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Scrapping service charge? Be careful what you wish for

By Peter Davies

- Last updated on GMT

Peter Davies on why scrapping service charge is a costly one-way street for hospitality operators.

Related tags: Service charge, tronc

Abolishing service charge and tronc might seem like a step in the right direction, but it’s a costly one-way street for hospitality operators.

Every few months I read of another hospitality business that has made the decision to abolish service charge, tipping, tronc schemes and everything that comes with it. Most of these businesses do it for what they genuinely feel to be the right reasons and with the best of intentions and motives. Some do it to be disruptive, some to be different and some just to try something new. Lots of people congratulate them and social media echoes to applause, and you would think that what is presently a trickle would soon become a flood. But it never does. Very few ever follow and of those that do, some end up regretting it and changing back.

The current service charge and tronc model is there for a reason and that’s because, when managed properly, it works. It benefits staff, businesses and, ultimately, consumers. The tax breaks alone are worth an estimated £1.1bn per year to the sector as a whole, and that’s a big hole to fill for anyone making the change.

Abandoning service charge and tronc and moving to a system of all-inclusive pricing and staff earning salaries without tronc brings additional costs through VAT, National Insurance, pensions, Apprentice Levy, Student Loans and more. And those costs are unavoidable. No-one is suggesting that these costs are automatically ‘bad things’ but they are real and can’t just be ignored or wished away. Th Government is not going to change the rules to facilitate businesses making this change, so someone else will have to pick up the tab. That someone will either be the business through higher costs and lower profits, the employee through reduced take-home pay, or the consumer through an increased overall cost of their experience.

Whenever an operator tells me they are considering this change there’s always a number of reasons why. It’s always worth exploring this, because very often the solution to a problem (or a perceived problem) can be found without losing the benefits of their current system. Some common themes include:

Tipping has historic connections to slavery and we should therefore abolish it
This may have a grain of truth in the US, although there’s no generally-accepted view on the point. But there’s zero evidence relating to any slavery link in the UK. Britain invented tipping in Tudor times, some 150 years before the slave trade started. Let’s not forget that US restaurateur Danny Meyer, an advocate of ‘hospitality included’ and no-tipping, has accepted it didn’t work and has reverted back – because his staff preferred it that way.

Staff receive wildly-fluctuating earnings meaning they can’t budget, plan, or access credit or mortgages
This may well have been true 10 or 15 years ago, but many service charge-funded tronc systems have evolved over the years to meet the understandable desire from staff for a greater level of certainty. With careful budgeting and planning any Troncmaster should be able to give their members a degree of certainty that, in normal periods of trading, their tronc won’t fall below a certain level. If this isn’t happening then the problem is not really service charge; it’s that the tronc is not being managed as effectively as it could and should be.

HMRC’s decision to exclude tronc from furlough meant our staff had to survive on far less than 80% last year
The Chancellor’s decision to exclude tronc was shameful, particularly (as we now know) because that decision was initially based on not understanding how modern tronc systems operate and that they are about much more than cash tips. Not that it offers much consolation but there was equally shameful treatment of millions of other workers unfairly excluded from support schemes. Undoubtedly hospitality staff received a slap in the face from the Government, but are we really suggesting the best response is to cut off our own arm in return? It’s arguable that throwing away the benefits of service charge and tronc only rewards the Chancellor for his poor treatment of the sector, and as we move forward to a post-pandemic world without lockdowns and Government-mandated closures it’s surely an unnecessary response.

Customers don’t understand it and worry about whether they should pay it
It’s true that a small minority of businesses don’t play fair by their staff and their customers. This happens in every sector of the economy and society, but of course it gives the system a bad name and tars others with the same brush unfairly. In my experience the overwhelming majority do the right thing and act in a way that most reasonable people would consider to be fair. The problem is it’s rarely spoken about. In normal times I would regularly dine out at businesses that told their customers nothing about where the money goes although I knew from first-hand knowledge operated perfectly fair and ethically-sound tronc systems. Be proud and upfront about running a tronc system – most will be happy to hear you do.

We shouldn’t ask customers to pay staff wages; we should pay those
I am lucky enough to know many excellent chefs. They have the ability to take the highest-quality ingredients and turn them into memorable culinary experiences, but not a single one can create cash from thin air. It can’t be done. The only means that a restaurant has to generate money is by taking it off customers in exchange for a few drinks, a decent meal, and being well looked after. This means that every pound received by an employee, regardless of the label, has come from customers. Wages, salaries, tips, service charges – all of them have come from customers. Customers absolutely pay wages – the last year has shown us, if nothing else, that without customers we have to rely on the Government to pay our staff. So is there not a responsibility to ensure that the way businesses pay their staff does not end up costing the customer more than it needs to?

Every country in the world has a different culture and ethos over tipping. No-one has it completely right, or completely wrong. The current service charge system is not perfect, but was introduced for good reason and, by and large, it works. Abandoning it brings a significant cost, and someone has to pay that. Fair play if you are intending to bear that cost from your profits, but if you are expecting your staff or your customers to foot the bill are you sure they are willing or able to do so?

To those advocating change I say this: be careful what you wish for. If the current business model ends, and the long-standing cost benefits disappear, they will never come back again. £1.1bn is a lot of extra food and drink to sell every year.

Peter​ Davies heads up the tronc​ team at WMT Troncmaster Services. Do you agree with Peter or are you considering scrapping service charge at your restaurant? Get in touch at James.McAllister@wrbm.com

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