Barbara on the Checkpoint podcast discusses the complex nature of the tipping culture, focusing on legal ownership and the implications of electronic tipping in New Zealand. She shares insights into who is entitled to tips made through EFTPOS, the taxation of such tips, and the potential need for legislative changes.
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Traditionally tipping has been used as an incentive for employees to provide good service to customers, where the employer gains the benefit of customer satisfaction and loyalty as well as an increase in productivity and quality of employees. On the other hand, the employee gains a benefit in the form of a tip for providing good service.
However, the change in methodology of tipping through apps and eftpos machines has made us rethink the nature of tipping and how it intersects with employment law and tax obligations.
The difficulty with the current tipping law in New Zealand is that there really isn’t any. Parliament has stayed well out of the picture and the issue has not come before the Employment Authority or Court. So where does that leave the current state of the law?
Tipping is a form of gift, that a customer provides to an employee for their service. Historically this was in the form of cash, directly to the individual. But unlike most gifts, tipping is a gift that is received by the employee in connection with their employment relationship, in other words, but for the employment relationship, the employee would not have received the gift. The connection with the employment relationship inherently makes the gift belong to the employer as it is considered business income.
It is then the prerogative of the employer to add an express term in the employment contract that tips would be allocated to employees either individually or through a pooling system and/or enact a policy that would provide for how tips are collected, held and allocated.
The modern introduction of tipping through eftpos machines and apps has not actually changed whom the tip belongs to as it has always been the property of the employer however it has changed the nature of the methodology used to distribute tips. It would be a difficult administrative task for the employer to individually assign the tips to the employee who earned those tips, so it is now common for the employer to distribute the tips through a pooling system, which has difficulties in and of itself.
On the face of it the pooling system seems to be a fair system, but it does have issues of its own. Such as, should the tips be proportionate to the hours that the employee worked, or should the tips be based on the days that the employees work? For example, a Friday/Saturday night would tend to produce more tips than that of a Monday night, so how does an employer decide fairly and reasonably, who gets the shifts more likely to produce higher tips?
Employers and employees should also be aware of the tax implications. In December 2023 the IRD issued an interpretation statement that discussed ‘when gifts are assessable income’ and considered that tips could fall within s CE1(1) of the Income Tax Act 2007 where an employee derives an amount in connection with their employment or service, which would apply whether or not the employee received the gift individually or through a pooling system.
Technically, the introduction of tipping through eftpos machines and apps does not change whether the tips are taxed or not as cash tips are also a taxable income. In fact, the introduction of modern tipping practices would lessen the administration on employees as it would automatically be taxed under PAYE when an employee receives their pay.
On the other hand, employers take on the extra administrative cost of handling and allocating tips to employees, so why would employers (if the law doesn’t require them to) enact a tipping policy so that employees are allocated the tips?
Is it time for Parliament to step in?
Recently, the UK have amended the Employment (Allocations of Tips) Act 2023, to protect employees in tipping situations, requiring employers to pay/allocate tips to employees (without deduction) and to do so within a certain period of time.
If New Zealand were to follow a similar approach, we would have clarity over who should be receiving the tips, and we would likely see an increase in tipping culture.
Whether or not Parliament takes action on this issue, we would encourage employers to enact policies that would pay the employees the tips which in turn would promote the employment relationship and recognise the hard work by employees in service-based industries.
