Restaurants ponder price increases as new tip-sharing law comes into force

Restaurants are wondering whether to put up food and drink prices or risk legal action over the sharing of tips and service charge payments with workers as new legislation comes in this week.

Taxi firms, hairdressers and hotels, as well as restaurants, pubs and cafes, will be banned from withholding tips paid by customers – whether in cash or by card – and service charge payments from workers. The legislation is being introduced by the government on Tuesday, more than eight years after a ban was first proposed .

The law is designed to boost the earnings of about 2 million waiting staff and other hospitality workers, and follows a series of exposés, many in the Guardian and the Observer , about companies deducting money intended for waiting and kitchen staff from customers’ card payments.

Instead of passing on the service charge, chains including the luxury Ivy Collection have chosen to bump up workers’ hourly pay rate by a set amount, no matter how much is collected during their working hours.

Many businesses have already adjusted their tips policy in the face of pressure from customers to ensure the service charge goes to the workers. However, some are still using the optional payment from clients to boost their profits, and one London chain, Ping Pong, introduced a “brand” fee instead of a service charge before the new rules came in.

With some hospitality businesses automatically adding as much as 15% in service charge – leaving it to customers to opt out – there can be substantial sums at stake. A 2022 survey by industry body UK Hospitality found that up to a fifth of businesses were keeping a share of the service charge to help cover their costs.

Those that have been using the service charge to pay staff or partly offset their wage bill now won’t be able to draw on this cash fund

Saxon Moseley, consultant

Kate Nicholls, the chief executive of UK Hospitality, says businesses have “been gradually getting ready for this” and moving towards a code of best practice endorsed by unions.

However, many restaurants struggling with the higher minimum wage and persistent food inflation will have little choice but to recoup costs related to the new legislation by increasing menu prices, reducing portion sizes or cutting costs elsewhere.

“Those that have been using the service charge to pay staff or to partly offset their wage bill are still going to have to pay their staff, but now won’t be able to draw on this cash fund,” says Saxon Moseley, head of leisure and hospitality at consultancy RSM. “And in that scenario, margins will be hit, in some cases fairly drastically.”

Meanwhile lawyers say some businesses are struggling to agree the terms of a “fair” share of tips. Michael Powner, employment partner at Charles Russell Speechlys, says reaching a deal is often a difficult process: “Employers need to ensure that what is agreed is ‘fair’ and that there is rational reasoning in place, while avoiding any potentially discriminatory rules.” Difficult areas, he says, could include whether the tips should be shared with those on maternity or sickness absence and, if so, for how long.

Bryan Simpson, who organises hospitality staff for the Unite union, said he was concerned about businesses imposing unelected individuals and senior managers as heads of tip-pooling committees. He said some chain were “deliberately misinterpreting the new fair tips legislation to suit business needs rather than the workers”.

“We will be doing everything in our power industrially, politically and legally to ensure that any unfair tipping policy is challenged,” he said.

Some workers already fear they may unexpectedly lose out as a result of the new rules, rather than gaining new rights to optional payments from clients.

At Pizza Express, which has faced particular scrutiny over its approach to the distribution of tips , waiters will now have to share their cut of the service charge with salaried managers and shift managers after the chain deemed that the senior staff were legally bound to be included because they occasionally needed to step in and wait on tables.

The restaurant does not levy a service charge unless a table is made up of seven people or more. It uses a “tronc” pooling system to share out the service charge and voluntary tips to staff. The precise sharing of tips is voted on by a staff committee led by a “troncmaster”.

In order to fund that change, the group has reduced waiters’ share of the tips to 68% from 70% and that will now also be shared with managers who wait tables. Non-waiters – largely kitchen staff – will share the remaining 32%.

It is understood that the company plans to review the policy in January and every three months after that.

The owner of the Ivy has previously said: “All cash or credit card tips are kept directly by the member or members of the team who received the tip.”