. Prime Minister Theresa May has now announced that legislation will be introduced at the earliest opportunity to ensure staff receive all tips that relate to their service, in turn, helping consumers to reward hard work.

Although the new law has been announced, there are no further details as to how this will apply across organisations or any expected implementation date. Tipping is a complex area in itself, without considering whether the new laws are going to apply to cash tips, gratuities paid through cards or service charges automatically applied to restaurant bills. Additionally, many organisations have specific arrangements in place as to how they handle tips, with some choosing to allow staff to handle these directly and others making arrangements for a tronc system. For example, the restaurant TGI Fridays has faced strike action over a new pay policy where waiters have a 40 per cent deduction from customer tips, with the deducted money being distributed to staff working in the kitchen. How such an arrangement will be affected by the new law on tip deductions will be unknown until the final version of the legislation is released.

In the interim, organisations are advised to carry out a review of their current tipping practices, ensuring they understand the process in place and whether deductions are being made from tips. Any documentation in place on this practice can also be reviewed. This will ensure the organisation is in a good position to implement the new restrictions placed upon them by the legislation once these are introduced.

Although tips are a complex area, it is key that organisations understand how these interact with NMW and NLW, tax and National Insurance (NI) to ensure they are not falling foul of these laws, especially due to the increase in underpayment complaints being made to ACAS and HMRC. Since October 2009, service charges, tips, gratuities and cover charges cannot be used to make up NMW/NLW meaning the worker has to receive at least the minimum pay rate without taking into account the amount of tips received. The tax and NI treatment of this money will differ based on how the tips are paid by the customer and the arrangements in place for paying these to the employee.

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