The issue of tips raises a number of questions in relation to labour, tax and social security law - for example, when should the tip be considered to be the income of the restaurant and when should it be considered to be the income of the waiter? If the tip is considered to be the income of the waiter, is it considered to be income sourced from labour or professional or business income? Are the manner in which the tip was paid (ie, whether to the restaurant or directly to the waiter) and the customer's intention in making the payment of significance? What are the reporting and compulsory payment duties to the tax and national insurance authorities, and to whom do such duties apply?
A tip can take various forms - it may be added to the account and paid as a service payment to the restaurant, or it may be paid directly to the waiter. In the latter case, the waiter can choose to pocket the tip, share it with other employees or deposit it with the restaurant. The restaurant may record the tip as income and include it in its reports to the tax and national insurance authorities. Alternatively, the restaurant may record the tip only in the service record or may include the tip in the waiter's salary and make compulsory payments (tax and national insurance) in respect of the tip.
Various interests are at stake regarding the tip, as follows:
- The customer usually wishes to give the tip to the waiter personally as a tribute to the good service that he or she has received, and not as an indirect payment to the restaurant.
- The waiter will often prefer to receive the tip directly from the customer as net income, without the associated reporting or compulsory payment duties. The waiter may also wish to receive his or her full rights from the restaurant according to labour laws (whether in addition to or as a supplement to the tip). Furthermore, at times, the waiter will wish to include the tip in calculating his or her rights according to the labour and national insurance laws, notwithstanding that the tip was not reported and that compulsory payments were not made with respect to the tip.
- The restaurant will wish to cut costs and include the tip in the payments to which the waiter is entitled from the restaurant according to the labour laws (ie, to take credit for the tip), but only in respect of that portion of the tip that is necessary to cover labour law costs (the balance will be retained by the waiter as payment paid by the customer and in respect of which the restaurant does not have reporting and compulsory payment duties).
- The tax and national insurance authorities will wish to collect payments with respect to the full tip, while preventing a situation in which benefits such as national insurance benefits will be payable in respect of a tip for which compulsory payments were not paid.
These issues were recently discussed in depth in a Supreme Court ruling relating to a claim by a widow whose husband lost his life during a voluntary act while saving the lives of others.(1)
The widow demanded that the national insurance payment included in her dependant's pension (to which she was entitled as a widow of a volunteer) also include the tips paid to her husband directly by customers, notwithstanding that such amount was not reported and that no compulsory payments had been paid in respect of the tips. The National Insurance Institute rejected her claim. The widow consequently filed a claim in court.
Registering and reporting duties
The underlying principle of the court's ruling was that a waiter is an employee of the restaurant and is therefore entitled to receive from the restaurant his or her rights according to the labour laws, calculated at least according to minimum wage.
When a tip is added as service to the bill and paid to the restaurant, the restaurant must register it as income in its books, not only in the service record. If the restaurant pays the tip (or part thereof) to the waiter, the payment is considered part of the waiter's salary. Registration, reporting and compulsory payment duties will therefore apply, and it must be included in the calculation of the waiter's social benefits and national insurance emoluments.
When the tip is paid by the customer directly to the waiter, the waiter and restaurant can agree between themselves that the tip (or part thereof) will be transferred to the restaurant and taken into account when calculating the payments made to the waiter from the restaurant, in accordance with the labour laws (eg, minimum wage). In such case the tip thus transferred will be considered to be the restaurant's income and the restaurant must register it as such. In addition, the restaurant will have reporting and compulsory payment duties in respect of the tip.
However, when the customer pays the tip directly to the waiter and the tip is not transferred by the waiter to the restaurant, it is not considered to be the income of the restaurant. The restaurant therefore need not register it as income, apart from recording it in the service record (according to the tax regulations pertaining to maintaining an accounting ledger). Furthermore, the restaurant does not have reporting or compulsory payment obligations with respect to the tip. Nonetheless, even though such a tip is paid to the waiter by the customer (who is not the employer of the waiter), it is paid to the waiter as an employee of the restaurant and not as an independent contractor or professional. It is therefore considered to be part of the waiter's labour income and not his or her business or professional income. The only party which may be relevant for reporting and compulsory payment duties in respect of such a tip is the waiter. However, according to tax law, the waiter (as a recipient of labour income) is in general not subject to a reporting duty in respect of labour income. There is therefore practically no enforcement of compulsory payments from the waiter in respect of the tip. Indeed, in several cases it has been ruled that such a tip should not be included when computing the social benefits due to the waiter from his or her employer, since these derive from the salary payable to the employee by the employer only and not by third parties.
National insurance emoluments
With regard to the national insurance emoluments payable in the case at hand, the court accepted the widow's claim to include the tip in the dependant's pension payable by the National Insurance Institute. However, in so doing, the court emphasised that the emoluments to a volunteer (or his or her dependants) are funded by the state treasury and not by the national insurance budget, and are therefore not dependent on collection. The court stressed that the legal result with respect to other emoluments (eg, injury emoluments, which are funded by the National Insurance Institute and dependent on collection) may be different. These may be calculated according to the salary paid to the waiter by the restaurant only, in respect of which the restaurant has reporting and compulsory payment duties.
On the face of it, there is validity in the contention that the waiter who receives a tip directly from the customer as a net payment, without the restaurant having received or having paid the tip and without the tip being at the expense of the waiter's rights from the restaurant according to the labour laws (as calculated on the basis of the salary exclusive of the tip) agrees that the tip reflect the full benefit to which he or she is entitled. Therefore, the employer should not have to bear the costs of social benefits in respect of such a tip. Furthermore, by the same reasoning, the National Insurance Institute should not have to bear the costs of emoluments in respect of a tip for which national insurance payments were not paid.
On the other hand, it clearly goes against the principles of the labour, tax and national institute laws if a tip that is payable directly by the customer (often constituting a major portion of the waiter's income) is not reported, no compulsory payments are made and the amount thereof is not taken into account in computing the social benefits and emoluments according to the labour and national insurance laws.
The situation discussed in Cohen exemplifies this point - had the claim been not for a volunteer's emoluments, but rather for an employee's injury emoluments, the volunteer's widow might have been deprived of the benefit in respect of the tip.
In the petition for a further hearing, the attorney general argued that the court should change the ruling according to which a tip paid directly by the customer to the waiter is not considered to be the restaurant's income. The court was encouraged to rule instead that such a tip be considered the restaurant's income and treated in the same manner as a tip paid directly to the restaurant. In this manner, the problems relating to reporting, compulsory payments and whether the tip is taken into account in computing the waiter's rights to social benefits and emoluments (according to the labour and national insurance laws) would be solved.
However, the court held that it would be inappropriate to create, by way of case law, a new legal arrangement with respect to the status of the tip paid by the customer directly to the waiter, since this issue raises problems of social and economic policy that (due to their complexity and ramifications) should be instead addressed by the legislature.
Therefore, until the situation changes, the customer and the restaurant will continue to benefit, the waiter will sometimes benefit, and the taxation and national insurance authorities will continue to lose out.
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