In our latest blog, we answer some of the common questions asked of us by employees in the hospitality industry regarding tips received by businesses on behalf of employees and the implications of the new Allocation of Tips Act.
If you want to know some of the basics of a tronc scheme and how to operate it check out our blog, ‘Understanding tronc schemes.’
Are cash tips included in the new legislation?
If a customer gives a worker a cash tip and keeps it, the employer has no control over that tip; it is therefore not a qualifying tip and is outside the scope of the legislation. Of course, the employee should report the receipt of the tip to HMRC and pay tax directly to HMRC.
What deductions can an employer make from tronc payments?
100% of tips, gratuities, and service charges received by the employer MUST be made available to employees enrolled in the tronc scheme and distributed by the Troncmaster in accordance with the scheme’s rules.
Statutory tax deductions are the only allowable deductions. If the tips are pooled and distributed outside of a tronc scheme, tax and Employees’ National Insurance are deducted.
We operate multiple sites. Can tips be pooled from each site and distributed across all sites, as some sites do not receive tips?
Sadly not. This used to be allowed under a tronc scheme, and was common practice, but this is one area where the new legislation affects tronc schemes. The legislation states that tips must be dealt with on a location-by-location basis and paid to employees employed at the time and site where the tips are received.
Can tips be spread over the year, or some tips retained and paid as a ‘Christmas bonus’?
No. All tips must be paid out to employees by the end of the month after the employer receives the tips. Some tronc schemes held back a proportion of tips from busy times, giving the employees a sort of savings scheme that could be paid out at key times of year, or used in quieter months to smooth out the amount of tips received. This strategy was popular, but the legislation no longer allows for this
Can Directors receive tips through a tronc scheme?
The legislation is built around the principle of ‘fairness’. Tips must be distributed fairly. Is it fair for a director to receive tips? The answer is possibly.
To be eligible, however, the director must have a contract of employment. Many directors, such as shareholders and owners, do not and therefore wouldn’t qualify. A director of food, as an example, which is effectively a title, would qualify if paid under a contract
Do self-employed workers qualify for a distribution of the tips?
No! The legislation cannot be clearer on this. If an employer has self-employed chefs, for example, caution must be exercised as HMRC is very keen on employment status.
What about agency workers that are ‘employed’ by an agency, the agency supplies the workers to the business?
The legislation has set in stone what was a very grey area. Agency workers who are under the control of the business must be included in the tip distribution. However, as the agency is the ‘employer’ for tax and National Insurance purposes, the business must pay the agency the amount due to the worker. The agency then makes the necessary payroll deductions.
What is meant by a ‘fair distribution of tips’?
The Code of Practice (CoP) published following the legislation passing through Parliament has suggested what should be considered fair. Of course, fairness is subjective; what might be considered fair to one person may not be to another. However, the (CoP) refers to the type of role (for instance front of house or back of house), basic pay, hours worked, seniority, length of service and customer intention.
Until and unless an employee goes through an employment tribunal, we will not know what is fair and what is not. Tips distribution can be complex or simple and still be deemed fair.
For instance, the tips are split on an even basis based on the number of hours worked by each employee as a percentage of the total hours worked. We have operated every permutation possible as Troncmasters. If a scheme is deemed fair by all employees, or a committee of employees, it is fair.
One way to ensure fairness and transparency is to consult with employees when designing the tips distribution policy or tronc scheme. This will ensure fairness
Prior to the change in legislation, we set aside tips received to pay for a Christmas Party, at the request of the employees. Can we still do this given 100% of the tips must go to the employees?
The simple answer is no. As 100% must be made available to the employees, the employer can make no deduction, even at the employees’ behest. Similarly, deductions cannot be made for uniforms, training or bonuses, as some employers have done in the past.
The issue is that employers hold the money on behalf of the tronc scheme and must be paid to the employees through the payroll, as instructed by the Troncmaster.
Can employers deduct credit card fees, or the fees of a Tronc Master, from the tips available for distribution to the employees?
No 100% must be paid to the employees.
In the interest of fairness, can the employees, or a tronc committee, instruct the Troncmaster to recompense the employer for the costs associated with the scheme, such as credit card fees and Troncmaster services?
This is, without doubt, the most difficult question that we get on this matter. Employees want as much as possible from tips left by customers but some acknowledge that there is a cost to the employer that they cannot recover.
The legislation states that, ‘an employer must ensure that the total amount of the qualifying tips, gratuities….is allocated fairly between workers of the employer at that place of business’. This is the 100% referred to in the CoP.
Until this is challenged through the Tax Tribunal/Employment Tribunal system, we cannot advise one way or the other on this. However, by saying the tips are ‘fairly allocated’, can a committed employee or group of employees state that they will forego a small amount to cover the employer’s costs? This, after all, would be the wish of the employees and would have no input from the employer. Time will tell on this. Sorry, we can’t provide a definitive answer!
Can an employee opt out of a tronc scheme because receiving a payment would jeopardise their receipt of Universal Credit?
Yes, however, the Troncmaster and employer must have written confirmation from the employee that they do not want any allocation from the tips and gratuities.
Is it correct that National Insurance Contributions are not applicable for tips allocated through a tronc scheme? It sounds like a tax dodge!
A tronc scheme is a legitimate tax arrangement with HMRC.
Let’s explain. All income is liable to income tax; this includes employment income, self-employed income, interest on bank accounts, dividends, and tips received.
However National Insurance Contributions relating to tips are only due on monies directly coming from employment.
Although it may seem that tips paid through a tronc scheme and included on the employees’ payslips are therefore from employment, this is not correct. There is an independent Troncmaster in place, and it is the Troncmaster who is allocating the payments. The Troncmaster is not an employer (even if they are an employee), and therefore, NICS are not due.
Is it essential that the employees have written confirmation of the rules of the tronc scheme and the basis of their allocation?
Yes, this is imperative and is now written into the legislation. Our recommendation is that the rules, policies, and agreements be between the employees and the Troncmaster. This ensures that the employer is not involved and that NICS are not due.