Employment update
Employment law update: tips, gratuities and service charges
A Unite the Union campaign has brought the issue of tipping waiting staff into the public eye.1 Philip Tsamados discusses where customers’ tips actually end up.
About the author Philip
Tsamados has 23 years’ experience as an employment law specialist. He is a solicitor at the Whitechapel Legal Advice Clinic based in Tower Hamlets Citizens Advice Bureau, London.
Stories recently abounded in the national media about the most well-known high street restaurant chains routinely deducting a percentage of credit card tips before they were distributed to staff (although some have since changed their practices). This is (forgive the pun) the tip of the iceberg because not all restaurants and other employers in service industries distribute tips, gratuities and service charges to their staff.
As a lawyer who spent many years working for a Law Centre in the west end of London dealing with low-paid , non-unionised hotel and catering workers, the question of to whom the tips, gratuities and service charges left by customers actually belonged made up a large percentage of my working life. At the time, there was limited control over employers using this income as a fund from which to increase profits and to top-up minimum rates of pay under wages councils - the statutory precursors to the national minimum wage legislation.
However, to be fair many employers allowed staff to retain tips, gratuities and service charges, either in whole or in part, and for tronc systems to operate whereby such payments were pooled and distributed to all waiting staff (and sometimes to kitchen staff ).
For my sins, many years ago I acted for a group of waiters in a high court case which was brought to determine whether it was lawful for their restaurant employer to use discretionary payments made by customers, as part of cheque and credit card payments of their bills, to discharge the minimum rate of pay obligations under the then wage council order. Ultimately, this led to the Court of Appeal finding that such voluntary, non-cash payments belonged to the restaurant owner and not, in general, to the waiter or waitress or waiting staff. This was essentially because the instrument of payment was in the name of the restaurant, and it was not clear what a customer’s intention was in making such an additional payment (Nerva and others v RL & G Ltd (t/a Paradiso E Inferno and Trota Blu Wine Bar) [1996] IRLR 461, CA).
As a result, such payments could be used by the restaurant to make up the waiting staff’s wages to the then statutory minimum wage legislation. This ruling, of course, had wider ramifications for anyone working in a service industry where tips or gratuities were given by customers. It seemed that the court was not able to see past the purely legal construction of the transaction to arrive at the true intention of the customer in this most commonplace of transactions. It had considered, but rejected, arguments that the payment was made by way of an implied agency agreement or under a constructive trust. As a result, the court dismissed the more obvious conclusion that the additional money was meant to reward the staff and not the restaurant owner. Since then, I have always advised friends and colleagues that the most certain way to make sure that a tip or gratuity gets to the waiting staff is to leave it in cash.
I have always advised friends and colleagues that the most certain way to make sure that a tip or gratuity gets to the waiting staff is to leave it in cas
‘Tips’ and ‘gratuities’ are just different words for describing voluntary payments commonly made in certain service industries, such as catering and hairdressing, which are intended by customers to reward staff for providing that service. In restaurants, in particular, a service charge of usually between 10%–12 % is also often also included in the customer’s bill and is commonly described on the menu as either a compulsory or discretionary charge. For the sake of shorthand, I have referred to the position of waiting staff in restaurants.
It was established case-law that a purely gratuitous cash payment made by a customer in a restaurant (but not one levied by way of a compulsory service charge) will always remain the property of the waiting staff or other recipients and not form part of those workers’ remuneration (Wrottesley v Regent Street Florida Restaurant [1951] 2 KB 277, CA). Nerva established that non-cash payments (ie, those made by cheque, credit and now debit card and contactless payment) belonged to the restaurant because they were paid to the restaurant.
So, the general position is as follows:
- Cash payments, other than those left as a compulsory service charge, belong to the staff.
- Non-cash payments, whether a tip or gratuity or the payment of a discretionary or a compulsory service charge, belong to the employer.
From 1 October 2009 onwards, tips, gratuities and service charges, and cover charges for that matter, paid to workers cannot be used by employers towards calculation of those workers entitlement to the rate of the national minimum wage (National Minimum Wage Regulations 2015 SI No 621 reg 1(m)) . This means that workers entitled to the minimum wage must be paid at the level of the national minimum wage, with any tips, gratuities, service charges and cover charges being paid in addition.
At the same time, the Department for Business, Innovation and Skills (BIS) produced A code of best practice on service charges, tips, gratuities and cover charges.2 Similarly, in July 2009, the British Hospitality Association also produced Discretionary tips & service changes – code of practice for restaurants and hotels to adopt in readiness for the new national minimum wage legislation.3
These codes were intended to reinforce the message to employers that tips, gratuities, service charges and cover charges cannot be used to make up national minimum wage pay. The BIS code of best practice was aimed at improving the information provided to customers and workers, and recommended that businesses clearly displayed their policy on tips, gratuities and service charges at the point of purchase and that they informed workers fully about how such payments were distributed. These are, of course, voluntary codes, but frankly I have rarely seen such information provided in any restaurant or café I have been to in the last six years and I, unlike most people, am looking for it.
In the light of the media attention about tips and waiting staff, BIS conducted a consultation exercise seeking evidence about how tips work in practice and how they are collected and distributed, including charges levied on staff as a percentage of their sales or an administration charge.4 In addition, BIS sought views concerning the role that the government should adopt in ensuring greater transparency and limiting the amount an employer can keep. Let us hope that, this time, any reforms which might follow are not simply discretionary but compulsory, like the service charges in most restaurants.
1 Visit: http://tinyurl.com/hzdhd6p
2 Available at: http://tinyurl.com/hlv7uap
3 Available at: http://tinyurl.com/joyrrhq
4 Available at: http://tinyurl.com/zu6x46d. The call for evidence closed in November 2015. At present, the BIS is analysing respondents’ feedback.