New regulations coming into force on October 1, 2009 prevent employers using customer tips to top up staff wages to meet the UK’s national minimum wage (NMW). The regulations also increase the adult minimum wage from £5.73 to £5.80 per hour.

The previous position was employers could use tips and gratuities to contribute toward NMW calculations if they were paid via the payroll, but not if they were given directly to workers by customers. This was confirmed by the Court of Appeal’s ruling this year in Annabel’s (Berkeley Square) Ltd and others v Commissioners for Her Majesty’s Revenue & Customs.

In the Annabel’s case, tips were collected through a “tronc” system – an independent tips distribution scheme – and then paid on to staff. The Court ruled that the sums paid to workers in this way were not payments made “by the employer to the work”, as required by the NMW legislation. By passing the collected tips on to the “troncmaster”, the employer had transferred legal ownership of the money together with the obligation to onward distribution to staff. However, the judgment also made clear that where tips were paid to staff alongside wages, via a single payroll operated by the employer, legal ownership was retained by the employer and so the money could be used to make wages up to NMW levels.

This is no longer the position with effect from October 1. From then, regardless of whether tips are paid to workers via the employer’s payroll, it will not be possible to use them when calculating their pay for NMW purposes. This follows a Government consultation earlier this year, which revealed majority support for the proposed change. Nonetheless, The Observer has reported claims that the UK catering industry could be severely affected by the change and that it could cost restaurants £130 million and as many as 5,000 jobs.

Quite apart from the NMW issue, trade unions have been campaigning for the law to be changed so that employers are obliged to pass on all discretionary tips to staff in full. While stopping short of this, the Government is planning to develop a new industry code of practice to make business’ tipping practices more open and transparent for the consumer. Further consultation on this is currently taking place.