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Tips, the National Minimum Wage and Deductions from Wages

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The Conservative Party conference has been about more than Brexit, and London employment solicitors were interested to see the announcement that legislation is to be introduced relating to tips – more specifically to make sure that tips left for workers in bars, restaurants and other establishments, will go to those workers in full. This is particularly pertinent given the situation that workers at TGI Fridays have found themselves in recently, told that 40% of tips would be diverted to supplement the wages of lower paid kitchen staff. While it remains to be seen how the legislation will work, and whether it would even fully address the TGI Friday’s issue, it’s interesting for UK employment lawyers to consider the relationship between tips and the National Minimum Wage and also the impact of the legislation relating to unlawful deductions from wages in the case where an employer seeks to retain a percentage of a discretionary service charge (or even the entire service charge).

Tips and the National Minimum Wage

Unlike the position in some parts of the United States where those interested in employment law for employees will be horrified to learn that it is still permissible to pay tipped staff at a very low level on the premise that they will ‘top up’ through tips, in the UK, all workers are entitled to the National Minimum Wage. In the UK, tips do not count when calculating whether an employee receives the National Minimum Wage or not. Any employer consulting with the best employment lawyers in London will quickly understand that it is simply not open to them to pay employees less than the National Minimum wage on the basis that they will receive tips.

For more information on the National Minimum Wage and the National Living Wage which is paid to those aged 25 and over, and to discuss any aspect of your tipping policy, our UK employment lawyers will be happy to help.

The difference between cash tips and those paid on cards

When a customer in a bar or restaurant opts to pay the ‘optional’ service charge detailed on the bill, he isn’t paying the worker directly, but the employer and the payment belongs to the bar or restaurant. The employee can only claim some – or all – of this ‘discretionary service charge’ unless there is a provision in their contract which specifies an entitlement to card paid tips. In contrast, a tip paid in cash, direct to the worker, belongs to the worker. The restaurant/bar should not ask workers to hand over tips paid in this way, or to expect tips to be shared in a particular way.

The tronc system for tips

The tronc system is a way for employers to reduce their national insurance bill while allowing employees to receive their tips in a way they approve of. Run by a third party, often an employee, but also offered as a service by accountants, this allows tips, including those paid on card, and as part of discretionary service charges, to be paid to the employee without national insurance contributions – although PAYE will be deducted. Although not universally adopted, a well-run tronc system can avoid some of the common issues that arise in connection with the payment of tips.

Tips and holiday pay

Although tips do not form part of the calculation of the national minimum wage, they can be part of ‘normal remuneration’ for the purposes of holiday pay. If the contract of Employment gives employees an entitlement to tips, or tips are a regular perk of the job, it could be arguable that an element of holiday pay should represent tips for the period that leave is taken. There is case law to say that tips received through a genuine ‘tronc’ arrangement (a tax efficient way of paying tips through a third party tronc master) would not be part of holiday pay, because they are not paid by the employer, but this would not apply if an employee is regularly paid an amount to reflect non-cash tips and discretionary service charge payments by customers.

Tips and deductions from wages

Unless an employer includes a provision in the contract in respect of deductions from wages, an employer who does deduct money from service charges and tips could face a claim for unlawful deductions from wages. It will be interesting to see if the legislation the UK Government introduces to tackle how tips are handled will be based on unlawful deduction from wages principles or some other basis. Unlawful deductions from wages are essentially those made by an employer without permission; this can be permission that’s specifically been given by the employee or worker, or permission provided in a term of the contract of Employment which allows the deduction in specific circumstances. An employer intending to take a percentage of any tips in order to over administrative costs, or for example breakages that happen in the course of Employment, should include a suitable term in the contract of Employment to avoid making an unlawful deduction.

For more advice about tips, discretionary service charges and the tronc system, get in touch with our London employment lawyers. We provide practical and intelligent advice designed to help employers run their businesses more effectively, while understanding and complying with their legal obligations towards their employees and workers. Equally, if you have been treated poorly at work, we can offer support in connection with any Employment Tribunal claim you may be considering. To talk to one of our employment solicitors in confidence, please call 0203 959 9123.

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