Will reforms on gratuities tip the balance?

Tipping is a matter of social custom and etiquette, and is more prevalent in the hospitality sector than any other. It will often be second nature to customers to add an extra chunk of change at the end of the meal and most will use the default 10% rule to avoid any confusion (or awkwardness). But after years of public concern that some tipping practices were not in line with the code of practice – the industry’s current voluntary guidelines that steers tipping policies – and that some employers were pocketing tips for other costs, a new bill has been triggered.

The Queen’s announcement of the new legislation on 14 October comes more than three years after a consultation into tips, service charges and troncs was led by former business secretary Sajid Javid. But on top of compassionate campaigns and protesting, it seemed plans to implement the law had been forgotten. However, many dining-out venues remained optimistic and ‘pro-tipping’.  

An independent survey of 75 UK dining-out venues showed that 96% were pro-tipping, but would like the process to be made more transparent. Of those venues surveyed, 81% said they would welcome new legislation that required all restaurants to share tips with waiting staff.

A guide to lean on​

Operators usually go by the rules that servers get the tips, but this is not always the case. The code of practice remains a prominent statute that aims to support principles within hospitality and promote widespread good tipping practice with prime values, including transparency and genuine allocation. But the code solely remains a voluntary guideline that operators do not have to abide by, and this is where the cracks in the law started to form.

Its stark rule, however, is that employers cannot use it to make up the minimum wage – and any tips paid to workers must be on top of their basic pay. In 2008, it was discovered that staff working at London's Hard Rock Cafe​ were paid a basic wage of £2.06 per hour with tips filling the gap to meet the national minimum wage – this was made illegal in October 2009.

UKHospitality chief executive Kate Nicholls said: “The code makes it clear to businesses, employees and customers how tips can be fairly shared so that all team members get what they deserve, and customers can be confident that the money they tip is going to the correct place.”

But when it comes to employers being forced to pass tips on to staff – the law becomes vague. Now, almost four years later, the Employment (Allocation of Tips) Bill has been announced to close up the loopholes.

Benefiting your staff​

Unite, the union, has welcomed the new legislation with open arms because this is what it has campaigned for. It hopes the legislation will crack down on some of the worse tipping abuses that have been uncovered in the hospitality industry.

Unlike the US, for example, tipping is discretionary in the UK. Employers are expected to pay the national minimum wage but some waiting staff say that’s not enough. Therefore, tipping is considered the polite thing to do in many places. So while a lot of employees in the UK rely on tips to boost their income, the Government estimates the new legislation could help more than 1m workers earn more – a lot of whom are on the minimum wage. The national minimum wage is currently £6.15 an hour for those aged 18 to 20, £7.70 for workers between 21 and 24, and £8.21 for staff aged 25 and over.

But Unite officer for hospitality Dave Turnbull said the “proof will be in the pudding” as it waits for the bill to unfold. He said: “Whether the Government’s promise of a ‘fair tips’ bill amounts to the Michelin-starred changes that hospitality staff have been waiting years for, or is yet another dish served cold, is open to question.”

Unite has waged a long running campaign for fair tips and has been critical of Government inaction and has accused ministers of dragging their feet. Turnbull continued: “We will continue to lobby to ensure that the bill delivers on the promise to outlaw bad tipping practices, including employers taking a portion of tips and to ensure all staff – including those in pubs – keep 100% of the tips customers leave.”

The Tories promised to tackle the tipping abuses, first with a consultation that ended in June 2016 and then with a promise of legislation over one year ago by former Prime Minister Theresa May. Turnbull said: “The fact a fair tips bill is finally on the Tory government’s legislative agenda is testament to the campaigning of hospitality workers and Unite but, after years of false promises, it remains to be seen whether it will ever actually be served up.”

More red tape​

Undeniably, covering costs for breakages or when the rare incident occurs of a customer “doing a runner”, then operators may have to dip into the tip jar.

Marc Bridgen, owner of the Dog in Wingham, Kent, said: “If things are damaged as part of service, or when staff don’t take the appropriate care, then sometimes these aspects are taken out of service. It is this side of things that could cause a challenge for us because there are times when we do have to allocate service to cover costs that the business shouldn’t pick up – and the staff understand that. But apart from that, 100% of our tips go to our staff.”

While staff understand it isn’t guaranteed they will always see 100% of the tips accrued for this reason, there are also concerns that some employers are taking a bulk of service charge to cover administrative costs too.

Uphouse Pubs representative Martin Barnes explained that when gratuities are paid by card there is a 0.9% credit card charge.

Barnes said: “We pass on 100% of tips to our staff, but we have had to take a second look at the tipping legislation. We have naively ignored that on a £100 bill, for example, when someone tips £10 on the card, we are paying the additional credit card charge on that £10 as well. There’s a 0.9% charge on the credit card total, so for that £10 tip, we're paying 0.9% of that to the credit card company.”

So, could the new legislation encourage operators to stop tipping through credit cards?

Licensees Association chief executive Nick Griffin said: “The increase in payment by card in itself is a thorny one. Up to 80% of all tips are now paid by card and this is only set to rise. Transactions are usually liable to a fee based on a percentage, so who bears this cost?”

But despite how unfair tipping practices could become entrenched as consumers increasingly pay tips on card, encouraging some employers to only distribute the cash tips, Barnes said this credit charge is a payment that some operators will now have to swallow with the new legislation.

He said: “There may be some operators out there who have been using the service charge to pay for that credit card charge, and that's a cost they’re going to have to swallow. As a small operator, I think its worth about £2,000 a year, it's not a small amount money. It could cause more red tape.”

A taxable angle​

According to The Independent,​ evidence in 2016 showed that around two thirds of employers in the hospitality sector were making deductions from staff tips, in some cases taking as much as 10%.

But for many of the major pubcos, their staff will not be jolted by the new legislation. Greene King, Mitchells & Butlers (M&B) and Fuller’s have all mutually announced this new legislation will not impact their policies because 100% of their tips already go to team members.

A spokesperson for M&B said: “We have always been very clear that we don’t take any share of our employees’ tips.”

A Fuller’s spokesman said: “It already works for us – all our staff tips are shared via the tronc allocation.”

But while many operators will remain unaffected, the Government’s pledge to deliver the new tipping rule has been met with scepticism among some of the industry’s key figures. UKHospitality has shared concerns that this may force the hospitality sector to foot the bill with another tax.

The Dog in Wingham’s Bridgen admits the legislation will benefit those whose operators are pocketing the card service and only distributing cash, but he agrees in that there are two sides to everything. “One: for an operator who takes all the service, this will obviously benefit their staff members. But two: with all of the service being controlled by HMRC, there is a taxable angle on it, therefore, the revenue wins.

“This legislation can make the Government look good because they’re standing up for all the servers out there and stopping big businesses pocketing it themselves. But, you could be very cynical and say it’s not about protecting workers. It’s actually about the Government managing the system tighter so the Inland Revenue can get a view on it and then tax it. It’s either the Government standing up for the worker or it’s the Government finding a way to get more cash.” 

Nicholls said: “This may mean measures to cap or remove charges to hospitality businesses altogether. We already have a clear, transparent and fair voluntary code of practice regarding the collection and sharing of tips. Legislation on tipping threatens to add another unwanted burden on businesses at an already very hectic time.”

The devil in the detail​

While nothing yet is set in stone – operators patiently wait for the detail of the bill so any nook and cranny can be scrutinised.

Griffin said: “Of course, the devil will be in the detail of any bill and while it may grab headlines to say staff will receive 100% of all tips, there is still much we need to understand about how this is to be done.”

He added that while the key to any adopted system is that it is transparent and fair, it must be ensured any relevant taxes are levied at source on increased income to make life as simple as possible for employees.

Bridgen added: “The biggest winner is the public and the second biggest winner is the staff. But then, I think, who will be affected the most in a negative way, will be the employers – whether they’re already doing a fair job or not?”

While consumers continue to be generous by rewarding service with a tip, big changes announced by the Government could tie operators’ hands meaning they then have to hand over cash to their fiscal masters. Yes, tipping is a matter of social etiquette, but could a risk of another ‘tax’ see tipping removed completely? Some operators may well be up in arms and argue this is bad news, but no doubt, the staff on the front line are more likely to welcome the shift.