(Bloomberg) -- It’s a ubiquitous line at the end of a meal in the UK: a “service charge,” ranging from 10% to 15%, tacked on to the bill.
Until now, there’s been very little transparency over what that charge means in restaurants—and what happens to that money—especially when the charge is paid by card. There’s even confusion about the terminology: What does a service charge mean? Is it different from a tip? And what about a cover charge or even the newly emerging “brand charges”?
On Oct. 1 the government introduced the Employment (Allocation of Tips) Act in an effort to address the question of what happens to tips. The law calls for several changes, the most prominent of which is that all money must go to staff—companies aren’t allowed to keep any part of it. (The exception is a “cover” fee or a per-person charge, ostensibly to fund business operations from bread to tablecloth washing.) Even admin fees related to processing credit card service charges can’t be deducted from service charges or tips—anything intended for staff must be received by them. Tips must also be paid out in a “fair” manner, and agency workers will be entitled to the same amount as full-time staff. According to research from consultant RSM, 4 in 5 people think 100% of tips and service charges should go directly to staff.
Ben Thomas, the chief executive officer of tipping payments company Tipjar, says public pressure meant the opacity around service charges had to be addressed. While “most businesses publicly claim the service charges and tips they collect go to staff, the truth is most have … adopted a policy of retaining some amount of tips and service charges historically,” he wrote in a blog post.
He added that sometimes the amount kept by businesses can be sizable, up to 90%, and that he’s heard accounts of tips being split with staff in the head office, far from the restaurant floor.
There are reasons why this happens: When service charges and tips are optional, then it’s possible to not pay National Insurance on them. However, when they are mandatory, they are subject to both income tax and National Insurance like any other form of salary.
Menu Price Hike?
Two-plus weeks in, establishments are still assessing the impact. At the hotel and members club The Ned in the City of London, an independent troncmaster (a person who distributes tips) has been installed to work with a 10-person committee to create a legislation-compliant policy. “It’s been a smooth process so far because we began consulting with our team in July,” says Gareth Banner, The Ned’s group managing director. “We always distributed 100% of tronc and tips, so in that respect, there’s no impact for our team. I think employees will be keen to receive their next paycheck, but we don’t anticipate that there will be any surprises.”
But the new law could mean a price increase on menus, says Soren Jessen, owner of London’s venerable 1 Lombard Street. At the same time that they now have to absorb charges like credit card processing fees, operators are also dealing with the rising cost of employee health insurance. “Most restaurants work on a net margin of 10%, maybe 12%, and some are as low as 5%. Anything that’s going to make it more expensive will end up being added to the bill.” He adds, “there isn’t much to give because of the small margins.”
Research from payments company Dojo found that almost half of Brits want the charge to be dropped altogether. “With consumers, there’s always the question with service charge—they ask where does it actually go?” says Jon Knott, head of consumer insights. According to government estimates, the law will result in £200 million ($262 million) more being paid annually to hospitality workers as well as those in service industries like hairdressing and beauty. It represents a significant change for serving staff, for whom tips make up a big chunk of income.
“If you’re at a high-end Michelin place, your tips can be 30% to 40% of your income,” says Allen Simpson, deputy chief executive at industry group UK Hospitality. But it’s not just at the top of the industry where this happens: “A publican told me their front-of-house people will get £25,000 in salary but probably £34,000 to £35,000 including tips.”
Charges Pile Up
The allocation of tips and service charges has changed significantly over recent years. A decade or two ago, the typical practice for tips and extra charges was to give waiters 10% of the bill in cash at the end of the meal if service had been particularly good. It’s become common to see 12.5% or more added to the bill as a service charge after a meal. Restaurants in the popular Wolseley Hospitality Group—including Brasserie Zédel off Piccadilly, Colbert in Chelsea and the Wolseley in St James’s and the City—add a 15% service charge, as well as a per-person cover charge of up to £2.50. The popular North African spot The Barbary in Covent Garden and now Notting Hill also has a 15% service charge; so does Josephine Bouchon in Chelsea.
Dumpling chain Ping Pong went so far as to add a “brand charge” in April, pushing an extra 15% discretionary charge on the bill for costs that it said were related to the price of running a franchise. It was so unpopular the fee was withdrawn after a few weeks.
Some of these recent changes have gone hand in hand with the move away from cash payments, as automatic service charges have now mostly replaced cash tipping. (Although it is technically optional, most people will avoid the awkwardness of asking a waiter to take it off.) The procedure has streamlined the tipping process: Restaurants created policies to either pool and split tips among waiters and kitchen staff or have it go directly to a table’s server.
But that change has also created a conundrum: Dojo research shows that most customers would prefer to tip in cash because it offers more flexibility. It also showed that around 4 in 5 tips are done on a card because diners simply don’t carry cash. (The number of cash transactions has fallen sharply in recent years, particularly since the pandemic, from 17.2 billion in 2015 to 6 billion in 2021.)
It’s also become increasingly common to see service charges slipping onto the bills for coffee at places like Grind. Controversially, some pubs are even putting a service charge on a humble pint. “Tipping has also spread across the industry with the new digital contactless tills in cafes and bars that come with a tipping option,” says Simpson.
However, this might not all be a new thing, he adds. “There’s been an interesting gap for things we’re used to paying for in cash—beer and coffee—where you’d have some coins left and you’d whack it in the tip jar. When we swapped to contactless, then suddenly no one got tips, so these are replacing the tip jars.”
The next question will be how restaurants, cafes and bars choose to define a “fair” allocation of tips and service charge. Will more experienced staff get a bigger share? Or does that go to people who work hardest? Will kitchen staff be included? There is one way to find out: Ask your server.
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