UK legislation on tipping staff about to be overhauled

The UK government has finally announced that it will legislate to prevent restaurant owners (and presumably other leisure and hospitality employers) from retaining tips given to staff.

The move comes following a public outcry in 2015 against certain high street restaurants that were called out for keeping 10% of the tips paid by customers using debit or credit cards. The new legislation will mean that gratuities paid by card, which today are deemed to be an employer’s property, must be paid to their employees, presumably without any deductions.  

There are approximately 150,000 businesses in the hospitality, leisure and services sectors in the UK - which jointly employ about two million staff - where tipping is common. Restaurant reservation platform supplier OpenTable recently surveyed UK customers and found that on average 87% of them leave a tip. 

But as the law currently stands, employees are only legally entitled to retain a cash tip as they are considered their property rather than their employers’. Tips paid on credit or debit cards, on the other hand, are deemed their employers’ property. Therefore, they are entitled to decide whether to pay them to staff, retain a percentage, or otherwise how the money should be divided.

This situation has led to a need for legislative intervention in relation to tips and gratuities for some time.

Legislative intervention

The definition of “wages” under S.27(1)(a) of the Employment Rights Act 1996 states that “fees…referable to the [worker’s] employment, whether paid under his contract or otherwise” are considered to include tips. As a result, workers have succeeded with employment tribunal claims for unlawful deduction of wages against employers that have withheld tips that did not belong to them.

For example, in Sondiere v The Capital Hotel (Knightsbridge) Ltd, the Employment Appeals Tribunal determined that tips fell within the statutory definition of wages because they were paid not by employers, but by customers. Tips were ”otherwise” wages for the purposes of the Section 27 definition.

In Saavedra v Aceground Ltd, meanwhile, the employee’s contract provided that he would be paid a specified rate, “plus service”. A 15% service charge was levied on each customer and was pooled in a tronc system, under which tips are pooled and employers take no part in deciding how they are distributed among staff – ordinarily all waiting and kitchen staff.

But due to a fall in turnover, the restaurant started to use some of the tronc to subsidise its business, leaving the waiter with a shortfall in the amount of tips he would otherwise have received.

In the first instance, the Employment Appeals Tribunal found that the service charge constituted “wages”. Secondly, it ruled there had been an unlawful deduction of wages equal to the difference between the service charge the waiter was paid and that which he would have been paid had his employer not used it to cover its own costs.

While service industry employees are currently able to seek recourse against employers that withhold tips and service charges, they can only do so if the tips are paid in cash or using a tronc system. Therefore, it is likely that, in future, the law will be extended to include all forms of service charge, leaving employers liable to hand over the full amount to staff rather than exercise their own discretion on the matter.  

Emma Bartlett is a partner at Charles Russell Speechlys LLP. She advises on all aspects of employment law and has particular expertise in dispute resolution and litigation, notably discrimination, whistleblowing and trade union issues. With a strong record in negotiating and resolving complex employment disputes, Emma is considered a skilled deal broker.

The UK government has finally announced that it will legislate to prevent restaurant owners (and presumably other leisure and hospitality employers) from retaining tips given to staff.

The move comes following a public outcry in 2015 against certain high street restaurants that were called out for keeping 10% of the tips paid by customers using debit or credit cards. The new legislation will mean that gratuities paid by card, which today are deemed to be an employer’s property, must be paid to their employees, presumably without any deductions.  

There are approximately 150,000 businesses in the hospitality, leisure and services sectors in the UK - which jointly employ about two million staff - where tipping is common. Restaurant reservation platform supplier OpenTable recently surveyed UK customers and found that on average 87% of them leave a tip. 

But as the law currently stands, employees are only legally entitled to retain a cash tip as they are considered their property rather than their employers’. Tips paid on credit or debit cards, on the other hand, are deemed their employers’ property. Therefore, they are entitled to decide whether to pay them to staff, retain a percentage, or otherwise how the money should be divided.

This situation has led to a need for legislative intervention in relation to tips and gratuities for some time.

Legislative intervention

The definition of “wages” under S.27(1)(a) of the Employment Rights Act 1996 states that “fees…referable to the [worker’s] employment, whether paid under his contract or otherwise” are considered to include tips. As a result, workers have succeeded with employment tribunal claims for unlawful deduction of wages against employers that have withheld tips that did not belong to them.

For example, in Sondiere v The Capital Hotel (Knightsbridge) Ltd, the Employment Appeals Tribunal determined that tips fell within the statutory definition of wages because they were paid not by employers, but by customers. Tips were ”otherwise” wages for the purposes of the Section 27 definition.

In Saavedra v Aceground Ltd, meanwhile, the employee’s contract provided that he would be paid a specified rate, “plus service”. A 15% service charge was levied on each customer and was pooled in a tronc system, under which tips are pooled and employers take no part in deciding how they are distributed among staff – ordinarily all waiting and kitchen staff.

But due to a fall in turnover, the restaurant started to use some of the tronc to subsidise its business, leaving the waiter with a shortfall in the amount of tips he would otherwise have received.

In the first instance, the Employment Appeals Tribunal found that the service charge constituted “wages”. Secondly, it ruled there had been an unlawful deduction of wages equal to the difference between the service charge the waiter was paid and that which he would have been paid had his employer not used it to cover its own costs.

While service industry employees are currently able to seek recourse against employers that withhold tips and service charges, they can only do so if the tips are paid in cash or using a tronc system. Therefore, it is likely that, in future, the law will be extended to include all forms of service charge, leaving employers liable to hand over the full amount to staff rather than exercise their own discretion on the matter.  

Emma Bartlett is a partner at Charles Russell Speechlys LLP. She advises on all aspects of employment law and has particular expertise in dispute resolution and litigation, notably discrimination, whistleblowing and trade union issues. With a strong record in negotiating and resolving complex employment disputes, Emma is considered a skilled deal broker.