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Tips and gratuities at work

A gratuity or tip is a sum of money given by customers for a service they have received, this is common in the hospitality sector. This guidance will look at the implication of receiving tips in the workplace and on the National Minimum Wage when tips are received.

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Overview

It's reported that there are around 165,000 business in the hospitality, leisure and service sectors where tipping is common. Bars, restaurants and hotels make up a large proportion of this sector, however, tipping is also important in businesses such as hairdressing, casinos and private car hire. Tips, gratuities and cover charges cannot be used to make up the National Minimum Wage, but should be paid on top.

There are a number of ways in which customers make payments towards tips, gratuity and service charges, these include a:

  • mandatory service charge
  • discretionary service charge
  • gratuity paid to the employer as part of a payment via credit /debit card
  • cash gratuity paid into a staff box etc
  • cash payment made directly to an employee.

The Code of Best Practice

The Government has developed a Code of Best Practice on Service charges, Tips, Gratuities and Cover Charges with trade unions, business representatives and consumer groups. It is a voluntary code and explains how employers should handle tips and gratuities. The code states:

  • all workers should be fully informed on the distribution and breakdown of service charges, tips, gratuities and cover charges and the level and purpose of deductions
  • businesses should seek to reach agreement with workers on any change of policy.

Employers should have a policy on tips including information such as:

  • how tips will be distributed, and if tronc is used
  • if cash and card tips are treated differently
  • the name of the tronc master where there is one
  • if any deductions are made from tips
  • what happens to tips during leave, sickness absence etc.

The Code of Best Practice on Service Charges, Tips, gratuities and Cover Charges applies to all tipping sectors including:

  • hotels and restaurants
  • gambling and betting outlets
  • hairdressing and other beauty therapy businesses
  • taxi operators.

National Minimum Wage and Tips

Workers have right to be paid at least the National Minimum Wage, the rate will depend on a worker's age and if they are an apprentice. If tips and gratuities are paid at work they cannot count towards the National Minimum Wage and should be paid on top of it.

Tronc Scheme

A tronc scheme is an arrangement for sharing tips, gratuities and service charges to employees. The person in charge of the tronc scheme is called a tronc master, they will be responsible for operating PAYE on payments shared through the tronc. The employer does not decide who participates or how the tips are shared.

When a payment is made via the tronc scheme it may be exempt from National Insurance Contributions if the:

  • tronc master is sharing money that was not paid to the employer and the employer doesn't pay the money to the employee
  • the employer does not determine who receives tips and how much they receive.

However, HMRC may need to check the arrangements meet the terms and conditions.