Companies banned from withholding hospitality staff tips under new plans

One hundred per cent of tips will go to staff under new government plans to overhaul tipping practices in the hospitality industry.

Scrutiny of tipping practices has been accelerated due to the move to cashless during the pandemic, with the government’s new rules extending to all card tips as well as cash.

Why is this important?

Between 2015 and 2016 the government pledged to take action to protect workers tips and service charges. This pledge came about due to revelations that certain businesses were keeping a percentage of staff tips to boost profits or top up kitchen staff and restaurant managers wages.

The trade union, Unite, criticised restaurant chains for taking advantage of the government’s failure to legislate on the issue, which saw some restaurants deducting up to 40 per cent of staff’s card tips to waiters to pass them on to kitchen staff in lieu of a pay rise. In 2015, the then business secretary, Sajid Javid, said that the government were considering whether to toughen up the existing voluntary code, or to legislate to enforce the correct practices.

In 2018 the then Prime Minister, Teresa May, announced proposed legislation to address these issues, stating “we will introduce tough new legislation to ensure that workers get to keep all of their tips – banning employers from making any deductions.”

Closing the legal loophole

On Friday (24 September 2021) the government announced that this legislation will now be brought in to make sure that tips left for hospitality staff are paid to them in full, less any tax and national insurance deductions. Two million people working in the hospitality industry, many of whom are earning the National Minimum Wage or National Living Wage industry, rely on tips top up their income and will benefit from the legislation. It is also key to make that customers are confident that their tips are going directly to the staff member and not to the company.

This announcement came shortly after the government announced its wider, first ever, Hospitality Strategy. This new legislation will complement the wider strategy which will set out ways to help the sector improve its resilience, including by making hospitality a career option of choice, boosting creativity, and developing a greener sector.

Why are card tips at the heart of the legislation?

Cash tips are already protected by law and must be given to the staff member who earned it. The issue is that there is no such protection for card tips. There are ‘voluntary’ guidelines, however employers are under no obligation to follow such rules. A change in the rules has become urgent after the pandemic spurred a switch to cashless payment, with 80% of all UK tipping now happening by card, making it easier for businesses to allocate funds as they see fit.

It has been law since 2009 that tips cannot be used to count toward minimum wage and businesses must make it clear how any tips and services charges are used. The 2009 Code of Practice, provided various examples of wording which businesses could use, such as:

We are committed to the Code of Best Practice on Service Charges, Tips, Gratuities and Cover Charges.This restaurant adds a discretionary service charge to customers’ bills.Ten per cent of any discretionary service charge or card tip which you choose to pay is retained by the business to cover the charges we incur in processing your payment, card fraud losses and administration costs in distributing sums to staff.Twenty per cent of the discretionary service charge or card tip is retained by the business [this includes deductions for breakages, till shortages and walk-outs] and 70 per cent is shared between the staff. All cash tips go to the staff. The amount available for staff in the restaurant is shared out through a system controlled by a staff representative.

Under the new law it will be illegal to keep any percentage of tips or services charges for any purpose whatsoever. All tips and services charges will be paid to staff, with the intention to make it fairer for the employee and clearer for the customer as to how their tip will be used.

What do these new rules mean for employers and employees in the hospitality industry?

This legislation is planned to become law next year (2022) and will include:

1. A requirement that all employers pass all tips (cash and card/electronic) onto workers without any deductions (such as administration charges) except for those deductions required by tax law.
2. A Statutory Code of Practice setting out how tips should be distributed to ensure fairness and transparency.
3. The necessity for a written policy on tips and the retention of records of how tips have been dealt with.
4. Allowing tips to be provided by using a tronc (a common fund into which tips and service charges are paid for distribution to the staff) but require that they are distributed no later than one month in arrears
5. The introduction of rights for workers to request information in relation to an employer’s tipping record, allowing them to bring forward a credible claim to an Employment Tribunal.

If an employer is accused of breaking this law, an employee will have the right to bring an action at an Employment Tribunal, with the result seeing employers being fined and ordered to compensate the employee(s) for their losses.

No date has been given as to when this change of law will come into effect, but businesses operating in the hospitality should start to prepare sooner rather than later.

If you need employment advice please call Lisa Kelly on  0191 211 7897 or by email at [email protected]