Tips versus service charge: How should businesses accept and allocate gratuities
Tips versus service charge: How should businesses accept and allocate gratuities
04 July 2024 | Published by Jodie Wilkinson
While there’s no expectation to tip in the UK, 60% of Brits said they’d add gratuity if impressed by the service, and 1 in 3 people stated they were likely to tip independent businesses to show their support.
Therefore, it's a good idea to learn more about tips and service charges so you don’t miss out on hard-earned money. However, as a business owner, it’s also important to know your responsibilities for distributing your tips amongst your staff.
With that in mind, this article will explain the difference between tips and service charges, the latest regulations around them, and how to accept and allocate them.
The difference between tips and service charge
Tips
A tip, or gratuity, is when a customer voluntarily pays an additional sum of money to express gratitude and satisfaction with their experience. Tipping isn’t compulsory but can be customary in certain industries or businesses, like the hospitality sector, where a service is delivered to a customer along with the product that they’re actually paying for.
Even though tips are at the customers’ discretion, there is somewhat of a cultural expectation in the UK that some form of a tip will be left — particularly in restaurants — when no service charge is added to the bill.
Service charge
A service charge is a different form of gratuity; it’s often a percentage of the total cost and is imposed onto a customer’s bill, either as a discretionary or compulsory extra cost.
A discretionary service charge is added to the customer’s bill at the end of service, but the customer can opt not to pay it for numerous reasons. This could be due to dissatisfaction with the service or simply not wanting to pay an additional fee.
A compulsory service charge is just that: not optional. Businesses issuing compulsory service charges must explain this upfront to the customer before the service begins. The only reason excuse not to pay a compulsory service charge is if the service is poor. In this case, customers are legally entitled to a price reduction of what they’ve ordered under the Consumer Rights Act 2015, which may also include foregoing the compulsory service charge.
How much should I charge?
When adding a service charge, knowing how much to ask for can be tricky. Go too high, and you risk offending customers and turning them away, or having multiple requests to remove the charge. Go too low, and you could cost yourself valuable extra income.
Restaurants in the UK that opt for service charges ask for anywhere between 10 and 20% of the bill. Remember, if you are a high-end restaurant that already charges high prices for your dishes, the top end of this might seem a stretch too far for your diners.
Top tip: Think about going for the lower end of the spectrum, and satisfied customers might decide to pay a tip on top of your service charge for exceptional service.
It's difficult to calculate how much money you'll make from tips, as it will vary from customer to customer. There's a loose rule that 10% of the bill is customary, but you can expect tips anywhere higher or lower than this.
Which should I accept?
The ultimate decision on what form of gratuity to accept is up to you. However, there are a few things to consider which might help you decide whether tips or service charges are better suited to your business.
1. Customer preference
Some customers prefer a service charge because it eliminates the need for them to work out how much is fair. Others can feel affronted by the expectation. It's a dilemma, but one you can overcome by simply asking.
The Covid-19 pandemic also saw changes in customer habits and the way they wish to pay. Our Tipping Index survey uncovered that post-pandemic, 1 in 7 people don't use cash because of health concerns, so they use their card for everything. 18% of people also no longer carry cash, which they would have left as a tip.
Therefore, a service charge may be the best option, eliminating the need to use cash. Or, you could invest in card machines with a built-in tipping option — like ours at takepayments — so customers can pay safely.
You could run a poll or generate a short questionnaire requesting your customer's opinions on the best way to pay. You could also ask what percentage they'd feel is appropriate if you opt for a service charge.
Top tip: Think about using your social media presence and subscriber list to disseminate a questionnaire — your followers and subscribers will be existing customers, and their preferences matter.
2. Payment systems
Traditionally, tips are given in cash, but in today's world, where cash use is declining, customers can only pay extra for service if your payment systems are set up to accept tips.
Brits tip more often than is perhaps believed. Our tipping index survey showed that 36% of us always leave a tip, and 60% will leave a tip if they're impressed with their service.
However, the pandemic accelerated the UK's move towards a cashless society, so businesses relying on cash-only tipping will miss out. In fact, government data shows that 80% of tipping in the UK is made by card payment now rather than cash.
Card payments offer a convenient way for people to tip the amount they actually want to, rather than what they happen to carry in their pocket. That makes it more likely staff will get higher tips, and in the current economic climate, every little helps!
Service charges added to the bill eliminate the need for cash altogether, arguably making them a simpler option. That is unless your payment systems are set up with tipping functionality (spoiler: all ours are!).
3. Staff preference
It's not just your customers' opinions that matter, but your workforce's too.
With cashless outdoing paper as consumers’ preferred payment method, staff often rely on their employers' trustworthiness to divvy out tips paid by card instead of keeping it for themselves. In fact, 43% of employees are less confident that they will receive a tip paid by card as opposed to cash, according to YouGov.
Therefore, workers may prefer set service charges as it's often easier to divide amongst staff, as opposed to tips, which will be different every time.
Can I accept both tips and a service charge?
The short answer is yes, you can. In fact, it’s not uncommon for customers to pay an additional tip on top of a service charge if they feel the service went above and beyond.
Sticking to a lower service charge, around the 10% mark, may increase the chances that your customers still feel inclined to add an additional tip.
How to accept tips and service charges
We’ve already alluded to the fact cash is on the way out, but this doesn’t mean you need to kiss goodbye to hard-earned tips.
When it comes to service charges, you simply need to add the additional cost to the total amount when keying the price into your card machine or electronic point of sale.
Tips are traditionally where things have become more complicated when it comes to paying by plastic, but thanks to technology, that’s a thing of the past.
Card machines
Top-spec card machines come with built-in tipping functionality, meaning your customers can pay how they want, not to mention safely, and still leave a tip.
Whether you’re using our takepaymentsplus or DX8000 card machine, you’ll have the option to turn on the gratuity feature and preset the tip value – leaving the choice in the hands of your customers.
Can’t decide which is right for you? Find out how to choose the best card machine for your business here.
Order & pay at table
There’s also our order & pay at table solution, designed especially for hospitality businesses.
Our state-of-the-art beepaid app allows diners to scan, order, and pay without leaving their seat. And, of course, tipping is built-in too.
Here’s how it works:
1. We’ll provide you with a custom QR code which you can leave around your premises
2. Customers scan the code with their smartphone and are taken straight to your menu
3. They can browse at their leisure and order from their table when they’re ready
4. Once service is complete, they pay (including tips) via the app
Impressive, right? Beepaid makes safe, streamlined, modern-day payments a breeze.
What are the rules around sharing tips?
We can’t talk about accepting tips without touching on a crucial aspect of gratuities: how should businesses share out any tips or service charges that they’ve received?
In recent years, it’s been raised that some businesses have taken a percentage of their service charges to add to their overall revenue or cover other expenses. With many hospitality staff members relying on tips to supplement their salaries, it’s been a controversial tactic that’s, understandably, left some staff feeling unfairly rewarded for their service efforts.
This won’t be an issue for staff soon, though.
The Employment (Allocation of Tips) Act 2023, or Tipping Act, will bring in a new Code of Practice around the distribution of tips for businesses in England, Scotland, and Wales. The legislation aims to protect the tips of hospitality workers, and states that employers must demonstrate ‘fairness and transparency’ when accepting and sharing gratuities.
The Tipping Act will enforce a new law requiring all tips and service charges to be paid to the member of staff who served the customer that provided the tip, instead of to the business as a whole. It’ll include tips paid via cash and card payments and is expected to come into effect on 1st October 2024.
For some who may have missed out on this in the past, this will be a welcome and well-deserved boost to their income.
How can I make sure I’m following the Tipping Act?
The new change means new legal responsibilities for businesses regarding the allocation of any gratuities they receive.
Under the new Tipping Act, employers must:
- Give all tips, service charges, and gratuities to workers without deductions, except in very limited situations, like the deduction of income tax
- Share a written policy on how tips are allocated and ensure employees can access it
- Keep a record of all tips paid and their allocation and distribution between each employee. Workers must have the right to request access to this record
It’s also worth noting that under the new legislation, employers can offer employees a different percentage of tips compared to other staff members. For example, front-of-house staff may be allocated more tips than those working back-of-house or those working differing contracts.
If the employer doesn't comply with the requirements after the law comes into effect, they could be sent to an employment tribunal. This could result in prosecution if there is evidence that they didn’t follow the code of practice when creating a tipping policy.
The employer may be ordered to revise a previous allocation of tips or pay up to £5,000 in compensation – which may extend to other workers at the business who weren’t involved in the tribunal.
Get in touch with takepayments today
Whether you decide to accept tips, service charges, or even both: our card machines for small businesses are equipped to make payments easier.
To find out more about any of our payment solutions, or discuss your options in more detail, contact our dedicated experts today! Or, check out our blog to learn more about takepayments' technology.
