Licensees should be alert to the implications of tipping.
By Rebecca Caws of thePublican.com's team of legal experts at London solicitors Joelson WIlson.
Knowing whether to reward service with a tip and, if so, how much, can be a social nightmare for some people, particularly when abroad, where the practice is often customary in bars and restaurants. Who will benefit from a tip and how should you tip most effectively?
There are various ways to tip: by cash, cheque or credit card and the position may be affected by any contractual arrangements between employer and employee regarding tips. There are issues relating to obligatory service charges, but this article deals only with voluntary tips.
The most simple scenario is when a cash tip is given directly to the individual, who is able to retain the tip. This has nothing to do with the employer, so the question of PAYE and National Insurance Contributions (NICs) do not arise.
But many employers operate systems to ensure that all employees share the tips, rather than just those who have direct contact with customers. PAYE and NICs may then be payable and issues surrounding the National Minimum Wage (NMW) could arise.
One method is to collect all the tips and distribute the money between all employees. If the employer does this personally and decides how much each employee receives, then PAYE and NICs must be deducted from the amounts paid by the employer.
Another method is to set up a tronc, which effectively pools all the tips to be shared among employees but is run by one of the employees - known as the troncmaster. PAYE is still payable, but is dealt with by the troncmaster not by the employer. As long as the payments are not connected with the employer, they are not subject to NICs. If, however, the employee's contract states that the employee is entitled to share in the tronc, then the payments will attract NICs.
NMW issues arise when employers count tips as part of the minimum payment (currently £4.85 per hour for the adult rate, set to increase to £5.05 in October). This can affect tax treatment of those tips. To count towards the minimum wage a payment must be paid through the employer's payroll and as such will be subject to PAYE and NICs.
Employers who believe that tips paid through a tronc count towards the NMW should know that this is not the case because the payments are not made through the employer's payroll. As a result employers should be wary as they could find themselves in breach of the NMW provisions.