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Managerial right did not allow companies to set off costs in employees’ tips

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Legal news
calendar 29 May 2022
globus Norway

The managerial right entails that companies unilaterally can decide on several terms relating to the employment. But this right has limitations, especially when it comes to control over the salary. In a recent case, two companies thought there was a justified reason to make set offs in the employees’ tips to cover the companies’ costs. The Norwegian Court did not agree as the tips belonged to the employees.

At two hotels, the established practice had always been that the tips from customers 100 % went to the employees. For that reason, the employees were also responsible for the taxation of the tips they received.

However, in 2019 the rules on tips changed and companies became subject to different requirements in relation to the employees’ tips. Among other things, the companies were suddenly subject to a taxation duty for the tips the employees received, including the employer’s national insurance contribution. In response to the new rules, the two companies changed their practice with reference to the managerial right. Before, the tips were paid out to the employees, the companies set the amounts off against the tax due from the companies and an administrative fee. Consequently, the employees received a smaller portion of the tips than previously.

Set off requires consent

The Norwegian Court of Appeal concluded that the companies could not set off without the employees’ consent. This was because the tips belonged to the employees, not the companies.

Because the companies had no legal right to set off under the applicable rules – the companies had to rely on the managerial right. However, the managerial right did not apply to set off in the employee’s tips . This was both because receiving tips was a reasonable expectation in the industry, and because the tips were a significant portion of the employees’ income. Additionally, the tips were an economic entitlement the employees had which made it particularly worthy of protection. Set off would therefore require consent, which had not been given. We have previously written about the restrictions on the right to set off, here.

It also added that customers are not required to pay tips. It is a voluntary decision that each customer makes, based on their experience. As the experience depends on the employees, the tips had to be considered a gift from the customers to the employees. Any amounts due to the companies were settled with the bill.

IUNO’s opinion

The scope of the managerial right is broad but when it come to the employees’ personal income, the main rule is that changes require consent. The right to salary is the most important entitlements in a working relationship and therefore also covered by a special protection against the managerial right, with a few exceptions.

IUNO therefore recommends that companies carefully consider any decision that affects the employees’ personal income before any decision is made. Otherwise, as in this case, unjustified changes can result in companies becoming liable for damages. Given that such entitlements do not necessarily follow from the employment contract alone, but may lie in reasonable expectations or company practices, it can be hard to identify if a legal entitlement even exists.

[The Norwegian Court of Appeal’s judgement of 4 April 2022 in case LB-2021-127698 – LB-2021-134280]

At two hotels, the established practice had always been that the tips from customers 100 % went to the employees. For that reason, the employees were also responsible for the taxation of the tips they received.

However, in 2019 the rules on tips changed and companies became subject to different requirements in relation to the employees’ tips. Among other things, the companies were suddenly subject to a taxation duty for the tips the employees received, including the employer’s national insurance contribution. In response to the new rules, the two companies changed their practice with reference to the managerial right. Before, the tips were paid out to the employees, the companies set the amounts off against the tax due from the companies and an administrative fee. Consequently, the employees received a smaller portion of the tips than previously.

Set off requires consent

The Norwegian Court of Appeal concluded that the companies could not set off without the employees’ consent. This was because the tips belonged to the employees, not the companies.

Because the companies had no legal right to set off under the applicable rules – the companies had to rely on the managerial right. However, the managerial right did not apply to set off in the employee’s tips . This was both because receiving tips was a reasonable expectation in the industry, and because the tips were a significant portion of the employees’ income. Additionally, the tips were an economic entitlement the employees had which made it particularly worthy of protection. Set off would therefore require consent, which had not been given. We have previously written about the restrictions on the right to set off, here.

It also added that customers are not required to pay tips. It is a voluntary decision that each customer makes, based on their experience. As the experience depends on the employees, the tips had to be considered a gift from the customers to the employees. Any amounts due to the companies were settled with the bill.

IUNO’s opinion

The scope of the managerial right is broad but when it come to the employees’ personal income, the main rule is that changes require consent. The right to salary is the most important entitlements in a working relationship and therefore also covered by a special protection against the managerial right, with a few exceptions.

IUNO therefore recommends that companies carefully consider any decision that affects the employees’ personal income before any decision is made. Otherwise, as in this case, unjustified changes can result in companies becoming liable for damages. Given that such entitlements do not necessarily follow from the employment contract alone, but may lie in reasonable expectations or company practices, it can be hard to identify if a legal entitlement even exists.

[The Norwegian Court of Appeal’s judgement of 4 April 2022 in case LB-2021-127698 – LB-2021-134280]

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Aurora Braut Bache

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