BUSTING OPEN SERVICE CHARGE
What is Service Charge, where does it go and what are the legal requirements?
By Hussein Ahmad, our resident hospitality accounts expert and Partner at Viewpoint Partners.
Many people who work inside the hospitality industry do not fully understand service charge. It’s not a surprise that paying diners get frustrated trying to work out ‘where their money goes’ and it’s even less of one that when asked the question, most business owners do an inward groan. ‘It’s complicated.’ But it’s also not that complicated.
The way that optional service charge is collected and distributed has implications for restaurants’ bottom lines and employees’ payslips. It’s important that we understand the different methods and the pros and cons of each, so that business operators can make the right choice for their company, that employees might understand their wage slips or job offers better, and that customers are not left in the dark.
In the first instance, we should establish this: optional service charge is legally the ltd company’s money, and not the staff’s. Despite public assumptions, a company is not legally obliged to give any of it away.
That said, most companies do use service charge – at least partially – to reward staff. We have outlined the ways with pros and cons below. NB: Viewpoint does not endorse any one of these methods above another, but bearing in mind the below information, we help our clients work out which model best suits them.
Tronc Schemes
To use a tronc system requires company registration through HMRC. You must also have a ‘tronc master,’ who is not a director of the business. This is typically a non-director-level employee. On payment, all optional service charge is ‘collected’ into a pot. Of that pot, the business owners decide how much they want to keep and how much is to be distributed via tronc at the end of the month. The tronc master then decides how the amount is split. This is most commonly distributed either in line with hours worked or by seniority of the staff members.
PRO:
- Service charge that is distributed via tronc does not have National Insurance charged on it, either for the employer or the employee, so it is cheaper for both.
- Independently run, separately from the employer, for the benefit of the staff.
CON:
- An employer cannot legally guarantee a level of tronc to be received each month by an employee.
- Because tronc service payments cannot be legally guaranteed, they also do not count as part of your wage to mortgage brokers, loan providers or for furlough payments.
Service Included
This model has gained in popularity recently as a seemingly more transparent way of charging customers and paying staff. In this format the optional 12.5% service charge is incorporated into the menu prices. However, with National Insurance and VAT factored in, it ends up being closer to a 17.5% price hike across the menu as a whole, paid by the customer.
PRO:
- Wages are guaranteed and not dependent on service charge (though not necessarily any higher than with one of the other models).
CON:
- Less competitive menu prices, more expensive for customers
Service Charge via Payroll
If a company does not have a tronc scheme, it can simply distribute service charge through the payroll. In the same way as with tronc, the directors can decide how much of each month’s service charge they want to distribute amongst staff (and how much is kept by the company).
National Insurance tax is paid by both the employer and employee on this distributed amount.
PRO:
- Service charge payments paid via payroll are considered part of your wage, so they count towards mortgage and loan applications, and furlough pay calculations.
- Employers can legally use this kind of service charge towards guaranteeing a staff member a certain take home amount, even if that amount is made up partly of an hourly wage and partly from guaranteed service charge (that the company would have to make up if the service charge was too low any certain month).
CON:
- This method is more expensive because NI is charged on payments to employee and employer
- Appears more opaque, as it is at employer discretion
Some things to note:
Whilst there is nothing illegal about using service charge to ‘top up’ employees wages, it is illegal to use service charge to make up minimum wage.
Cash tips given to employees directly are owned by that individual, and companies are not entitled to ask them to hand the money over or direct how they should be shared.