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  • Published:
    03 March
  • Area of Law:

How to manage tips and gratuities fairly

When customers leave a tip in a pub, hotel or restaurant, they like to think that it is used to reward the people who served them so well. However, this isn't always the case.

A government investigation recently revealed that some employers take a cut of tips or gratuities paid by card or cheque to cover bank and administrative handling costs. Evidence has shown that these deductions can amount to as much as 10 percent of the value of the tip – but are they fair?

In September 2015, the government published a call for evidence about tipping practices. In particular, it wanted to learn more about the use of admin charge deductions and ‘troncs’, which are systems used to pool tips and share them out between staff. Once the evidence has been considered, recommendations could follow.

In the meantime, employers are advised to adopt policies and procedures that are fair and transparent, and that represent industry best practice. The government established a voluntary Code of Conduct in 2009, with the support of the British Hospitality Association, which contains some practical advice for employers about how to manage tips and gratuities.

About the Code of Practice

Importantly, the Code of Practice states that ‘cash tips’ that are given directly to a member of staff belong to the employee, not the employer. In the case of ‘noncash tips’ and discretionary service charge payments, however, it is stated that employers may make a deduction to cover any costs incurred in handling the tips and gratuities – credit card and banking charges for example. However, the guidance also states that any other deductions made by the business should be communicated to customers as part of a disclosure process.

When it comes to disclosing how they deal with noncash tips and discretionary service charge payments, the Code states that employers should have a written notice available for customer inspection and on their website. This disclosure should make it clear if an amount is deducted for handling costs and if so, how much. It should also explain how the remainder of the money is shared out and the process for distribution. This process should be controlled by an employee representative.

The legal framework

Under current law, if tips and gratuities are paid to the employer, for example by credit card as a percentage of the bill, rather than directly to the worker, they are the property of the employer. In such cases, the employer may deduct a proportion of the tip to account for admin or processing costs. However, these arrangements should be agreed with employees as part of their employment contract.

The Employment Rights Act 1996 outlines that withholding tips that an employee is contractually entitled to receive is an unlawful deduction from wages. 

In terms of the National Minimum Wage, the law states that tips, gratuities, cover and service charges should not be treated as part of a worker’s pay.

Our advice

Phil Pepper, employment law partner, said:

“Consumers quite rightly assume that any tip they leave is passed to workers regardless of whether it was paid in cash or by card. If this isn’t the case, they need to be made aware of this and ideally employers should have a policy in place which is clearly displayed.

“Most businesses have a system in place which involves a nominated member of staff taking responsibility for distributing tips and gratuities fairly in accordance with any company policy. Such systems are administrative in nature, so employers may feel that making a small deduction from any tips earned is a fair way of accounting for this use of management time.

However, problems can arise if things are not happening in an open and transparent way. To avoid this, businesses should follow the Code of Practice and establish a clear policy for handling tips and gratuities. This should be explained to workers as part of the recruitment process and agreed with them individually.”

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