Industry figures have described the Government's announcement that it will outlaw the practice of topping up minimum wage with tips from next year as bad news for both operators and staff.
In the wake of a long-running campaign by the Unite union and two newspapers, the Government last week announced it would close the loophole that allows non-cash tips to be used to top up waiting staff's basic pay to meet the national minimum wage, currently £5.52.
Business Secretary John Hutton said the decision was an issue of "fairness and common sense" and the Federation of Small Businesses (FSB) backed him up, claiming that 99% of its 2,000 restaurant members did not use tips to subsidise wages.
FSB national chairman John Wright said: "Big businesses have been using this loophole to keep costs down. It creates an unfair playing field and means small companies, which pay their staff a decent hourly rate and let them keep tips on top, simply cannot compete."
But Bob Cotton, chief executive of the British Hospitality Association, warned that the Government's proposals had not been "thoroughly thought through". He warned that under the current system, tips distributed via a tronc are not subject to national insurance (NI) deductions. But if this practice is banned, the entire minimum wage payment will become subject to both tax and NI contributions, increasing the tax rate for staff and operators.
"The only person to gain will be the taxman," he added.
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How will staff be worse off?
According to Peter Davies, senior manager at business advisory firm Vantis, a waiter currently working 48 hours a week earning £8.50 an hour in London, with £3.50 coming from the house and £5 from tips, has weekly gross earnings of £408.
"He pays income tax of £60.60 on the total amount but pays national insurance (NI) only on the earnings from the house, which at £168 works out at £6.93 a week. This means he gets £340.47 a week after taxes," said Davies.
"If the tips exemption goes altogether, the same waiter will have to pay NI for his entire weekly salary. This means he will pay NI of £33.33, leaving him with a total salary of £314.07 - that's £26.40 less than before."
Davies added that the employer's costs would also increase from £8.06 per week at present to £38.78 a week, as more employer NI would be due.