tips gratuities

Tips have long been an essential part of the hospitality sector

A way customer’s can show appreciation of the people who have served them, and for staff a valuable addition to their income.

But what is the difference between a tip, gratuity or a service charge that is automatically added to the bill?

There are different methods by which money paid by the customer can be classed as a tip or gratuity;

tips gratuities

Cash

This was traditionally the most common way a customer can leave a tip. Money left on the table or handed to the employee.

tips gratuities

Amount added to value of bill while paying on debit / credit card

Increasingly, people are paying by card and it is easier to add an amount to the bill, or round up the bill and instruct staff that this is to be a discretionary tip.

tips gratuities

A voluntary or discretionary service charge

This is an amount of money added to the bill by the operator. This can be discretionary or mandatory. Service charges are a murky area as the money on a service change is classed as income for the establishment and therefore there is no legal requirement to pass onto employees. This is probably a area that will change should there be new legislation in the future to make the process ‘fairer’ for employees.

What are the different ways businesses deal with tips and gratuities?

1) Distribute some or all of the tips to staff via a tronc. This is the fairest and most tax efficient way of managing tips as it has taxation benefits to both the employer and employee.

2) Distribute some or all of the gratuities to staff outside of a tronc scheme. This allows the business to control the distribution of tips but as it is not being managed via a tronc any tax savings are forfeited.

3) Cash tips can be kept by the staff themselves, although most organisations pool tips so they can be distributed to include non customer-facing staff such as kitchen staff or housekeeping.

What about service charges and cover charges?

A service charge is an additional amount that is added to the customer’s bill before it is presented to them. Usually this is a set percentage of the bill, and is calculated on the total, inclusive of VAT. A customer must be made aware of it before they order (usually through a statement on the menu) and that it is discretionary. If they pay it then this is usually treated as a replacement of a tip.

A cover charge is not the same as a service charge, it is a non-discretionary additional amount added to the bill usually for items such as entertainment or linen. As it is non-discretionary it is treated as being part of the general takings of the business and not as a form of tip or gratuity.