What’s been happening with Tips, Service and Cover Charges? Part 1 - HOSPA survey

Posted on behalf of Howard Field.

What some of the hospitality industry trade bodies are doing

The Association for Licensed Multiple Retailers (ALMR) whose members comprise mainly restaurant and bar chains have been in discussion with UNITE the union that has a specific interest in the sector. As a result a draft Tipping Code of Practice was produced. Some information about this was prematurely included in an article published in the 15 September 2017 edition of Caterer. 

Discussions regarding this new code are ongoing, and meetings between ALMR and the British Hospitality Association (BHA) have been taking place, to which HOSPA is now contributing.

A proposal tabled by the BHA and agreed in principle is that there should be a 2018 Code of Practice to replace the version published in 2009. This to be drawn up by the industry reflecting the interests expressed by all of the affected parties.  The adoption of the new code to be underwritten by the trade associations and bodies representing businesses, employees and consumers. 

What HOSPA is doing - Important Survey

For HOSPA to contribute towards moving these issues forward, a survey is to be carried out to research a wider representation of current practices and views.   

The survey is now online, and accessible via https://www.surveymonkey.com/r/hospatips1

Responses from as many interested parties as possible are being sought, so if you are involved in a hospitality business where tips and service charges apply, please

take part. Contributing to the HOSPA survey will provide an important range of supporting information and opinion to aid with the formulation of the new Code, and for you to be able to inform and influence participation within your business. The survey will close after 31 December 2017. 

A meeting of HOSPA Finance Committee members and invited representatives from certain hotel and restaurant operators took place in September.  Those attending represented principally London upmarket hotels and London based quality restaurant operators and their advisors. This summary is a selection of key points from the discussions.

1. In identifying the nature of the issues, the range of interested parties involved, and the government and BHA surveys and best practice guides that have been issued it is clear that there is much confusion about these subjects. For example, no-one at the meeting was aware of any use of Cover Charges as part of employee remuneration arrangements - and it was agreed that any reference to these as being similar to Tips and Service Charges should be eliminated unless there is clear evidence to the contrary.

2. As for tips and service charges, apart from cash tips that were generally accepted as belonging to the employees, a range of treatments exists for the handling of non-cash tips and of service charges. There are few common practices that encompass who receives payouts of these, which departments participate in distributions, how individual payments are allocated, and how the income and expenditure of these items are handled for accounting purposes.

3. Some high end hotels in London incorporate a 5% service charge in their room charges. This is applied selectively and not to all market sectors. Such income where distributed is to all departments in the hotel.

4. Terms of employment and the need to have incentives to attract and reward staff and systems that optimise the use of troncs and VAT concessions, issues such as revenue related franchise, management or other fees all discourage treatment of service charge income as revenue in the accounts. As a consequence, payroll costs are commonly shown net of service charges, and retained service charge income is often credited against specified costs. While claiming to conform to the USALI standards, hotels are interpreting the standards to suit their particular circumstances and policies.

5. Examples of the treatment of service charge income showed that deductions for handling costs are common, and that the use of service charge income varies between total payout to employees in all departments to partial payouts by department to designated categories of staff. In almost all examples discussed the income is used as part of the overall costs of labour.

6. Recognising the rising impact of direct costs such as statutory minimum rates, pension and related costs, a few hotels have been able to restructure employment terms to extend the range of participants in the distribution of service charge income in return for lower base pay.

7. It is an anomaly that the hospitality industry has employees a large part of whose earnings do not arise via the payroll of the business, and although taxable do not require employee (or employer) NI contributions. For how long this will remain the case is uncertain, but the sense of the meeting was that there was no incentive for the industry to upset the current arrangements.

8. The terms of the code of practice being considered between the ALMR and UNITE the union go beyond transparency, with the union seeking to limit deductions to cover costs or retentions, and to establish that all tips and service charges ’should go to the workers’. The impression created by the union (and hence the press) has been that employees are being exploited. The media has tended to pick up only the negative implications of such messages and no mention is made of the many employees and businesses that have arrangements with which all are perfectly satisfied.

9. With the outlawing of the use of tips and service charges towards minimum pay, and the planned increases in these pay rates and other payroll and general operating costs that will have to be covered in future - together with the impacts of Brexit, recruitment of staff etc, anything that requires price increases or irrecoverable cost increases should be strongly resisted. In that context, the meeting felt that any move to mandate the details of how service charges are handled should be avoided.

10. With the wide variations of perfectly legal systems that exist, it was agreed that it is not possible to produce a standard form of explanation of current practices that would be understandable and satisfy all the relevant parties. The view was expressed that the priority for transparency should be between the business and the employees - and that if this was well handled, then messages to other parties such as the guest/customer and public would be more consistent.

11. It was also suggested that there is a need for a clearer understanding of the nature and operation of troncs, and that production of a guide should be considered. [Subsequently HOSPA has undertaken the drafting of this.