THE NEW SERVICE CHARGE LEGISLATION
What is it and how will it affect YOU?
There is a new law which is due to come into place at some point next year, which changes the way service charge is treated and allocated. The aim is to put more money in the pockets of employees, and to prevent employers from withholding or misusing tips.
This sounds like a straightforward, fair and timely bill, but it is not without difficulties and controversies. Issues arising from these changes will confront both employers and employees, and it is important to be prepared.
We hope to explain these in the following breakdown.
What is it?
The Employment (Allocation of Tips) Bill is new proposed legislation which will require employers to ensure that all tips, gratuities and service charges are paid to workers in full, less PAYE where applicable, by the end of the following month, in a fair way.
When will it happen?
The bill went to the House of Lords on March 3rd. There are then likely to be some amendments before it passes, which is predicted to happen in May 2023. It is unlikely to come into force until April 2024, to give businesses time to make necessary changes, as well as coinciding with most financial year ends.
These changes will not be enforced retrospectively, which means that the new ways of working will only take place from the start date onwards.
Why is this happening?
In 2015 the government responded to a spate of news stories about unfair tipping practices in a number of high street chains – among them Pizza Express was accused of deducting 8% of tips paid to staff on credit and debit cards, Las Iguanas was reported to have a policy requiring staff to pay back 3-5.5% of their total table sales in cash to the restaurant each night, and Côte Brasserie was criticised for retaining the 12.5% automatically added on card payments. This led to an investigation and a call for government intervention into policies. Following this investigation the first proposed bill was presented in 2018, and a commitment to “ensuring that tips left for workers go to them in full” was even mentioned in the Queen’s Speech in 2019.
The issue faced more public attention during and after Covid, when furlough and reports of poor operator practice meant that there was greater awareness and pressure to support hospitality workers. The aim of this new bill is to standardise tipping practice in a fair way, improving working environments for a workforce that has been historically overlooked and is dwindling in the wake of Brexit and Covid. It also intends, in the words of UK Hospitality Chief Executive Kate Nicholls, to “reassure prospective hospitality sector workers at a time when the industry is seeking to fill vacancies”.
Some people speculate that the reason Conservatives have asked backbenchers to put this through as a private bill is that there would be less scrutiny. Timed to come into play ahead of the general election next year, their aim may be to win over young voters, who assume the bill will affect them positively, as well as eroding Labour’s base through supporting workers rights.
The breakdown:
What do they mean by “paid in full”?
And what does this mean?
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Operators cannot pass on administrative fees, bank charges or processing fees to the employee. So, if a customer tips £20 and Visa charges 2% on the transaction, the employer must give the full £20 to the employee, making a loss of 40p.
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Employers can still use the previous service charge systems, whether distributed by the employer via payroll, or by the employees via tronc. As before, deductions for National Insurance and Income Tax (PAYE charges) will still be made on all service charge distributed via payroll (but not via tronc).
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In the case of third-party tip systems such as TipJar, the service charge gathered cannot go into the operators’ bank account. It must go directly into the bank account of the relevant staff member.
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Service charge must be paid from the site it is received, directly to the staff that work there – i.e. multi-site operators cannot pay staff from a central pot formed from all sites.
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If an operator takes a large number of transactions through high % credit cards (i.e AMEX) there will be a significant increase in cost for the same revenue achieved. Obviously this will make transactions via these forms of payment less attractive, and operators may change their policies regarding the types of cards accepted.
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Third-party tip systems are likely to have to scramble to work out some tech to make direct payments possible – possibly linked to an electronic rota system.
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If Restaurant A is performing well, and Restaurant B is performing below par, you cannot use Restaurant A’s service charge to subsidise Restaurant B’s staff. This potentially creates several issues: Restaurant B’s take home pay will be less competitive, so would not attract and retain the best staff. Instead of enabling an operator to fix a potentially short-term issue, a decline at the under-performing restaurant might be accelerated.
What do they mean by “fair”?
And what does this mean?
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This is one of the details causing some difficulty, as there is currently no pre-existing definition of what ‘fair’ is. This is likely to be established via consultation and tribunals, and clarified once precedents are set.
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In the meantime we can expect a code of practice to be issued from the government. Employers should act in line with this code and, although this would not be legally binding, if this is not done then companies risk being found in breach of the legislation at employment tribunals, and/or face reputational damage.
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The conditions to establish a tronc fund are not changing, and if you already have a tronc system in place, it will automatically be presumed to be fair.
- All staff who hold the same job title must be given the same amount of service charge. This applies whether they are directly employed or not – ie agency staff employed through a third party must still receive service charge. This means that if Bartender A is directly employed on a salary at £14ph, plus £3ph of Service Charge, then Bartender B who is contracted from an employment agency at £18ph must also receive £3ph of Service Charge directly from the Operator. (n.b. This is one of the most controversial aspects of the bill, which some people are saying is likely to be amended).
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A clear, written policy will be needed in each business, accessible to both customers and employees, to specify how service charge is distributed.
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It is likely that many companies will move onto a Tronc system, where they may not have done previously. This may put more financial strain on employers, who will have to pay for an external Tronc company.
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It’s unlikely that agencies will reduce their rates, meaning that agency staff become an extremely expensive option. Employers may wish to stop using agency staff altogether due to the high cost and potential for unrest, but they may have no choice – temporary staff are unlikely to move into permanent roles given the reduction in take home pay, and more permanent staff may move onto agency books given the sizeable increase in take home pay.
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Note that although tips gathered by third-party providers are NOT allowed to be paid to the employer’s bank account, and must be paid direct to the relevant employee, where agency staff are hired the service charge WILL be paid by the operator to the agency and then passed on to the staff. (It is unclear how this additional layer of management will be treated in terms of paying out by the end of the following month – see above)
Explain ‘by the end of the following month’…?
And what does this mean?
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100% of the amount received must be paid directly to staff, by the month end following the date it was received – i.e if you receive £2500 of service charge on March 5th, you will have until April 31st to pay to staff the full amount.
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Operators must keep 3 years’ worth of records of the amounts received and distributed, to be available if called upon.
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It is no longer possible for operators to hold on to a ‘pool’, often used to stabilise service charge payments for staff through the ups and downs of the year, or to help with cash flow.
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The resulting cash flow issues mean that businesses will become increasingly unstable and we may see an increase in closures.
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Operators may find it hard to hold on to staff during the quiet months with less service charge, and easier to recruit for busy months where the service charge is flowing.
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The industry may become less attractive for employees because of unstable pay
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Mortgages and loans may be much harder for employees to obtain due to pay fluctuation
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Operators may not loan the tronc system at any time. That means they can’t dip into it to help out employees in need, and they also can’t use it to loan themselves the resources for surprise big-spend items like equipment failure. This will create huge cash flow issues (both for employers and employees) as tight margins mean that most hospitality businesses are unable to hold a rainy day fund.
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There is potential for a high cost to industry: record-keeping will mean operational expenditure, and many operators’ payrolls will need to be overhauled – e.g. there is no allowance made for operators whose payroll is completed AFTER the end of the month, now requiring an accountant to either implement two payrolls (base and service charge) or a new schedule.
Who can receive service charge?
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All non-customer facing staff (Head Office, Kitchen Porters, pre-opening staff, cleaning staff) can receive Service charge, although it is unclear whether this is mandatory. There will be a central operations pot for them to be paid from, drawn from a ‘fair’ allocated percentage taken to pay them. These roles do not apply to the Place of Business sub-clause (the rule that forbids service charge being pooled and spread across sites – see above).
Can service charge be guaranteed?
And what does this mean?
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Yes. Operators can guarantee service charge as long as there is a ‘fair’ policy in place, just as they do currently. But as in the current system, any service charge distributed via paycheck (ie not via an employee-run system such as Tronc) will incur NI and tax deductions for both the employer and the employee.
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In the case of contractually guaranteed service charge, any shortfall in tips must be made up by the employer, and any overflow must be distributed according to the new legislation.
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There will be a ban on any contractual changes that REDUCE the amount of salary received from the employer in exchange for service charge – in other words, the split between salary and service charge must be established from the first day of the new law coming into effect, and then cannot be changed to reduce the base salary (you can however INCREASE the base salary). This is not retrospective.
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Realistically any “guaranteed service charge” would have to be either very conservative, or very accurately forecasted (which is almost impossible), to avoid an employer being out of pocket or in contravention of legislation.
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Even though guaranteeing service charge comes with risk and deductions, employers may wish to use service charge as part of a guaranteed pay packet because, unlike increasing menu prices to cover higher base pay, this does not not incur VAT on the bill.
What is legislated as service charge?
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Only cash tips are exempt from the new legislation. These will be the responsibility of the employee.
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Tips received via a third party, e.g. tipjar etc, are not exempt from this legislation.
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For HMRC to accept that the figure is service charge, it must be made clear to the customer that it is discretionary, with no obligation to pay. This clarity should be reflected on the bill presented to customers, and in the advice given to customers by the company’s employees.
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Amounts that are not paid in money can still qualify as a tip, gratuity or service charge, but only if they are paid in the form of a “voucher, stamp, token or similar item” – something with a fixed monetary value and capable of being exchanged for money, goods or services. The example they give is that casino chips are included, but a bottle of wine wouldn’t be.
How will the changes be enforced?
And what does this mean?
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Every operator must have a written policy on how service charge is distributed, and they must record 100% of what is received, paid and when.
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Employees may request the above at any time (however they cannot request a employee-by-employee amount, only details of the lump sum).
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If any employee does not believe they have been paid in accordance with the service charge policy, they can make a claim to the employment tribunal. If the claim is upheld they will be paid £5000 in the form of a compensatory fine from the employer.
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Where a claim is made, any other employees who are affected, regardless of whether they have themselves made a claim, will also be due the same compensatory fine – i.e. If one waiter from one site is mispaid, then all waiters from all sites will also be due to receive the compensatory fine.
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A claim has the potential to be extremely costly for an employer, given the number of people and sites who might need to be paid the £5000 compensation.
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The claim would be based on whether the operator’s practice contravenes the “statutory code of fairness”, which is deliberately subjective, therefore operators may be open to lengthy or unwarranted legal action where the definition is contested.
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Smaller businesses who have previously conducted accountancy and service charge administration by owners/managers in-house may now be forced to pay for external services to ensure compliance, putting them under further financial pressure.
Is this going to be positive?
Unite estimates that, on average, workers miss out on approximately £2k per year in tips not granted in full. This bill seeks to redress that and put more money in the pockets of workers. This would be a hugely positive outcome.
However, as we mentioned above, this bill is controversial. Some are concerned that it is going ahead without full consideration of the immense breadth of business types and business models across the country, and without a full understanding of the day-to-day operations of a hospitality business.
Many speculate that the bill in its current form may cause a number of potentially negative repercussions to the hospitality sector in general. In an already challenging trading environment this may force closures and/or even greater struggle. Struggling businesses can mean fewer jobs and/or lower base pay.
POSITIVES
NEGATIVES
- Bad-faith employers can now be held to account via legal action and staff will receive compensation.
- Staff will potentially see more money in their pockets
- Some postulate that the only businesses who will close are those whose business model was not sustainable from the outset
- More young people may be attracted into the industry as its reputation for fairness and proper regulation improves
- Operators may reduce base pay to try to recoup losses incurred via admin fees, card charges etc, meaning that many staff may not in fact see more income.
- Companies will need to spend more money on accountancy, external Tronc masters and administration.
- Operators may need to pass rising costs on to the consumer, which may mean that higher menu prices drive away custom and result in closures, or reduce tipping.
- Setting up new ways of working is costly for already struggling businesses
- Difficult cash flow may mean that unexpected costs such as equipment failure forces immediate closure, and the consequent loss of jobs with no notice period.
- Employees may see their salaries reduce during quiet seasons, creating instability.
- Operators may find it harder to hire during quiet seasons
- Employees may be concentrated in areas where tipping is higher, resulting in staffing struggles for businesses outside central, high-footfall or wealthy locations.
- More full-time employees may jump ship to agency work to take advantage of the significantly higher pay; however operators may have to stop hiring agency staff altogether due to prohibitive costs and employee discontent, exacerbating the staffing crisis