Faced with high staff costs, restaurants are finding ways around new laws to make sure waiters can keep their tips. There is a better way, says Richard Crampton Platt
“Call it whatever you want, it’s still theft!” I said to my flabbergasted general manager. It was bright and early on a Monday, we were sitting in our restaurant’s shoebox office, and I was being shown how to compile a FLASH report, a weekly financial summary. We’d come to how the tips were distributed amongst the staff, via a method called “fixed deductions”. This sounds very boring, but the result was that a proportion of tips was funnelled away from waiting staff to cover nebulous administrative costs. My bosses admitted they didn’t understand it, read me the head office line from a handbook, but I smelt a rotten fish immediately.
This happened over a decade ago, when I was more idealistic but ethically bang on the money. In my time I’ve seen plenty of other techniques for not sharing out tips. Judging by recent news that L’Antica Pizzeria in Hampstead has relabelled service charge as “admin fees” not much has changed. And yet last year the Tipping Act came into force, designed to ensure that tips get distributed transparently and fairly. Do they? Or are the 54 per cent of people don’t think tips go to staff correct?
To understand this mess, you need to understand why restaurants do it. Labour is the biggest cost, but the minimum wage stops you from hiring too cheaply. There is a lot of competition amongst dining establishments and the human element is fundamental to why customers sit at a restaurant table rather than cook at home. But you can’t have a low-price and high-salary restaurant. Something has to give, and tips fill that gap.
VAT-exemption
Service charge, when added to your bill, doesn’t attract VAT, National Insurance, or corporation tax if administered correctly. To qualify, it must be “discretionary” – but this is something of an illusion. If I went to an Apple store to buy an iPhone and they said, “It costs £1,000, but we put an optional 12.5 per cent on top to pay our staff,” I’d laugh and save £125. In restaurants hardly anyone does this because they don’t wish to be rude to their waiter.
When I give Apple revenue for something I want, they can do whatever they like with it — that’s called profit, baby. But to get the tax break, you need to follow extra rules, otherwise HMRC will demand a share. Some, like Michel Roux Jr. have admitted that service charges are seen by some restaurateurs as revenue. So the government wanted to ensure these charges were genuinely tips going to staff.
That’s why the “fixed deduction” method I mentioned was closed last year. Now no deductions can be made, not even credit card fees. Tips can’t go to head office staff, or to pay for sick pay or holidays. Nor can a “rainy day fund” be kept; all tips received in a month must be paid by the end of the next. Case closed? No.
Service charges are seen by some restaurateurs as revenue.
Restaurateurs recognised that these rule changes would flood service-charge funds with extra money. They don’t want to give bussers or kitchen porters a pay rise for no reason, especially when there are no productivity gains to be found. So many have been searching for loopholes.
Do head office staff work in head office or in the restaurant? A friend working for a famous London chain told me that a director boasted he’d found a way round the new law. If head office staff travel around different restaurants, they get allocated to that site’s payroll. So it’s possible that the most expensive people in the company could take all the excess tips, instead of your waiter – as steakhouse Gaucho let slip then retracted recently. Imagine a finance director on £106,000 a year getting minimum wage plus about £85,000 from tips.
There is another loophole we’ll see more of: gig-economy or freelance restaurant staff employed via agencies. I call this the “Deliverooification” of staffing. If you’re self-employed you can “pay yourself” less than minimum wage. Also, the Tipping Act doesn’t apply to you. Naturally, this is a selling point being marketed to restaurateurs worried about wage bills. Others will quietly add hidden extras like cover charges, instead of just charging properly. Staff at Harrods even went on strike over this. The legislation has also brought more paperwork and costs of compliance, which punishes those who follow the spirit of the law, whilst those who don’t still find opt-outs.
What can be done about all this? In my view, customers, government and restaurateurs all make good points. The cost of eating out would be much higher if various fudges hadn’t been found over the past 20 years to artificially lower it. Our prices would look more like Scandinavia, and we’d eat out better but less often. So why not just tax tips in the same way as pay? Then, instead of younger Richard accusing his employer of theft, restaurants would have to price their services like every other company: transparently.