Tips on employees’ tips

Employees at two hotels kept the whole amount of the tips received from customers. The employees were responsible for reporting their tip income to the tax authorities. However, in 2019, new rules on tips entered into force. After this, companies were responsible for keeping an overview, reporting the individual employees’ tip income, withholding tax, and paying employer's national insurance contributions for the tips.

Because of the new rules, both companies’ expenses for national insurance contributions and administrative costs increased. In response to this, both companies changed their practice based on their managerial right. Before the tips were paid out to the employees, the companies now set off the new expenses against the employees’ tips. Because of this, the employees received a smaller portion of the tips than before.

It is not the gift, but the thought that counts

The court concluded that the companies could not set off against the employees’ tips. This was because the tips were the employees’ property, not the companies’.

The court found that customers’ tips were given to the employees, not the companies. As such, tips had to be considered a gift to the employees, and the companies had no claim on the tips.

In addition, companies could not set off expenses against the employees’ tips based on the managerial right as tips is a source of income. Although tips cannot be considered salary, there are similarities, as tipping will benefit both the companies and the employees. As a salary-element, tips have special protection against the companies’ managerial rights. Any set off against the employees’ tips would therefore require consent.

IUNO’s opinion

This case clarifies the limits to the managerial right in relation to employee tips. Other cases have shown that companies have the managerial right to deny tips altogether. However, companies cannot set off expenses against the tips. This is because the customers’ tips are intended as a gift for the employees, not the companies.

In response to tips, companies are therefore left with the options of denying tips altogether, accepting the increased costs, or getting the employees’ consent to set off. IUNO recommends that companies discuss any consent with the employees. Employee consent will also require a written agreement.

[The Supreme Court’s judgement of 20 April 2023 in case HR-2023-728-A]