NIM02983 – Tips, gratuities and service charges: National Minimum Wage: Payments of or in respect of gratuities make up wages to NMW

Where gratuities or payments in respect of gratuities are used to satisfy an employer’s NMW obligations, they may still be disregarded from earnings when calculating Class 1 NICs liability if either condition 1 or 2 of the gratuity disregard ( NIM02905) is satisfied. The fact that a payment is taken into account for NMW purposes does not determine the question of whether the payment is liable for NICs. A payment can count towards NMW pay but still be exempt from NICs.

See NIM02985 about IR’s and HMRC’s previously published views on this issue.

Example

Facts

Miguel, the proprietor of a restaurant, pays his staff an hourly rate that is less than the NMW rate that they are entitled to. Tips are pooled and paid through a tronc run by Conchita, the troncmaster elected by the staff. Conchita decides who will participate in the tronc and how much each tronc member will get. Miguel is not involved in the allocation of the payments from the tronc.

Conchita is responsible for operating PAYE on distributions from the tronc. At the end of every week Conchita passes a payment from the tronc to Miguel with a schedule detailing the gross tronc distribution in respect of each tronc member and the net amount that should be paid to each tronc member by Miguel. Miguel pays the net tronc monies to tronc members through his payroll with their wages, and shows the amount from the tronc on their payslips. Miguel checks that the amounts for payment from the tronc with the wages he pays through his payroll are at least equal to the NMW.

Commentary

The source of the payments made from the tronc are tips paid by customers so the payments are in respect of gratuities. As Miguel is not involved in the allocation of the payments from the tronc there are no NICs due. If the payments from the tronc were not sufficient to bring the worker's pay up to NMW rates, then Miguel must make payments up to the NMW. These top up payments are not tips nor in respect of tips, so NICs will be due on any top up payments he makes.