The Government has announced plans to outlaw the practice under which restaurants pay staff a basic wage below the national minimum wage and make up the rest of it in tips left by customers. 

New law 

The new law is set to come into effect next year and was announced on the tenth anniversary of the National Minimum Wage Act.  It will close a loophole left by the Act that allows tips and gratuities processed through the employer’s payroll to count towards the minimum wage.

Current law 

Under the terms of the current law, any service charge, tip or gratuity paid through the employer’s payroll can count towards the national minimum wage. Many restaurants, including a number of leading chains, have taken advantage of these provisions by using service charges collected by the employer and then paid out through the payroll to subsidise the minimum wage. 

This can happen whatever the method of payment used, however it is most usual where service charge is added to a credit card payment and paid into the business’ bank account.  Where tips and gratuities are given directly to workers by customers without any other party being involved, they cannot count towards payment of the national minimum wage.  Currently therefore the safest way to ensure that staff receive tips intended for them is to leave cash on the table, rather than add the tip to the amount paid by credit card. 

However, even then there is no guarantee that staff will get the tip, if the employer intervenes in the process by collecting the cash tips and distributing them through the payroll system.

The current practice has been seen by many as a form of exploitation which abuses the intentions of paying customers as well as those who wait on them.  When introducing the changes, the Business Secretary John Hutton, acknowledged that customers who leave a tip in a restaurant expect it to go to staff and don’t expect it to be used to subsidise owners whom paid staff below the minimum wage. 

Restaurants forced to change 

When the new law comes to force, restaurants and others in the hospitality trade will have to pay the minimum wage (currently £5.52 but rising to £5.73 on 1 October), with tips and service charges being paid on top of this, not counting towards it.  The change will have a real significant impact for hundreds of thousands of staff employed in the hospitality industry across the country.

The Independent newspaper, who fought a campaign to change this practice also called for legislation requiring the restaurant trade to display their policy on service charges on the menu.  The Government has not taken up this proposal, which would mean that restaurants would have to be transparent and open about their policy on the use of tips, although it has discussed drawing up a code of practice on the point. 

The fact that this loophole to the national minimum wage exists in the hospitality trade indicates that it may well be present elsewhere and it is perhaps time the Government had a wider look at the possible loopholes in the application of this law.