New Rules for Treating Tips and Gratuities
From 1 October, employers must ensure 100% of tips and gratuities are paid to employees.
Traditionally, tips involve cash payments, whereas gratuities are paid by card on the customer’s bill. Essentially, they are the same: a customer payment as a thank you for good service.
The legislative update has been introduced by the Department for Trade and Business. It estimates £200 million will be received by workers that would otherwise have been kept by employers.
Tax is due on any tips received however they do not count towards National Minimum Wage.
‘When you tip someone for good service, you expect them to keep all their tip. They did the work – they deserve the reward,’ says Justin Madders, Minister for Employment Rights. ‘This is just the first step of many in protecting workers and placing them at the heart of our economy. We will be introducing further measures on tipping to ensure workers get their fair share of tips.’
What action should employers take?
There is no significant change for payroll teams however it is essential that employers treat gratuity payments and service charges correctly.
If tips are given directly to an employee, they should be declared via a Self Assessment tax return.
For cash left on the table or gratuity payments by card, employers must either:
- Decide how tips are distributed amongst workers. This involves NIC and PAYE deductions via payroll.
OR
- Use a special arrangement for pooling tips, known as a tronc system. In this instance, no NIC payments are due and PAYE deductions are made via payroll.
Failure to distribute 100% of tips can now result in employment tribunal claims.
Why are changes needed?
Most employers already ensure employees receive 100% of tips earned. Some, however, do not treat employees fairly. The new rules aim to crack down on this minority of businesses. Those who continue to adopt unacceptable tipping practices risk paying fines or compensation via employment tribunal cases.
The change is intended to ensure fair and transparent distribution of tips among employees. Importantly, it also builds trust and transparency between customers and businesses, especially where service charges are automatically added to bills.
Is your business affected?
If your team receives tips, you need to ensure 100% of the amount is distributed and processed correctly. If you would like to discuss this, please talk to the payroll team at Hargreaves Owen. Enjoy an initial discussion without obligation. Join us for a coffee! We’re based between Baldock, Letchworth and Hitchin with a lovely café on site.