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National Minimum Wage – Service charges, tips, gratuities and cover charges
Thursday, October 8th, 2009
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With effect from 1 October 2009, regulation 31 of the National Minimum Wage Regulations 1999 was amended so that any payments made by customers by way of a service charge, tip, gratuity or cover charge may not count towards the national minimum wage (NMW). Each worker’s pay, excluding such customer payments, must meet the minimum wage requirement.
In December 2008, when then the Government first consulted on its intention to prevent employers using tips to comply with the NMW, there were additional proposals to introduce a non-statutory code of best practice on the distribution of tips to workers and on informing customers on how their tips are allocated.
On 30 September, the Department for Business, Innovation and Skills (BIS) published the final code of practice. It was prepared in collaboration with trade unions, business representatives and consumer groups and is endorsed by the CBI, the British Hospitality Association, the GMB, Unite and the Trades Union Congress.
The basis for the non-statutory Code of Best Practice is four specific Principles of Transparency, all of which are binding on employers who “sign up” to the Code. (In the following notes, the word “tips” is used to describe “service charges, tips, gratuities and cover charges”.) The Principles are:
- Businesses will clearly display on their premises, prior to the point of purchase or choice, their policy relating to mandatory and discretionary tips, and make this accessible.
- Businesses will have a process in place to deal with requests from customers about how and to whom all tips are distributed, and the level and purpose of deductions.
- Businesses should ensure that workers understand and are able to confidently explain their business’ policy on tips to customers, or know where to direct customers for further information, and without risk of detriment.
- All workers should be fully informed on the distribution and breakdown of tips and the level and purpose of any deductions. Businesses should seek to reach agreement with workers on any charge of policy.
The Code provides a number of examples of statements that can be displayed on notices, menus, leaflets or bills, explaining the policy of the business towards tips. One simple example is:
“We are committed to the Code of Best Practices on Service Charges, Tips, Gratuities and Cover Charges. For every £1 received in card tips, the staff keep 70p, 10p covers business costs and administration and 20p goes to the business [this includes deductions for breakages, till shortages and walk-outs]. All cash tips go to the staff.”
With regard to each worker’s understanding of the policy on distributing tips, the Code states that
“businesses should ensure that all workers:
- understand the process for the distribution of tips between the business and the workers, and between the workers themselves (for example, workers should be told if a tronc operates and who the troncmaster is)
- are aware of the amount and purpose of any deductions from tips, and seek to reach agreement with workers on any policy change
- have access to a written statement setting out the business’ policies on tips which can be provided to customers
- are aware of the level of deductions from tips made to cover breakages, till shortages or customer walk-outs
- are aware of the business’ grievance procedure.
Businesses should give information to workers in the form of a written statement. Where the business employs a cohort of workers where English is not the workers’ first language, the business should consider making information available in other languages.
This statement should include:
- how tips are distributed and, if applicable, if this is done through a tronc
- if cash and card tips are treated differently
- the name of the troncmaster if appropriate
- how much might be deducted for administration and what this covers
- any other deductions
- what happens during holidays, sick leave, parental leave and other forms of leave.
Where tips are passed to workers without National Insurance contributions, workers should be informed that this may have implications for entitlement to certain social security benefits.”
The Code includes a model Statement. There are no statutory changes to the tax and NICs liabilities on tips or to the guidance given to employers in HMRC’s E24 Guide, although the E24 booklet has been updated to reflect the NMW changes. Commitment has been given to a review of the Code in a year’s time.
Further information:
The Code of Best Practices on Service Charges, Tips, Gratuities and Cover Charges
E24 Guide to Tips, Gratuities, Service Charges and Troncs
A fairer deal on tips and wages
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