Tribunal rules that tips are not part of NMW

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An Employment Appeal Tribunal has ruled in HM Revenue & Customs'(HMRC) favour with regard to National Minimum Wage (NMW) legislation relating to tips.

In the case of Annabel's restaurant and night club, it was agreed that employers have to pay their staff at least the NMW regardless of any tips, gratuities, service or cover charges, so long as the tips are not paid directly through the employer's payroll.

HMRC argued that payment via a 'tronc' (an independent tips distribution scheme) does not count towards the NMW.

The Judge determined that where restaurant or bar service charges are paid by the customer to the employer, but are then paid into a 'troncmaster's' bank account for distribution in accordance with a 'tronc' scheme agreed between the troncmaster and employees, the sums so distribu...

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04th Aug 2008 16:43

Spot On
Chris hits the nail on the head here - the only result of this Government announcement is that they will get more money in NICs (and possibly VAT too if they outlaw service charges). Employees will be worse off because they will have more NIC to pay and a smaller tips pot to share. I've been saying for months to anyone eho wanted to listen - this was about more cash for HMRC and a chance for the unions to move into a largely non-unionised sector.

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By Anonymous
26th Jun 2008 12:14

Too Generous
I think you're being a bit too generous to the person who drafted the NMW rules.

I've no idea what goes on inside Burger King. I believe that people purchase "fast food" there.

Once upon a time our streets were clean enough to eat your dinner off. Nowadays people do eat their dinner off the streets. Mostly they've finished by the time they get to my house, so I provide a front garden as a convenient place for them to leave the packaging.

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25th Jun 2008 16:42

A terrible draft(ing)
...and regardless of where you stand on the issue I think that there is one point that everyone can agree on, which is that the National Minimum Wage legislation was obviously written (a) in a hurry, (b) on the back of the proverbial fag packet, and (c) by a work experience student whose subsequent career had nothing to do with law, tax, employment, or anything vaguely similar.

Has anyone ever tipped in Burger King?

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By Anonymous
25th Jun 2008 15:40

Call me cynical but... it not equally possible that some employers offset the tax savings to restrict wages?

I still think that it would be not a bad thing if restaurateurs - whatever scheme they use - actually told the customers what happens to their tips and "discretionary" service charges.

And, referring to Peter's final point, the fact that:
1. the CA needs to get involved, and that
2. everyone from the maitre d' at The Ivy to the potwasher at Burger King KIrkcaldy has a conflicting opinion

suggests that the law is unclear and probably unfair. We need Rolls-Royce legislation, but we seem have a Hyundai Accent made on a Friday afternoon by people who have just been made redundant.

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25th Jun 2008 08:40

It isn't just about the business owner
But to give the employee the same £ net under SC as happens under the current system it wouldn't be a 10% price uplift - factor in VAT and NICs and it would have to be 16.7%.

Just a (final) thought - it isn't all about tax breaks for the owners, employees do get to keep more of their money as well by not having to pay 11% employee NICs on the tronc money they receive.

Provided that salaries are sufficient to keep them above the NI Earnings Threshold (and I know of only a tiny number of establishments where they are not) then the employee doesn't lose the entitlement to state pension and other contributory benefits that comes with paying NI.

And coming right back to where we started, the case is heading for the Court of Appeal so HMRC's Press Release was not only ever-so-slightly disingenuous but also premature.

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By Anonymous
24th Jun 2008 16:58

You're Right Peter... conclude that adoption of "service compris" would mean a major upheaval in the nosh trade. Possibly some would go out of business - but they do that anyway. It's an industry (it seems to me) with a high level of churn.

What I think I'm saying is that if there were two restaurants side by side, exactly identical except for the fact that A was "SC" and charging 10% more and paying staff properly, whereas B was "SNC" but asking me to remunerate the waiters so that they don't have to, I'd go for A.

You're possibly tempted to suggest that Restaurant B will always give me better VFM because they are more tax efficient. But I don't see that holding up. The reason for tax/NIC planning is surely to benefit the business owner (and why not?) rather than the customer.

Sorry BTW for the Daily Mail reference. That was a cheap shot.

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24th Jun 2008 14:48

You misunderstand me..
Sorry, perhaps I wasnt clear. If "servis compris" is adopted then - clearly - the tip is included within the overall cost and nothing else is expected. But restaurants will then have to incorporate that into their pricing resulting in an increase in the cost of eating out, and the UK (London particularly) is already one of the most expensive dining-out cities in the world. If tipping/service charges disappeared overnight, without a corresponding increase in prices, an awful lot of restaurants will be laying off staff or closing. That's not a Daily Mail scare story - just the business model that most restaurants use, rightly or wrongly.

In an ideal world of course a tipping culture wouldn't exist - as you say, you're not expected to tip the checkout staff in Sainsburys - but it does, and its a fundamental part of both business economics in that sector and also employee remuneration and expectation. The tax tail should never wag the dog but, as in so many other instances, it does.

As for the marginal tax rate, of course as the customer you don't see it or feel it; either you leave a tip or you don't. But the waiter certainly would notice the difference, as would the receptionist, chefs, bar staff, and kitchen porters.

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By Anonymous
24th Jun 2008 12:08

Hang on Peter!
Are you suggesting that if we move to a "service compris" system I'll still be expected to leave a tip?

Call me mean if you like, but the ideal system for me, the customer, is where someone tells me what my meal/hotel services/haircut is going to cost, and I pay it. End of story. I don't want to regard the person that serves me as an underling whom I may or may not reward with a gratuity at my whim - that kind of patronising attitude belongs in the last century. Or the one before. I want the businesses I deal with - whether it's the Savoy Grill or Primark - to reward its employees/suppliers fairly and openly without expecting me to compensate for its ruthless costing policies.

None of this has anything to do with tax of course except to say that any business (or entire industry!) that is using tax-efficiency rather than customer focus as its main driver is surely heading for disaster.

BTW your "60% Tax Shock Horror" argument is a bit Daily Mail-ish - it's based on marginal tax which clearly doesn't apply if you're mean and don't leave a tip at all.

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24th Jun 2008 10:02

But do we need more laws and regulation?
Essex Man, thanks for your kind words and I agree that the main problem here is communication (or the lack of it) - between customers and businesses, and businesses and their employees. I'm not sure that more legislation is the answer, and in any event whilst Parliament might well pass regulation that forces businesses to be more open with their customers they cannot stop restaurants doing what they want with the money - both the British courts and the European Courts have already ruled on that. That's why Unite's "Fair Tips" campaign won't become law.

But ultimately there are two factors involved here - firstly the need to hold down prices for customers during a shaky economic period, and rising costs - fuel, energy, food inflation, taxes; and secondly the tax system itself which penalises businesses who try to "do it properly". If Unite had their way businesses and employees would be slapped with National Insurance meaning less money in hand for staff. That can't be right.

A final thought - many forums are full of requests for us to move to a French-style "servis compris" system. At present a properly-run tronc results in a tax take for Gordon of 20% (basic rate tax). Servis compris would increase that to a whopping 61.3% - so over 60% of your tip would go in taxes!!

(If you don't believe me - 20% tax, 11% employee NICs, 12.8% employers NICs, and 17.5% VAT)

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By Anonymous
23rd Jun 2008 12:51

Peter D
Heard your spiel in Radio 4 "Money Programme" and thought you were scrupulously balanced and explained things well. Congratulations.

Would folk agree that in the interest of everyone (industry, workers, customers and state) concerned, there should be definitive legislation (properly researched and consulted) on tips and service charges, covering Income/Corporation Tax, NIC, VAT, Tax credits and NMW, with every establishment that collects this money being obliged to give clear information to customers about what happens to their money?

I'm not among those who assume that they are being ripped off every time they eat out, but IMHO there is too much secrecy in the industry and not enough of a level playing field

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17th Jun 2008 12:44

Link here
Interesting case. Full judgement can be found here:

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17th Jun 2008 12:40

Not all that it seems
You'd be forgiven from reading HMRC's press release in thinking that no tips are able to be counted towards NMW at all but this isn't the case. This particular case centered on a very specific set of circumstances and a method of distributing tips that many businesses moved away from a few years back following HMRC's climbdown post-Operation Gourmet. Put simply, if a business passes to a troncmaster prior to distribution (eg, in cash or into a separate bank account) they they do not count towards NMW, but if the business pays the tips direct alongside the wages (this is entirely possible and can still meet the NIC exemption) then it will count towards NMW. HMRC fully accept the latter scenario as NMW-compliant.

The case is also highly likely to be appealed.

So the story heading is actually not correct - it should read "Tips may not always count for NMW".

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