The Rules on Tipping, Tronc & Service Charge – An in-depth guide to the UK law for the Hospitality Industry

Kalra Employment Law Solicitors are delighted to share a guest post from Paperchase Accountancy – the UK’s leading hospitality accountancy firm – covering their ‘all you need to know’ legal guide on Tipping, Tronc & Service Charge.

Tipping, Tronc & Service Charges

An ‘all you need to know’ guide

In the hospitality sector gratuities have become a very controversial issue, with staff wanting a better scheme for distributing tips more fairly, with Government wishing to ensure businesses hand over 100% of gratuities to the staff.

In the week that Business Secretary Kwasi Kwarteng gets ready to launch a scheme where hospitality workers will receive 100% of tips and service charges, do you really understand Tipping, Service Charge and Tronc? Marc Bertorelli from hospitality accountancy specialists, Paperchase, looks at service charges, gratuities and tips and investigates with help from Peter Davies of WMT, and Samantha Newton of Buzzacott, both providers of TRONC Master Services.

Having worked ‘front of house’ in hospitality for several years before joining Paperchase, I was enrolled into a Tronc that distributed gratuities and tips to all employees. Then, I gave no thought to how other employers operated their schemes, but now, talking with more and more operators about how Paperchase can help them with their businesses, talk of gratuities and service charges are a reoccurring topic of conversation and I realised that I didn’t really understand the overall issue, and neither do our clients. As Paperchase are not Tronc service providers, I decided to find out more, and here are my findings. So, if you have another viewpoint, then, please let me know.

As we crash headlong towards the festive season, and hospitality gets ready for its busiest time of the year, businesses and staff look towards this time to recoup some of the losses incurred during the last 18 months. Restaurants through increased revenues and staff through generous Christmas gratuities. With a current staff shortage in the sector and a resistance from British workers to enter the industry, tips, gratuities and service charges are a vital part of remuneration and attracting staff to hospitality. Due to Covid, Furlough, EU workers who went home after Brexit, and the lack of cash as gratuities in the last 12 months making it harder for staff to pocket tips, collectively, this has resulted in an increase in job vacancies of over 60% in the past year.

How gratuities are administered and distributed are continually under scrutiny and during the last few years there has been a steady flow of media coverage regarding hospitality businesses failing to deal with tips and service charges in a manner which is fair, ethical and transparent. Many rumours and much media coverage point a finger at hospitality operators who might appear to be keeping such payments for themselves despite the intention that the money should be given to the team who have delivered the customer experience.

As Business Secretary Kwasi Kwarteng gets ready to launch a scheme to remove power from pubs and restaurants to deduct and retain service charges, he intends to protect staff under new laws which would target and identify unscrupulous practices. So, without taking a personal stance, let’s look at how monies for service are charged to the customer, how that money is distributed to the staff, and on that journey, we may have a better understanding of what the implications are to the various schemes that are being operated within the hospitality sector.

Government Findings

In 2016 the UK Government set out some clear policy objectives regarding Tips, Gratuities and Service Charges, finding that in principle consumers believe the following:

• Tips, Gratuities and Service Charges are discretionary*
• Tips, Gratuities and Service Charges are received by the workers in an establishment
• The process of distributing these gratuities is clear and transparent

*Because payment of this charge is optional or discretionary on the part of the customer, VAT does not usually apply
It was also felt that the whole team who have contributed to the overall dining experience should receive a share of gratuities that were calculated and managed fairly, independently, impartially and transparently. The result being that the customer feels that they have rewarded the whole team including servers, front of house, making them feel valued and rewarded.

The way gratuities are paid to the business by customers and then distributed to the staff will vary from business to business, however in the main there are three ways that customers may choose to pay a gratuity:

• Paying a service charge shown on the bill
• Adding an extra amount over and above the sale to a card
• Leaving a cash sum

Any payment made to staff from such payments are taxable, deducted by the business when the gratuity is part of a service charge or part of a card or cheque payment. When trying to understand the types of payment of discretionary service charges, gratuities and tips, depending how they are paid to the business, certain rules apply.

Card & Cheque Payments

Under British and European law, all service charges, gratuities and tips paid as part of a card or cheque transaction that go through the till are the property of the business. As such, they are part of the revenue of that business, and whilst these monies are intended for the staff and should be passed on as a salary payment to the employee.

If the employer chooses to do this, they will be responsible for making sure employee Income Tax is paid. However, the bad news is, any tips paid directly by your employer, including cash tips that are collected on your behalf, will also incur additional tax in the form of National Insurance contributions. Businesses not doing so, should be mindful of public reputational issues that may ensue.

Cash Tips

Cash tips are not necessarily the legal property of the business, and if staff share and retain cash tips it is their own responsibility to declare this income to Revenue & Customs, as these payments are taxable. Whether your tip is given to you as cash in hand or it is paid electronically by the customer, all tips are subject to Income Tax. Depending on the type of tip and how it is distributed, you may also have to pay National Insurance contributions too.

Tronc Systems

A Tronc, also known as a Tronc scheme or Tronc system, is a special payment arrangement that lets businesses fairly distribute staff tips, gratuities, and service charges. A Tronc scheme must be controlled by a member of staff, or an independent third party, but not by the business. The benefits of implementing a Tronc scheme include:

• Significant savings to staff and the businesses through exempt NICs
• Staff get 100% ownership of their gratuities, and a say in how they are distributed
• A truly independent arrangement, free from employer interference, run for the benefit of staff
• The pooling and distribution of tips is completely transparent for staff and employer
• Improving staff motivation and retention as employees feel valued and rewarded
• The Tronc remains in line with the latest HMRC policy changes ensuring you’re safeguarded from any HMRC challenge
• Banks can lend on TRONC for mortgages calculations

Many employers decide to distribute gratuities by adding them to the general payroll but distributing gratuities in this way results in the’ extra’ being taxed as salary, meaning staff receive it net of income tax and NICs. Discretionary payments of tips allocated through a Tronc scheme, where all qualifying conditions are met, are exempt from employers and employees NICs. Given that employer and employee NICs total over 25%, this represents significant savings. Put simply, a Tronc leaves everyone better off.

All In!

One other scheme that is often quoted is to go ‘all inclusive’ where all menu items include a charge for service. Peter Davies of Tronc specialists WMT has written on this subject for several years and when Peter lays out the cost of doing so. An ex HMRC officer specialising in the hospitality sector, Peter is an authority in this area.

Let us look at two scenarios. The first is the payment of gratuities or service charges via a Tronc scheme, and the other is an ‘all inclusive’ system where all items on the menu are calculated to include a service charge. The following examples calculate monies paid to the staff on £100 for service charged.” Explains Peter.

Service – in the TRONC
For each £100 for service in the staff TRONC paid to the staff
Cost to the customer = £100
Cost to the employee by way of tax = £20
Cost to the business = £ 0

Service – in All Inclusive Pricing 
For each £100 for service the restaurant must allow for: VAT, Employer & Employee NI, Income Tax, Pension Contributions, Apprentice Levy, Statutory Sick-pay, Holiday Pay, Maternity Pay and Student Loan repayment. In all this carries a cost of £53.93 for each £100.

For that £100 = £53.93 of COST

Service or Gratuity payment to the employee = £48.17

Alternatively, to pass this on the customer, to offset that cost to the restaurant, the restaurant would have to charge the customer a total of £164.71

In 2015 in the USA Danny Meyer pioneered a ‘no tipping’ all-inclusive policy in his Union Square Hospitality Group in New York and became an industry thought-leader on this matter. In July 2021 Meyer announced in a LinkedIn post that he would be ending the no-tipping policy he famously pioneered, and when you outline the scheme, seeing how it looks on paper, you can see why he folded his scheme.

Administration Charges 

Businesses collecting, processing and paying service charges, gratuities and tips will incur an administration charge which is typically 5% of the funds paid by the customer. This is universally acceptable and the percentage covers credit card fees, bank charges and third-party costs such as Tronc. When a business does not wish to absorb these costs, then it may retain them as an administration charge. Best practice is for that business to make it known to the customer and the staff of the intention to retain that fee and the percentage charged.

Putting a detailed statement on a menu or the website of the business may read:

“A Discretionary service charge of 12.5% will be added to your bill. Of the money you choose to pay, 95% is distributed to all the team via a communal Tronc system, which is managed by (member of the team / an independent third party). The remaining 5% is retained by the business to cover direct costs and from which we do not make a profit. Further details are on our website. Please tell your server if you do not wish to pay the discretionary service charge.”

A business should provide these details on the website and a copy of Tronc rules should be available on request.

Fair Tip Share – new initiative

Much of hospitality business has operated in a way which most would consider fair. Complications occur due to laws around legal ownership, taxation and who should get what. As a result, many businesses have decided that it is better to say nothing unless prompted.

This has allowed the view to take hold with the dining public that there is something dubious or underhand about the whole affair. Peter Davies was asked by several leading operators to put together a statement of what “good practice” looks like. Market research carried out by WMT together with EP Business in Hospitality showed that customers wanted information that would allow them to make an informed decision about whether to tip or pay service. So, the idea of a kitemark was born and ‘Fair Tip Share’ was launched.

‘Fair Tip Share’ is an accreditation scheme for restaurants, bars, hotels, pubs, casinos and other hospitality businesses. It helps operators who wish to be transparent about the way they distribute the gratuities they collect from customers to their staff.

Members will be able to display the ‘Fair Tip Share’ logo telling consumers that their policies and procedures have been independently vetted to ensure they comply with the scheme’s standards with additional detail and information available online. Visit ww.fairtipshare.co.uk for more information.

Education

So, before Kwasi Kwarteng begins to regulate the industry, with whatever legislation he plans to enforce, my advice to restaurant operators would be to educate yourself, and then educate the customer. This was a grey area to me and I work within the industry, so to the customer, it would be even more confusing. Ensure the customer understands exactly how he or she is rewarding staff, and exactly how the staff are going to be paid their gratuities!

Written by Marc Bertorelli of Paperchase, the UK’s leading hospitality accountancy
www.pchase.co.uk

Contributors:
Samantha Newton – Tronc Master Services @ Buzzacott
Peter Davies – Tronc Master Services @ WMT

Ask KLG: What does this mean for employers?

The impact of this impending change on the hospitality sector will remain unclear until the Employment Bill becomes legally binding.

Some hospitality businesses may need to amend their tipping practices as a result of the new legislation. We expect a new code of practice will be introduced to help employers understand their new legal obligations.

Mr Dean Russell, Conservative MP for Watford, is an advocate for the Employment Bill. He believes employers should be required to introduce some form an agreement to ensure staff keep the tips they are entitled to. We agree that this would be a useful way for the hospitality sector to ensure workers understand how tips will be collected and distributed.

If employers fail to comply with the new legislation, we anticipate that there will be a requirement to recompensate workers, and possibly the additional sanction of a government issued fine.

For bespoke advice on employment law matters please contact our solicitors via [email protected], 0330 221 0684 or by filling out the enquiry form on our website.