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By Annika Neukirch, Trainee Solicitor


Tipping and service charges are peculiarities of the service industry which have attracted controversy recently. In 2015, for example, after widespread criticism, Pizza Express followed other restaurant chains such as Giraffe and ended its practice of charging their employees an 8% ‘administrative fee’ for paying them their share of tips which customers paid by credit card rather than in cash.

More recently, restaurant chain Zizzi has been in the spotlight when it was announced that the amount of tips received by staff would decrease from 70% to 50% following the increase in national minimum wage levels earlier this year, although they have denied that the two instances are linked.So what are the rules on tipping? Since 2009 it has been the case that tips and gratuities cannot be taken into account when calculating whether the employee has been paid the National Minimum Wage. Previously, sums paid through the employer’s payroll could be included for the purposes of National Minimum Wage calculations.

In relation to taxation, there is no doubt that cash tips given directly to employees are taxable as income. It is up to the individual employee to declare tips to HMRC and pay the appropriate tax on them. However, often restaurants will operate a so-called ‘tronc system’, where service charges and tips are pooled and then distributed by a ‘troncmaster’ according to an agreed formula. Often troncmasters will also be responsible for deducting PAYE before the transfer is made to employees. This system also has the advantage that the payments not classed as being made by the employer, and therefore no national insurance contributions are due. This can be contrasted with the position where an employer collects all tips and then distributes them without the troncmaster as an intermediary. 

There is currently no legislation dealing with tips and discretionary service payments. Instead, in 2009 the Department for Business, Innovation and Skills introduced a ‘Code of Best Practice on Service Charges, Tips, Gratuities and Cover Charges’ which is voluntary and aims to increase transparency in the service industry where such payments are common. The four main principles enshrined in the Code of Practice are:

clearly displaying policies regarding mandatory and discretionary service charges and tips prior to the point of purchase;
having processes in place to deal with requests from customers about how and to whom all service charges and tips are distributed, and the level and purpose of any deductions;
ensuring that workers understand and are able to explain the policies on service charges and tips to customers;
making certain that all workers are fully informed on the distribution of tips and service charges and any deductions, and seeking agreement of the workers prior to implementation if changes to this policy are to be made.

However, it is evident that the Government has deemed this voluntary Code to be insufficient. In response to reports concerning unfair practices by some businesses in relation to the distribution of tips amongst staff, for example the charging of an ‘administrative fee’ to process electronic tips,  the Business Secretary launched an investigation on tipping at the end of August 2015. The evidence received indicated that, in addition to admin fees, some employers retain the whole of the service charge, or alternatively, rather than retaining all or part of the discretionary payments for services,  they  may require workers to pay  to them  a percentage of their individual  table sales made during a shift., Such payments are made out of tips, and go towards non-waiting staff, recruitment, training, team activities, and rewards. However, if a particular staff member makes insufficient tips to cover this charge, this must be paid from the subsequent shift. Further, the evidence received indicated that consumers rarely know what happens to their tips.

These practices have led the BIS to launch a consultation on proposals to regulate tipping practices. Their consultation document outlines and seeks views on a number of proposals to take action in relation to:

increasing transparency for consumers by making clear that discretionary payments are voluntary;
ensuring that employees receive a fair share of tips, for example by prohibiting non-tax deductions from discretionary payments or limiting the amount of deductions employers can make;
banning or restricting the levying of table sales charges on staff;
increasing prevalence of, and further regulating, tronc systems;
updating the Code of Practice, placing it on a statutory basis to allow it to be taken into account in court or tribunal proceedings, and ensuring that written policies are maintained and available to all workers in relation to tips.

What is clear from the responses to the Government’s call for evidence is that there is uncertainty amongst employees, employers, and consumers in relation to tipping and service charges. Only 36% of employer respondents were sure that they followed the Code of Practice guidelines fully, and there was also support amongst employer businesses for increased transparency in relation to the rules around discretionary payments for services. 

The BIS consultation is open until the end of June, and it will likely be some time before recommendations are made and implemented. However, even without updated statutory rules and guidance employers can take steps now to improve their systems and practices. 

Any charges should be clearly pointed out to consumers before the point of sale, for example on menus, and policies on tipping practices should also be clearly displayed. It is also advisable to have a well thought out tipping policy in place that outlines, for example, how troncmasters are elected, how any pooling of tips operates, and details of any deductions made by employers from tips, including the reasons for such deductions. It is also sensible to communicate with employees as far as possible in order to ensure that everyone is aware of the policy.


Please get in touch with a member of the Stronachs Employment team if you have any queries about the above.

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