National Minimum Wage and tips

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The National Minimum Wage (NMW) came into effect on 1 April 1999. It is relevant to all businesses that have employees, regardless of the size of the business. The Government sets the NMW rate for the next financial year in October of the preceding year, following the recommendations of the independent Low Pay Commission LPC. The requirement for businesses to pay their staff these rates is enforceable by HM Revenue and Customs (HMRC).

If HMRC finds that you have underpaid any of your staff, they can issue a Notice of Underpayment requiring you to repay arrears to your staff (paid at the current minimum wage rate) and pay a penalty to the Government. The penalty is 200% of the total underpayment, with a maximum of £20,000 per worker.

Anyone working for you (including part-time and casual staff) is entitled to receive the National Minimum Wage, except:

• Anyone ‘genuinely self-employed’ (for example, someone who controls their own time, what work they do and invoices you rather than receiving wages).
• Voluntary workers.
• Workers who are based permanently outside the UK, such as the Channel Islands or the Isle of Man.

There are four rates of the National Minimum Wage. Rates as of 1 April 2024 are:

• £11.44 per hour for employees aged 21 and over (National Living Wage).
• £8.60 per hour for employees aged 18 to 20.
• £6.40 per hour for employees aged under 18.
• £6.40 per hour for apprentices aged under 19, or those in the first year of their apprenticeship.

Further information on the National Minimum Wage, including current rates, can be found on Gov.uk’s National Minimum Wage and National Living Wage advice pages.

Included: in addition to basic pay, certain other payments may count towards the National Minimum Wage, including:

• Bonuses;
• Incentives;
• Accommodation;
• Money for items such as clothing and shoes, where the worker can decide where to buy the items.

Excluded: other additional payments are excluded, including:

• Premium payments for overtime of shift work;
• Special allowances;
• Expenses;
• Tips, service charges or any other type of gratuity (see Tips and service charges, below);
• Expenditure on items such as clothing and tools related to work.
• All benefits in kind, including meals, except accommodation. Benefits in kind do not count towards minimum wage pay, even if they have a monetary value. However, there are special rules if you provide a worker with accommodation.

Accommodation offset

If you provide accommodation to a member of staff, you are entitled to offset an amount for this against the National Minimum Wage. If the accommodation is provided free of charge, the daily accommodation offset rate is £9.10 and the weekly offset rate is £60.90 from 1 April 2023. For more details, see the Government’s National Minimum Wage and Living Wage: Accommodation pages.

There are four main types of work, and each can apply in the accommodation sector:

• Time work: when you pay the worker according to the number of hours he/she works.
• Salaried hours work: when the workers have a contract to work a set number of basic ascertainable hours each year, in return for an annual salary paid in instalments.
• Output: paid by the piece – such as the number of things they make, or tasks they complete.
• Unmeasured: paid in other ways.

The different types of work give rise to varied ways of determining entitlements. For more information, see the Gov.uk advice on minimum wage for different types of work.

Regardless of the contract type, the determination of work hours does not include rest breaks, sick time or holidays.

The National Living Wage does not replace the National Minimum Wage. Rather, it is a premium to be paid on top of the National Minimum Wage to employees aged 23 and over.

When it was introduced on 1 April 2016, the National Living Wage increased the minimum wage that must be paid to employees aged 25 and over. From April 2023, it applies to employees aged 23 and over at a rate of £10.42 per hour. Those employees aged between 21 and 22 are not eligible for the premium and therefore remain on £10.18 per hour, while the other three National Minimum Wage rates (for those aged 18-20, under 18 and apprentices aged under 19) are unaffected by the National Living Wage.

As with the National Minimum Wage, the National Living Wage premium is set annually following recommendations from the independent Low Pay Commission. Both rates apply from 1 April each year.

Further information on the National Living Wage is available on the Gov.uk National Minimum Wage and National Living Wage pages.

Records

• You are required to keep sufficient records to prove you are paying the National Minimum Wage.
• You must allow workers to see their record within 14 days if they make a request in writing.

The new Employment (Allocation of Tips) Act 2023 amends the Employment Rights Act 1996 so that employers are now required to:

1. Pass on all qualifying tips and service charges to workers without deductions, except in very limited scenarios, such as deduction of income tax. This must be done, at the latest, by the end of the month following the month in which the tips are paid by customers (for example, a tip received on 14 June must be paid by 31 July);
2. Ensure that tips are distributed in a fair and transparent manner when the employer takes control, or exerts significant influence, over their distribution;
3. Have regard to the Code of Practice on Fairness and Transparent Distribution of Tips when distributing or influencing the distribution of tips;
4. Maintain a written policy on how tips are dealt with at their place of business, and ensure this policy is made available to all their workers;
5. Maintain a record of all tips paid at their place of business and their allocation and distribution between each worker, to which workers have the right to request access.

Qualifying tips

The Act defines “qualifying tips, gratuities and service charges” as monies (or items of fixed value, such as a drink or vouchers) that are received by either the employer or staff that are subject to employer control. The method of payment in which the tip is received (i.e. cash, card or electronic payment) is not relevant to whether it is deemed to be a qualifying tip. Nor is whether the tip is added to the bill or paid separately to the bill

Conversely, tips that staff receive and keep directly from customers are not deemed to be qualifying tips.

It is important to note that that Act requires employers to pass on the full amount of all qualifying tips. This means that all administration costs have to be paid by the employer, including all costs associated with processing the tip, such as the charges applied by credit and debit card companies.

Employer control

Under the legislation, an employer is deemed to have exercised control or significant influence over cash tips if either they tell staff how to distribute tips or if they collect tips and distribute them, for example, at the end of a shift or as part of the regular payroll.

Fair and transparent distribution

Employers must ensure that qualifying tips are allocated fairly between workers (including part-time, seasonal and agency workers) and that they should have regard to the Government’s Code of Practice when developing and implementing a system to achieve this.

Allocating and distributing tips fairly does not require employers to allocate the same proportion of tips to all workers. Employers can allocate different proportions of the tips to different workers, but need to ensure that they give due consideration to all of the workers involved in providing service to customers and utilise a clear and objective set of factors to determine the allocation and distribution of tips. 

The choice of factors should be fair and reasonable given the nature of the business and could include:

• Employee role (for example, different distributions between front of house and backroom workers);
• Basic pay (and how workers are engaged);
• Hours worked during period when tips are received;
• Individual and/or team performance;
• Seniority / level of responsibility;
• Length of time employed;
• Customer intention.

Employers need to take care to ensure that the distribution policy they develop complies with the Equality Act 2010 by not discriminating between people with protected characteristics, either directly or indirectly. For example, if staff with protected characteristics are more likely to be employed in positions that receive a lower distribution, this could constitute indirect discrimination. 

To ensure a fair and transparent distribution policy is developed, employers should consult with employees and regularly review the policy to ensure that it continues to meet the requirements of the Act. The tipping policy must be in writing and include how tips are accepted, how tips are allocated and distributed and what steps the employer takes to ensure tips are handled fairly and transparently in accordance with the tipping Act. The policy must also be distributed to all employees.

Distribution of tips

Employers are free to distribute the tips directly to staff, through the payroll system, or to appoint a tronc arrangement (either in-house or through an independent tronc operator). Whichever distribution method is used, the employer remains responsible for the fairness of the distribution and must act if it is found that the distribution is being made in an unfair manner. The employer must also ensure that the distribution is made within the timeframe set out by the legislation (by the end of the month after the month in which the tip was received).

Record keeping

Employers must keep a tipping record which includes details of all qualifying tips received and the amount allocated to each worker. This record must be maintained for a period of three years, beginning with the date on which the tip was paid. Employees have the right to make a written request – limited to one request per worker in a three month period – to view the tipping record for a period dating back up to three years, provided they worked during the period requested.