There is no getting away from the fact that tips and service charges contribute significantly to admin costs; especially for food and drink-led businesses. They are a great way to get an injection of revenue into the business and still reward employees. But what are the rules on disclosing what staff entitlements are and should this be openly available to the public?
In the hospitality sector tips contribute significantly to an employee’s income and are applied in the following ways:
- Service Charge: Made mandatory or discretionary, this charge is applied at the end of a bill or added to the menu. The employer will pay directly to the employee as a percentage where the employer will distribute part to their employees upon paying their wage
- Tips and Gratuities: This is where a voluntary cash payment is made directly to the employee. 100% is either kept by the employer or part of the funds is shared between all employees.
- Cover Charge: This is a mandatory fixed fee paid upon booking or as part of a final bill.
But how much involvement should customers have when it comes to the distribution of the tips? Should businesses be keeping their customers aware of how their tips and gratuities are shared internally?
Currently, businesses are not legally obligated to disclose how much of their tips is distributed to their employees. However, this is an area that is under an immense amount of scrutiny and could soon see change. Since 2015, The British Hospitality Association (BHA) and several sector bodies have been promoting “Tipping Transparency” for food and drink-led businesses. This idea comes from the notion that transparency levels still need to be increased and that there is too much secrecy on tips and how they are shared amongst employees. Ufi Ibrahim, CEO of The BHA stated: ““Although restaurants are legally entitled to deduct administration costs from service charges, for example, we think it’s important the customers understand exactly how much is deducted and why… Customers should be able to reward good service and know where their money ends up and how much of it goes to the staff.”
Consequently, The BHA has implemented a tips disclosure policy, which they intend for the government to make a legal requirement for all pertinent businesses. The association propose that the disclosure should cover:
- Whether an amount is deducted for handling costs (and how much);
- How the remainder is shared between the restaurant and the employees;
- The broad process for distribution, for example, that they are shared between the employees in the restaurant through a system controlled by a representative of the employees
Already thousands (members and non-members of BHA) of businesses have applied the tips disclosure policy and made it public to their customers. Although not mandatory, hospitality businesses should explore the option of a tips disclosure. Not only does it add credibility to a business, it also reduces confusion for the customers on where their money is going and for employees on how much they will receive.
The government are still reviewing the proposal which took place in June 2016, and the sector await further feedback. You can find out more on tips and gratuities in our blog: Gratuities, Tips and Service Charge: Is VAT, Tax and NIC Payable? or contact our hospitality specialist, Adam Moody at email@example.com.