Concerns about the treatment of tips within the hospitality sector (particularly in relation to the percentage of tips that goes directly to the employer) are nothing new. However, with recent media reports suggesting that some major restaurant chains continue to withhold a proportion of tips left for staff to cover "administration" costs, the Business Secretary has announced that he will take a serious look at the practice. A call for evidence has been launched, during which the Business Secretary is seeking the views of employees, the public and the industry, on whether Government intervention is required to ensure greater transparency in this area. The call for evidence is due to close on 10 November 2015.
Under current legislation, cash tips given directly to staff by customers, belong to the staff, not the employer. However, there is no requirement for employers to pass on tips, gratuities, cover or service charges to their staff, where they are paid directly to the employer (for example by credit card, as part of the overall bill). Whether employers pass this money on to staff is a matter for them and is governed by the contractual arrangement between them. Where staff are contractually entitled to receive tips, withholding this money would be an unlawful deduction from wages under the Employment Rights Act 1996. In addition, if an employer tells its customers the money will be distributed to staff when it will not be, then that is likely to be a breach of the Consumer Protection from Unfair Trading Regulations 2008.
One suggestion put forward to address this issue is to cap the percentage of tips that can be kept by employers to cover "administration costs". However, critics argue that imposing a cap will simply legitimise the underhand practice of restaurants taking a proportion of staff tips and would be impossible to enforce.
In addition to the legislative framework, a Code of Practice was developed in 2009 following research suggesting that one in five restaurants did not pass tips on to their staff. Although the Code is overseen by the industry body (the British Hospitality Association), it is currently voluntary and so there is no obligation on employers to comply with its four principles of transparency.
As well as a crackdown on lawful tipping practices, the Government has announced a package of additional measures to ensure workers receive the pay they are entitled to. These measures include a crackdown on employers who deliberately fail to comply with the legislation governing the National Minimum Wage (NMW) and the new National Living Wage (NLW) which comes into force in April 2016.
Tips, gratuities, cover and service charges do not count for NMW pay purposes. Workers must be paid at least the NMW for every hour worked before tips, gratuities, cover and service charges. In relation to enforcement, David Cameron has said that the new NLW would only work if it was "properly enforced" and has confirmed that the Government will be funding a new unit at HMRC to crack down on firms thought to be flouting the law. Under his proposals employers face increased fines (double the current fine for a breach of the NMW legislation) if they deliberately fail to pay staff correctly. In addition, anyone found guilty of non-compliance will be considered for disqualification as a company director for 15 years.
The new proposals are intended to send a message to unscrupulous employers that they will pay the price if they underpay their staff and underpin the Government's pledge to ensure hardworking people receive the pay they are entitled to.