What businesses need to know about the Government’s consultation on tipping, gratuities, cover and service charges

If you own or run one of the 150,000 businesses in the hospitality, leisure and services sector where tipping is common you’ll already know a major review is underway into how tips and other types of charges should be handled. But what exactly is being proposed? With less than six weeks left to submit your views to the Government, Jane Lockyer gives you the breakdown.  

Why is the consultation taking place?

The Government consultation follows an investigation that started in August 2015 after concerns were raised over tips, gratuities and cover and service charges. Right now there are no legal rules regarding what proportion of tips must be paid to workers, and after evidence was submitted by consumers, workers and employers groups the Government has put forward a number of proposals.

What is the Government proposing?

The Government has put forward ideas based around three broad objectives.

  1. Ensure transparency to consumers that discretionary payment for service is just that – ‘discretionary’.
  2. Ensure workers receive a fair share from discretionary payments for service.
  3. Increase transparency for consumers and workers regarding the treatment of discretionary payments for service.

In other words, if you’re not doing it already, make it clearer tips and gratuities are at the customer’s discretion; make sure staff get the tips they deserve; and finally, make sure both customers and workers know exactly where tips and gratuities are going.

Is the Government proposing alternative ways of achieving these objectives?

Yes. A number of proposals have been put forward and that’s what the Government is seeking feedback on. Below you’ll find a breakdown of each one.

“Ensure transparency to consumers that discretionary payment for service is just that – discretionary.”

The Government is giving three options here.

  1. Companies can still suggest to customers a discretionary payment in percentage form i.e. 10, 15 or 20%, but must make it clearer to the consumer that it is discretionary. Among the suggested ways this could be achieved is including clearer signage on menus and websites and or offering two final bills – one with the discretionary price included, one without. In all cases a customer would effectively have to “opt-out” if they didn’t want to pay.
  2. Under the second proposal companies couldn’t suggest a specific amount (a percentage) – instead it would be up to the customer to decide what payment should be made. In this scenario a customer would effectively “opt-in”.
  3. The third option the Government wants considered is ensuring cover charges are more clearly explained so customers understand they are mandatory and that workers do not benefit from them. Again, clear signage is one of the ways it is proposed this could be achieved.

“Ensure workers receive a fair share from discretionary payments for service.”

Across the industry companies take a different view on what should be retained for business purposes. In some cases they keep money for tax purposes only, in other cases money is retained for payroll costs and staff food and drink. The Government wants a more uniformed approach that sees more money consistently go to workers and it has put forward a number of proposals.

  1. All payments go to staff apart from money required under tax law.
  2. Businesses could retain money for tax purposes AND a set amount agreed by the Government for credit card charges and payments through payroll. The Government stresses that companies would be prevented from making any profit from such deductions.
  3. The Government is proposing banning or restricting charging staff a levy on table sales after it emerged some firms are using it to fund things like staff food and drink and recruitment and training. It is seeking more information about why this happens.
  4. Finally it is being proposed that “tronc” systems (where tips and gratuities are pooled) should be handled by employees not management. The Government wants suggestions on how these tronc systems could be increased.

“Increase transparency for consumers and workers regarding the treatment of discretionary payments for service.”

Based on the evidence gathered the Government does not believe the current voluntary code of practice is either widely used nor well understood and is failing to achieve a consistent level of transparency for both the public and workers. So the Government is making two proposals.

  1. Update the code.
  2. Make the code statutory. Whilst it would not impose specific legal obligations it would raise the status of the code and it could be taken into account in any court or tribunal proceedings.

The Government has a number of questions in this area including how much it costs businesses to adhere to the current code.

How do I give my feedback and how long have I got left?

The consultation closes on Monday the 27th of June. Feedback can be made online at:

You can also print off a form at the following address: proposals-for-further-action

Send the form to Labour Market Directorate, Department for Business Innovation and Skills, 1 Victoria Street, London SW1A 0ET.

In the meantime, as a commerical property lawyer, I will continue to do battle with landlords on turnover leases where landlords, newly alive to the issue of how tips and service charges are dealt with by restaurants, want to ensure that such sums are included in the calculation of turnover. Restaurants as tenants need to ensure that these amounts are kept off the total to reduce their rental liability.

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