Sunday, 15 May 2016

Restaurants and Tipping

Open letter to the Business Secretary, Mr Sajid Javid

Dear Mr Javid,

I am writing with respect to your forthcoming consultation on restaurant tipping and gratuities.  I would like to point out that your proposal to prevent restaurants adding a gratuity (which is always optional) to customers’ bills would likely put our restaurant out of business.  This is not because we rely on any of these monies to fund our day-to-day business but is in fact because we absolutely DO NOT retain any gratuities for the restaurant but distribute ALL to our staff.  Please allow me to explain.

We are a medium-sized, independent, family-run restaurant trading on a single site.  We own our restaurant premises which is in a good position on the edge of Spitalfields Market. We therefore do not pay rent, nor do we have any mortgage on the property. You would think this would leave us in a very favourable position.  And yet, our pre-tax profit has been very modest these last three years, certainly not enough to pay a market rent on our premises.  

We currently employ 24 staff, mostly full time and are proud to pay everyone properly. Some staff are paid at an hourly rate of the minimum wage or living wage, depending on their age, and no-one receives less than £6.70 per hour.  Chefs and managers are paid on salaries which are dependent on experience/levels of responsibility and all salaries are on the generous side for the industry.  We also operate a Tronc system and this is administered by a Troncmaster.   Most customers are happy to pay the 12.5% optional gratuity we add to the bill, provided their meal and service has been up to scratch, but we respect a customer’s right not to pay it should anything go wrong with their meal. However, we do fairly well for gratuities and often receive generous tips on top of service.  All gratuities and cash tips are collected and this, the Tronc, is paid into its own bank account and is distributed after tax is calculated to staff directly into their bank accounts.  All of our staff, whether kitchen porter, waiter, bar staff, chef or manager, receive a share of Tronc which, for example, was worth in the four weeks to 20 March this year between 97p and £4.19 per hour, depending on the employee’s role and level of responsibility/performance.  At busy times, like in the run-up to Christmas, it can be worth considerably more.  

Because the Tronc is administered by the Troncmaster and not the owners, it is subject to special tax arrangements: the Tronc is treated as if it was a second job and is normally subject to Basic Rate tax but is not subject to National Insurance either for employee or employer.  This represents a considerable saving for both.  Our restaurant retains NONE of the tronc for its own use, not even an “administration” charge as seems to be normal in other restaurants.    In fact, the restaurant effectively pays for the administration of the Tronc because the Troncmaster is paid to administer the system as part of his normal duties as our General Manager.
I think you would agree that our staff are well rewarded and that their pay is admirably enhanced by our Tronc system, which is administered openly and honestly according to the letter and spirit of the law.  The Tronc system enables us to enhance employees’ pay. It allows us to distribute fairly across all staff, because a customer’s experience in a restaurant is not merely dependent on the service provided by the waiter/waitress but is a joint effort by all staff.  But crucially, a well-administered, fair Tronc system, where all gratuities and tips are collected and distributed to all staff, will incentivise everyone to do their best, for customers, for the team and for the business.
I would now like to consider the likely consequences of your suggestion that restaurants should no longer be allowed to add a gratuity to the bill so that service is considered to be included in the price of the meal and customers are left to tip if they feel so inclined. This would leave staff at the mercy of customers’ generosity (or otherwise).  Whilst some customers are realistic about tipping and others are undoubtedly generous, many people have absolutely no idea of what is a reasonable tip. We have had customers refuse to pay the service charge on the grounds that they don’t believe it goes to staff (despite our staff’s insistence that it does) to press a fiver in their hands in place of a £20 suggested gratuity, kidding themselves that they are looking after the waiter, when in fact they are being unfair and completely unrealistic. Moreover, if tips are given largely in cash, it is more likely that waiting staff will pocket them for themselves.  There would therefore be very little attempt to share with other background staff and tips would be much less likely to be recorded and subject to tax.
Even if tips were pooled, the pool would be a fraction of what we now collect in gratuities, partly because they would secreted away by waiting staff and partly because, with service considered to be included, customers would be giving tokens rather than anything meaningful.  Therefore, if our restaurant was to maintain current levels of remuneration without the Tronc system being funded by adding a gratuity to the bill, we would have to raise pay significantly.  Our total Tronc for the twelve months to mid-March was more than £100,000.  This would represent a 30% increase in our total wages bill and would more than wipe out any notion of profit. There would also be an associated increase in employer’s NI and our employees moreover would also have to pay more employee’s NI.   Of course, we could just pay our staff a lot less than they are currently paid, as in other restaurants, particularly those large chains which retain some or all of the gratuities.  However, I would not run such a restaurant as I fundamentally believe in paying properly to encourage loyalty, hard work and low staff turnover.
Could we recoup some of the extra money we would be spending on wages by raising our prices?  There could be some room for manoeuvre.  But this is a very competitive market and it would not be easy to raise prices without an associated loss of trade. There is particularly a lot of competition from take away food businesses in Spitalfields where, by and large, food outlets will not be paying VAT and can therefore charge a lot less than a sit down restaurant. Furthermore, if we were able to raise prices, to help fund the higher wages required to offset the loss of the Tronc, the increased prices would be subject to VAT.  
So, consider this, without the Tronc system we now use, we would be looking at a £100,000 shortfall in the pot of money currently paid to our staff.  Our staff and our business would be subject to more National Insurance if we paid an equivalent sum to bring total remuneration back up to current levels.  If we were able to raise prices (subject to what the market would allow), this extra revenue would be subject to VAT. Who would benefit in this scenario?  Certainly not our staff who would probably end up less well paid and would be also paying out more of their pay in NI contributions.  Our business would be considerably worse off as it would be paying extra NI, extra VAT and extra wages.   HMRC would benefit with the extra NI and VAT payments (I do trust that this is not just another revenue-raising initiative - VAT at 20% is already punitive) although with a sharp drop in our profitability, there would be a sharp drop in our Corporation Tax liability.  Worst of all, there would also be a significant possibility that we would no longer be able to trade with all these extra outgoings, so that all of our employees would be out of a job and HMRC would be out of the £300k or so a year our business pays in tax one way or another (VAT mainly, PAYE, Corporation Tax, Business Rates).  And this in a business that has no rent to pay, is open and honest with the tax authorities, employs 24 staff at generous pay levels and in excellent working conditions.   
But according to the Telegraph, one in five restaurants keep all the Tronc and use it as revenue to fund their ordinary business.  Perhaps many of the other four out of five keep some of the Tronc, possibly quite a lot of it.  If your consultation is about properly rewarding employees, what would this proposal to ban gratuities do for those who work in these restaurants?  I would say probably very little. Restaurants that are paying the minimum wage/living wages now and are not passing on ALL of the gratuities as we do, will likely continue to do so.  They would probably put up prices to customers to cover their “losses” from gratuities, but are unlikely to pay staff any more than they absolutely have to.  
I totally agree that something needs to be done to stop this dishonourable practice of siphoning off these funds that customers agree should be destined for staff.  After all it is against the law to top up staff wages to minimum/living wage levels using gratuities.  But to ban gratuities being added to bills would completely miss the point and would not benefit staff generally.  In my business, where we do the right thing with the Tronc, it would mean more NI deductions for staff and the restaurant, an increase in pay that would probably ruin the business altogether and/or an increase in VAT payments. Customers would face higher prices and wouldn’t have the option of withholding the gratuity if the service didn’t cut the mustard.  Restaurants would have a limited capacity to incentivise staff to provide good service.  This is clearly the worst of all worlds.
The answer is surely to properly police the current system. By ensuring that restaurants distribute tips and gratuities fairly and openly via an honest and properly run Tronc system, following the law as it currently stands, the gratuities customers are asked to pay would end up in the right place, with the staff.
Yours sincerely
Kay Sinden
Owner of The English Restaurant, Spitalfields