Tips & Gratuities

Gratuity is defined in the Labour Code as a tip, gratuity, or money that has been paid, given or left for an employee or patron of a business over and above the actual amount due for a service. Customers leave a gratuity to show appreciation for the people who served them. They can be paid in cash or by adding value to the bill when paying by card. Tips and gratuities are one in the same, although in the past the terms often differentiated whether the amount was left as cash (tip) or by card on the bill (gratuity). This distinction has now become blurred and they are best viewed as one and the same.

Customers leaving a gratuity or tip often assume that the money they leave goes to the employees who served them, but this isn’t always the case. Often operators would pool tips and distribute to the wider team who have been involved in delivering the service, such as the kitchen. In some cases, businesses also held back a proportion of the tips to cover ‘business administration’ or to boost profits. However, following recent changes in tip laws, employers will be required to pass on gratuity, tip and discretionary service charge payments to workers without any deductions. You can learn more here.

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.

Even though the service charge has been added by the venue, it can be either discretionary or mandatory (like a cover charge). 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 for a tip. If it is non-discretionary, it is classed as business income, just as the cost of the food is, and is subject to VAT, NI and corporation tax.