If you’re running a restaurant, bar, or any business where tipping is common, you might consider adding something about these tips to your employment contract. On the surface, this seems like a good way of making your policy clear to staff, but the reality is that this action can cause more headaches than it solves.
Here’s why.
The problem with tips in contracts
Tips are unpredictable by nature. They change day by day and season by season and depend entirely on how generous your customers are feeling. You’re setting yourself up for complications when you include something like this variable in a legal contract.
Think about it – how can you make promises about something you can’t control?
Legal headaches you might not expect
When tips are mentioned in an employment contract, the employee is contractually obliged to receive them. As such, tips are part of the payments that the employer must make and are subject to tax and National Insurance Contributions deductions.
Employees’ NIC must also be paid to HMRC, negating the advantage of paying tips through a tronc scheme. This can cause real problems when it comes to making sure you’re paying minimum wage.
Let’s see how this could play out.
You have a quiet month where tips are low. If tips are mentioned in the contract, you might find yourself legally obligated to make up the difference to meet minimum wage requirements. This isn’t just about money – it’s about staying on the right side of employment law.
The holiday pay problem
Including tips in employment contracts will force you to factor them into holiday pay calculations.
Imagine trying to work out holiday pay for someone whose tips vary dramatically between the summer tourist season and quiet winter months.
Which period do you use as your reference? How do you keep it fair? These are the kinds of practical problems that can give both you and your payroll team sleepless nights.
Making life harder than it needs to be
When tips are part of the contract, you must keep detailed records of every penny to prove you are following the agreement. This means more paperwork, time spent on administration, and chances for staff disagreements. It can turn what should be a simple extra benefit into a source of constant tension.
A better way forward
Do NOT include tips in a contract of employment.
Instead, engage an independent Troncmaster to provide a tronc agreement for the tips allocation rules. By using a tronc scheme, you will ensure that the tips are not part of employment income. Although the tips amount will still be taxable, they will not attract Employers’ or Employees’ National Insurance, so there will be less tax to pay for the employee and employer.
And if you are worried that a tronc scheme means payments need to be made through a separate PAYE, fear not. They can be made through your existing payroll (PAYE). It just needs to be set up correctly.
One final potential pitfall to be aware of is how tips are mentioned when advertising a job vacancy. Do not advertise that the employee will receive a salary plus tips. Advise that the employee will be eligible to join the tronc scheme run independently of the employer.
Keeping everyone happy
The key to managing tips successfully is clear communication. Your staff need to understand how tips work in your business, but this doesn’t mean it has to be in their contract. Regular team meetings, clear written policies, and open discussions about tipping arrangements through a tronc master work much better and ensure compliance with tax and NIC regulations. Don’t forget, the benefit of having a Troncmaster in place is that employees’ and employers’ NICs are not payable.
Write a simple, clear tipping policy that is separate from your employment contracts. This policy should explain how tips are handled in your business, but be flexible enough to adapt to changing circumstances. Make sure everyone knows where they stand, but avoid making promises in legal documents about things you can’t guarantee.
The Bottom Line
Tips are meant to be a way for customers to show appreciation for good service. However, when you start including them in employment contracts, you risk turning them into a source of employment income. Instead, keep your contracts focused on the basic terms of employment and handle tips through clear policies and open communication.
Remember that while this might seem like more work upfront, it’s much easier than dealing with the problems that can come from putting tips into contracts. Seek advice from an experienced Troncmaster service, such as Tips and Troncs.
Final Thoughts
Running a business where tipping is common can be complicated enough without adding extra legal obligations to the mix. By keeping tips out of your employment contracts, you maintain the flexibility to handle them in a way that works for everyone while avoiding potential legal pitfalls down the road.