Tips - Government to Review Law

Currently, restaurants operate a wide variety of practices when it comes to dealing with tips and the Government does not regulate as to how they should be managed.

The Department for Business, Enterprise and Regulatory Reform (DBERR) has agreed to examine the laws relating to the payment of tips in restaurants. It will look at several issues of concern and take all representations into account, including those of the British Hospitality Association and the trade unions.

Currently, tips paid to a member of staff by a customer do not count as wages for the purposes of the National Minimum Wage (NMW). For example, this would be the situation in a restaurant when the customer gives a tip directly to the waiter. However, tips paid through the employer’s payroll can count for the purposes of calculating the NMW. This would be the case where a restaurant adds a service or cover charge to the bill and remunerates employees through the payroll.

In a recent case, the Central London Tribunal confirmed that customers’ tips added to a bill paid by cash or credit card and then distributed to employees via a ‘tronc’ system (a special arrangement used to pool and distribute tips), do count as being paid by the employer and thus count towards the NMW. HM Revenue and Customs’ guidance note E24 had not been clear on this point. However, the Employment Appeal Tribunal (EAT) has ruled that tips paid to employees at the Mayfair nightclub, Annabel’s, between 1999 and 2003, did not count as wages for the purposes of the NMW. The tips were paid each week to one of the employees (the ‘troncmaster’) who distributed them amongst the waiting staff through a separate payroll. The EAT held that the tips did not belong to the employer but were held in trust by the troncmaster for the members of the tronc. HMRC have recently issued a new advice sheet on taxes and tips.

The DBERR will also investigate whether restaurants should be required to disclose their tips policy to customers.