Tips for dealing with changes to gratuity rules

With changes to how tips and gratuities work coming up, employers will need to review their current payroll processes to make sure they are fair.

The way tips and gratuities work may be changing. Following a consultation by the UK government, reforms were announced that would bolster workers’ rights and ensure that tips are received in full. The changes are expected in an Employment Bill, however this did not receive a mention in the latest Queen’s speech. 

In the press release that announced the plans it states that 80% of UK tipping now happens by card rather than cash. Currently, where a business receives a tip by card, they have a choice as to whether they keep it or pass it on, in full or in part, to staff. As society becomes increasingly cashless, this is an issue that the UK government are keen to resolve.

Code of practice

The legislation will make it illegal for an employer to withhold tips from employees, however they are received. This will mean that employers will need to conform with a statutory code of practice that will set out how distribution of tips should work to “ensure fairness and transparency”.

The new rules will require all tips, without any deductions, to be paid to workers. To go along with this, workers will gain the right to make information requests relating to their employers’ tipping records. This will allow claims to be brought forward to any employer not complying with the code of practice and could see employment tribunal action. Tribunal action can cost companies severely, so compliance with any new rules will be essential to many small businesses.

It is not currently known what information will be included in the code of practice employers will need to comply with, but there are things we can start to think about. Businesses will require a robust and clear tip policy, either as part of the contract of employment, employee handbook or similar relevant agreement. Much like how annual leave is handled, the relevant agreement should be clear to avoid disputes and remain compliant with legislation.

The consultation, “tips, gratuities, cover and service charges: proposals for further action”, also investigated ensuring that customers were aware of when a service charge was discretionary.

Current rules

The simplest method of paying tips is allowing employees to keep tips paid directly to them in cash. Funds paid in this way, with no involvement by the employer whatsoever, are the easiest for the employer to handle. The worker keeps the tip, and no PAYE is required.

However, the employee must declare the amounts to HM Revenue and Customs (HMRC) directly for income tax purposes. They can do this through a self assessment tax return form, online on their personal tax account or by calling HMRC’s income tax enquiries helpline.

Where an employer makes the payment to an employee for tips – such as when tips are paid by debit card, credit card or cheque – PAYE must be operated on these payments.

A payment is exempt from national insurance if it meets either of the following two conditions:

• it is not paid, directly or indirectly, to the employee by the employer and does not comprise or represent monies previously paid to the employer, for example, by customers

• it is not allocated, directly or indirectly, to the employee by the employer.

Using a tronc

There are different rules if using a tronc. A tronc is run by a “troncmaster” – someone who is responsible for the sharing out of tips to employees. A troncmaster can be either an employee, a third party or someone connected to the employer. 

Care needs to be taken to ensure correct processing is followed for troncs. The troncmaster needs to ensure HMRC is aware of the arrangement, and they will be responsible for operating the PAYE aspects of the scheme. The employer may process payments through their PAYE scheme, acting as an agent, but the troncmaster must maintain records relating to the tips and tronc.

Payments using a tronc are exempt from National Insurance contributions if:

• troncmaster is allocating money that originally was not paid to the employer and the employer does not pay the money directly or indirectly to their employees

• employer does not determine, directly or indirectly, the allocation of those tips.

HMRC provide many useful examples on their guidance page for employers to understand how tips are handled in different situations.

As of October 2009, tips and gratuities cannot be used towards calculation of national minimum wage pay. Regardless of any agreements, workers have the statutory right to be paid at least the national minimum wage that applies to them.

Planning for the changes

With the changes potentially coming up, employers will need to assess their current processes and decide if they will remain suitable. Deductions from tips and discretionary service fees will no longer be allowed and workers will have the right to inspect records to ensure the rules are being handled correctly. This may require structural changes to the way some companies handle tips and gratuities.

Source: Accounting Web