National Minimum Wage and tips

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The National Minimum Wage (NMW) came into effect on 1 April 1999. It is relevant to all businesses that have employees, regardless of the size of the business. The Government sets the NMW rate for the next financial year in October of the preceding year, following the recommendations of the independent Low Pay Commission LPC. The requirement for businesses to pay their staff these rates is enforceable by HM Revenue and Customs (HMRC).

If HMRC finds that you have underpaid any of your staff, they can issue a Notice of Underpayment requiring you to repay arrears to your staff (paid at the current minimum wage rate) and pay a penalty to the Government. The penalty is 200% of the total underpayment, with a maximum of £20,000 per worker.

Anyone working for you (including part-time and casual staff) is entitled to receive the National Minimum Wage, except:

• Anyone ‘genuinely self-employed’ (for example, someone who controls their own time, what work they do and invoices you rather than receiving wages).
• Voluntary workers.
• Workers who are based permanently outside the UK, such as the Channel Islands or the Isle of Man.

There are five rates of the National Minimum Wage. Rates as of 1 April 2023 are:

• £10.42 per hour for employees aged 23 and over (National Living Wage).
• £10.18 per hour for employees aged 21 to 22.
• £7.49 per hour for employees aged 18 to 20.
• £5.28 per hour for employees aged under 18.
• £5.28 per hour for apprentices aged under 19, or those in the first year of their apprenticeship.

Further information on the National Minimum Wage, including current rates, can be found on Gov.uk’s National Minimum Wage and National Living Wage advice pages.

Included: in addition to basic pay, certain other payments may count towards the National Minimum Wage, including:

• Bonuses;
• Incentives;
• Accommodation;
• Money for items such as clothing and shoes, where the worker can decide where to buy the items.

Excluded: other additional payments are excluded, including:

• Premium payments for overtime of shift work;
• Special allowances;
• Expenses;
• Tips, service charges or any other type of gratuity (see Tips and service charges, below);
• Expenditure on items such as clothing and tools related to work.
• All benefits in kind, including meals, except accommodation. Benefits in kind do not count towards minimum wage pay, even if they have a monetary value. However, there are special rules if you provide a worker with accommodation.

Accommodation offset

If you provide accommodation to a member of staff, you are entitled to offset an amount for this against the National Minimum Wage. If the accommodation is provided free of charge, the daily accommodation offset rate is £9.10 and the weekly offset rate is £60.90 from 1 April 2023. For more details, see the Government’s National Minimum Wage and Living Wage: Accommodation pages.

There are four main types of work, and each can apply in the accommodation sector:

• Time work: when you pay the worker according to the number of hours he/she works.
• Salaried hours work: when the workers have a contract to work a set number of basic ascertainable hours each year, in return for an annual salary paid in instalments.
• Output: paid by the piece – such as the number of things they make, or tasks they complete.
• Unmeasured: paid in other ways.

The different types of work give rise to varied ways of determining entitlements. For more information, see the Gov.uk advice on minimum wage for different types of work.

Regardless of the contract type, the determination of work hours does not include rest breaks, sick time or holidays.

The National Living Wage does not replace the National Minimum Wage. Rather, it is a premium to be paid on top of the National Minimum Wage to employees aged 23 and over.

When it was introduced on 1 April 2016, the National Living Wage increased the minimum wage that must be paid to employees aged 25 and over. From April 2023, it applies to employees aged 23 and over at a rate of £10.42 per hour. Those employees aged between 21 and 22 are not eligible for the premium and therefore remain on £10.18 per hour, while the other three National Minimum Wage rates (for those aged 18-20, under 18 and apprentices aged under 19) are unaffected by the National Living Wage.

As with the National Minimum Wage, the National Living Wage premium is set annually following recommendations from the independent Low Pay Commission. Both rates apply from 1 April each year.

Further information on the National Living Wage is available on the Gov.uk National Minimum Wage and National Living Wage pages.

Records

• You are required to keep sufficient records to prove you are paying the National Minimum Wage.
• You must allow workers to see their record within 14 days if they make a request in writing.

Tips and service charges

You are not allowed to use tips and service charges to form part of the National Minimum Wage. This means that employees must receive at least the National Minimum Wage as base pay, with any income from tips or service charges being additional. This is regardless of whether the gratuity is paid directly by the customer to the employee (for example a cash tip left on the table in a restaurant) or through the payroll (such as a discretionary service charge added to the customer’s bill).

Please note that there is new legislation going through parliament that will introduce legal requirements on businesses in relation to passing tips to staff (see New tipping bill, below). In the meantime, employers are advised to follow the existing guide for the treatment of tips and service charges by businesses: A Code of Best Practice on Service Charges, Tips, Gratuities and Cover Charges. This code has been endorsed by UKHospitality, the Trade Union Congress and the Confederation of British Industry (CBI), and is based on four principles:

1. That businesses clearly display their policy on tips and service charges for customers.
2. That businesses have a process in place for explaining to customers how charges are distributed and what, if any, deductions are made.
3. That businesses should ensure that staff understand the policy and are able to explain it to customers.
4. That staff are fully informed of the distribution of tips and service charges and any deductions, and are consulted on any changes.

How should cash tips be dealt with?

Cash tips are payments given directly by customers to individual employees, not to the business. Any arrangement for sharing cash tips among employees should be in accordance with their wishes. The business owner will not be involved in this process. It is the responsibility of the employees receiving such cash tips to make proper disclosure to HM Revenue and Customs, and to account for Income Tax in respect of these earnings.

How should service charges be dealt with?

For gratuities, such as service charges that are incorporated into the billing system, the business can currently deduct costs incurred in handling and distributing these payments to employees. Such deductions would cover credit card and banking charges, payroll processing costs and the average costs of credit card fraud.

Businesses are also able to make deductions associated with other costs, including breakages, till shortages and customers leaving without paying. While the level of these costs will vary depending on the nature of the business, the Department for Business, Energy and Industrial Strategy guidance suggests that total deductions should not be more than 30% of gratuities received.

These deductions should be revealed to customers as part of the disclosure process.

Where discretionary service charges and non-cash tips are paid to employees by the business, they should be paid from the company bank account, with Income Tax deducted under PAYE. The broad process for distribution of these amounts should be revealed to customers as part of the disclosure process (see below).

What disclosure should be made?

Businesses should disclose to customers how they deal with service charges and non-cash tips, at least by a written note available for inspection at each restaurant and on the company website, if there is one. The disclosure should cover:

• Whether an amount is deducted for handling costs (and how much).
• How the remainder is shared between the business and the employees.
• The broad process for distribution, for example that they are shared between the employees in the business through a system controlled by a representative of the employees.

New tipping bill

There is currently a Private Members’ bill regarding tipping going through Parliament, which has the support of Government. This will impose legal requirements on employers with regards to the treatment of tips. The Employment (Allocation of Tips) Bill will amend the Employment Rights Act 1996 to insert new legal obligations on employers to ensure that all tips and gratuities are passed to employees, and that there is a transparent and fair process for their distribution among employees.

While the exact requirements of the new legislation are still under debate in Parliament, it is expected that the key requirements will be as follows:

• All tips must be distributed to employees (and any agency workers) in a fair and transparent manner.
• All tips must be distributed to employees by the end of the month following the month they were collected.
• Businesses will not be allowed to retain any part of the tips collected to pay for costs associated with the collection or distribution of tips. For example, if a tip is paid by credit card, the credit card payment costs cannot be deducted.
• The distribution process and individual employee allocations must be recorded, made available to employees, and retained for three years.

The bill will also enable the Secretary of State to introduce a new code of practice about the fair and transparent distribution of qualifying tips, gratuities and service charges, detailing what would count as a fair distribution for the purposes of the new legal obligations.

It is expected that the legislation will be enacted in 2023 and come into effect in 2024. However, businesses should look to introducing a tips distribution system that complies with these requirements as soon as possible.