Tipping points – the debate continues on service charges and gratuities

05 May 2010 by
Tipping points – the debate continues on service charges and gratuities

It was all supposed to have blown over by now. Union Unite's two-year Fair Tips campaign reached a conclusion (of sorts) in October 2009. New legislation ensuring waiters are paid a basic minimum wage - before tips and service charge are included - was introduced, and restaurants were given a code of practice on how to tell customers where their tips ended up. That was that: job done. Or was it?

Restaurants certainly acted last October - they had to. And it's still a touchy subject for many. Some restaurant chains refused to comment for this feature, keen to move on from a period spent under constant bombardment from campaign groups and the public at large. However, one that was happy to talk was Carluccio's, the Italian deli chain that was at the receiving end of a lot of criticism during the campaign, and has since raised basic pay for all its staff to at least minimum wage and ensured 100% of tips now go to the waiters.

Despite the hoo-hah surrounding the company during the campaign, managing director Simon Kossoff believes its attitude to tipping hasn't changed drastically. "We've had to stick to the new legislation so some staff have seen a pay rise, but our system has always been that there is no service charge: we want the customer to tip what they want, when they want," he says. "We also believe it should go to the waiter involved so that those who are the best earn the most."

And the money spent on pay rises looks unlikely to impact on the business as a whole. "The legislation had a long lead-in time and we were able to restructure rotas, look at menus, even put in a few price increases, so there was plenty of time to flag this up," Kossoff says.

D&D London also changed its tipping policy, dropping the 12.5% discretionary tip added to bills late last year. "We dropped the 12.5% service charge on bills because we felt that it had had its day," explains chairman and chief executive Des Gunewardena. "It had become regarded as a non-discretionary levy, like a cover charge or VAT. Virtually all our customers paid it, whatever they felt about the quality of service. We thought that it was time to give our London customers the freedom - as, for example, in New York - to leave whatever tip they wish, depending on how good the food and service has been. We thought the move would be popular with customers, and that it would improve the quality of service. Early days still, but the policy definitely seems to be working and I am very happy that we made the move."

So far, Gunewardena says, staff are better off than before, with the company absorbing any extra costs that have arisen from the switch in policy.

The stress upon greater transparency - encouraged by the Government and by the British Hospitality Association (BHA), who both released codes of practice on the issue - has also had a marked effect. Restaurant chains such as Wagamama and PizzaExpress and Porters English Restaurant in Covent Garden all now include information about their tipping policies on menus, and staff at many restaurants are now trained as a matter of course to explain the restaurant's tipping policy to guests.

For example, a quick phone-call to Las Iguanas restaurant in Soho cleared up the confusing tipping information displayed on its website within 45 seconds (12.5% service, of which staff receive 7.5% and the remainder goes into training and a staff competition). In fact, a quick internet search of three major companies - Strada, Loch Fyne and Wagamama - turned up information on tipping policies within a minute.


The information is out there, as are plenty examples of best practice. At places such as Carluccio's, Pizza Hut, Canteen, TGI Friday's and many more, 100% of tips go to staff. When speaking to Unite, Gavin McGlyne, TGI Friday's HR director for the UK, was adamant that best practice makes the most sense.

"At TGI Friday's, all tips are paid to team members," he explained. "Friday's doesn't take a single penny from their tips. Our plan is to attract the very best people, train them well and then set them free to wow our guests and earn great tips. This results in us having fantastic waiters and waitresses across the country earning £30,000 or more per year once tips are taken into consideration."

So it might seem as if it's happy-ever-after for the Fair Tips campaign. But, sadly, that's not the case, with out-and-out victory not yet declared. Instead, Unite is still trying to attract restaurants to sign up to its Fair Tips Charter and pledge 100% of tips to staff, with the union adamant that not all waiters are yet getting a fair deal.

"We are pleased that the Unite campaign for fair tips has led to an acknowledgement that the hospitality industry must clean up the very confusing tipping system," says Derek Simpson, Unite joint general secretary. "We welcome this move to raise awareness on who gets the tips. Bosses should hand over all the tips left by customers for workers, with no deductions. The public expect those who serve them to receive the tips they have left; they don't want the money to boost the profits of these businesses."

Squarely in the Fair Tips campaign's cross hairs are the administrative fees that restaurants deduct from service charges paid on cards. Speaking to Caterer, a spokesperson for the campaign says: "It is essential that hospitality establishments recognise that customers expect all the tips they leave to go to the hard-working staff who serve them. They must now ensure that they are not charging staff excessive and unreasonable administrative fees to distribute the monies that staff have earned."

Admin fees of 5% are quite normal to cover the costs of credit card fees, but fees of up to 20% are rumoured to be applied by some restaurants looking to skim from the charge, with the fee breakdown buried away on websites. "It is not enough for tips policies to be displayed on an obscure page of a corporate website," says the Fair Tips spokesperson. "Staff and consumers must be able to see the tips and service charge policy displayed clearly at the point of choice so that they can make an informed decision about the establishment.

For the BHA, the issue is one of transparency - hence its code of practice for tipping - and the ongoing Fair Tips campaign doesn't seem to sit comfortably at all. "The key point is full disclosure and transparency," says Bob Cotton, chief executive of the BHA. "Customers then have choice how they want to leave a tip."

Regardless of the ongoing campaign on administration fees, it seems that not all waiters have come out from the legislation as quids-in as they might have hoped. In fact, among all these changes, the only sure-fire winner, says Peter Davies, senior manager at business advisory firm Vantis, will be HM Revenue & Customs. Staff who now see the lion's share of their tips, on top of national minimum wage, will have been appreciative of the pay rise but that bonus could, in reality, be minimal. "In some cases, staff aren't even that much better off than before as there are extra national insurance contribution implications with the extra wage," Davies explains. Estimates of how much extra national insurance the Government will generate from the new way in which waiters must be paid varies between £1.4m and £14m.

Restaurant businesses certainly have had to change to survive the new legislation. "Maybe in the good times a business could take the hit of adding 20% to 30% on top of wages and letting staff keep all the service, but not in a recession," Davies says. "They might have had to restructure wages, or downgrade the pay of middle management and let more benefit from tips; there might even have been some redundancies. But there was no great pot of money that was going to come out from behind the rainbow on 1 October."

Despite all the activity over the past two years, with the campaign's damning of restaurants' tipping policies and the numerous and sometimes high-profile voices added to the campaign - Gordon Brown even waded in at one point - Davies points out that he doesn't know of any restaurants that were ever - or are still - ripping people off; they are merely paying staff what they can afford to pay, and staff are free to leave for pastures greener. "There are lots of different interests at play here," he says. "There are the interests of the restaurants, who want to keep costs down; the interest of the customers, who don't want to feel ripped off; the interests of the staff, who want to earn their service; and the interest of the Government, who want to be seen to be doing something but are also interested in the extra national insurance contributions. And it's a case of reconciling all these interests."

But where does it all leave us? It may not be until the summer that we see the effects of the payroll restructure and business changes necessitated by the legislation, Davies says. But at least now the customer is likely to get an honest response if enquiring where his tip will end up. Although until that equates to all profit going to staff in every restaurant, the Fair Tips campaign looks set to continue.


â- Businesses wishing to comply with the disclosure Code of Practice should ensure that their statements are factually correct and not misleading (deliberately or accidentally) and, importantly, do not compromise the exemption from NICs. Proprietors are advised to ask themselves "will this reassure or discourage our customers from tipping by card or paying a service charge?" Most businesses adopting the code of practice are expected to make a short statement on their menus.

â- Restaurants should look carefully at the costs they incur in collecting and administering these payments and distributing them via the payroll. Recovering those costs is both legitimate and reasonable, but should not be used as a way of retaining unreasonable amounts - it is likely to be difficult to justify an administration charge exceeding 10%.

â- Businesses should ensure that staff are properly briefed on the policy being adopted and, if they are asked by customers, the consistent response they should provide. A more detailed explanation about what happens to the tips could, for example, be placed on the website and customers could be referred to it.

By Peter Davies, enior manager at business advisory firm Vantis


On 3 March 2010 the Department for Business, Innovation and Skills (BIS) launched a campaign to encourage more customers to ask the question "Who Gets the Tip?" so that customers know what happens to the tips they leave. Its research showed that the majority (66%) of adults are more likely to go back to a business that provides clear tipping information and that allows staff to keep the majority of their tips.

The campaign follows the launch of the voluntary Code of Best Practice on Service Charges, Tips, Gratuities and Cover Charges (the Code) which was introduced on 1 October 2009. Its main aims are:

â- To encourage businesses to display information prominently about tipping policy.
â- To be transparent to consumers and employees about how tips are distributed.
â- To ensure that employees understand the tipping policy in place and know where to direct customers for additional information.

Six months on from the launch of the voluntary Code, the Government wants all businesses to adopt the Code and to be transparent to consumers and employees about how their tips are distributed.

Source: Charles Russell LLP


â- The British Hospitality Association code of practice on tipping
â- The National Minimum Wage: A Code of Best Practice on Service Charges, Tips, Gratuities and Cover Charges
â- The HM Revenue and Customs guide to taxation of tips and troncs

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