Mastering Restaurant Payroll: A Restaurant Owner’s Guide
By Business owners wear many hats, and that’s truer for restaurants than it is for most. Restaurant owners and managers are juggling everything from demand forecasting to restaurant payroll.
The processes associated with Human Resources (HR) are critical for effectively managing the workforce, encouraging a positive work environment and ensuring employees are committed and engaged.
But for small to medium-sized restaurants, hiring HR expertise in-house isn’t always an option, and critical operations often fall to owners and managers. If you’re trying to fathom out payroll and stay one step ahead of a changeable legislative environment, this is the guide for you.
The restaurant payroll struggle is real
Running payroll for restaurants is particularly tricky. Seasonal fluctuations, hourly wages, a transient workforce, and flexible employment practices add a myriad of complexities for restaurant owners and managers.
On top of that, frequent updates to regulations such as minimum wage, National Insurance, parental leave entitlement, and even gratuities make compliance something of a nightmare.
Tax Deductions
Employers and those managing restaurant payroll have a responsibility to ensure that restaurant employees pay the correct amount of income tax – which means understanding the intricacies of tax codes.
These can be impacted by benefits such as uniform allowances and parental leave, and will differ across the workforce. The diversity of the workforce in the restaurant industry, with varying employment contracts and working hours, further amplifies the intricacy of these tax deductions for those managing restaurant payroll.
Legislative changes
Changes to legislation and working regulations are something every restaurant owner needs to keep on top of. But the legislative landscape when it comes to payroll is particularly challenging, and there are already multiple changes slated to kick in in 2024.
National living wage
The Autumn Budget saw the announcement of changes to the UK’s national living wage, due to come into force in April. These new changes increase the national living wage by £1.02 per hour and broaden eligibility to include 21 and 22-year-olds, who were previously exempt from living wage requirements.
National Insurance Contributions
Restaurant owners, and those responsible for payroll, must correctly calculate and deduct National Insurance Contributions (NIC) for each employee based on their monthly pay and remit this to HMRC on their behalf.
For sectors like hospitality, where workers’ hours and pay vary month-to-month and are rarely uniform, this creates a huge administrative burden. If an employer gets NIC wrong, they can face financial penalties, recovery action and interest charges. For impacted employees, incorrect NIC can affect their entitlement to benefits, such as state pension.
NIC is further complicated by schemes like the newly announced Investment Zones; a UK Government initiative related to the Levelling Up agenda. Designed to build commercial clusters within the UK, businesses within these zones benefit from government support including reduced NICs.
While not yet all confirmed, there are a dozen Investment Zones planned. As well as South Yorkshire and Liverpool (confirmed) the other areas impacted are likely to be around the West Midlands, Glasgow, Manchester and Tees Valley.
Businesses employing large numbers of staff in these areas are the most likely to benefit, and Deloitte expects that savings for businesses could top as much as £2,200 per employee per year over a three year period.
TRONC
The introduction of the Employment (Allocation of Tips Act) 2023 in the UK will add additional responsibilities for restaurant owners and operators when it comes to paying Tronc, although we do not yet know the date the legislation will come into force.
Restaurant owners will be legally obligated to ensure that 100% of all tips, gratuities and service charges left by customers are distributed evenly among eligible workers, and no deductions can be made for administration costs. Tips can also no longer be used to ‘make up’ employee contractual wages, and agency workers will have the same entitlement as staff.
HMRC (His Majesty’s Revenue & Customs) is expected to publish a Statutory Code of Conduct for the fair distribution of Tronc, this will likely require employers to make the distribution rules clear and available to employees. We are still waiting on the Government to release technical guidance on the changes.
Updates to the Paternity Scheme
Updates to the Paternity Scheme in the UK will come into effect from April 2024. Designed to boost equality in parental leave and pay, the changes require fathers to give 28 days notice of their intention to take paternity leave. For the first time, many will be able to take their two week’s leave separately i.e., they will not be required to take both weeks in one block.
Holiday Entitlement Pay
If you were tearing your hair out trying to understand holiday calculations for Irregular Hours and Part-Year Workers, you weren’t alone. In an effort to clear up some of the confusion, the Department for Business and Trade recently released draft legislation that proposes a new system, expected to come into force for holiday years starting April 2024.
As well as defining both Part-Year Workers and Irregular Hours Workers, the draft states that holiday accrual for both should be calculated at 12.07% of hours worked, which can either be banked or taken as paid holiday.
Time constraints and administrative burden
Handling payroll while running a restaurant is no mean feat and demands a delicate juggling act from restaurant owners. Hospitality is often reactive, with owners and managers called on to address operational issues that often can’t wait. Against this backdrop, payroll understandably takes a backseat – until the end of the month looms and it becomes the pressing issue.
The nature of an industry characterised by volatile demand and seasonal variations adds even more considerations to payroll administration. Staffing levels must be aligned to predicted demand and can make it challenging to establish consistent payroll practices, particularly for those still trying to optimise scheduling.
This increases the administrative burden on owners managing restaurant payroll manually. Errors can be costly, both financially and reputationally, and accidentally overlooking critical details – particularly in an environment where regulation is routinely updated – is an ever-present threat.
Financial risks and penalties
Ask any restaurant owner their top fear and concerns around errors in workforce management will undoubtedly rank highly. Mistakes in minimum wage, NIC or income tax calculations leave businesses open to financial penalties and legal action.
Since 2015, the UK Government has doubled the budget for minimum wage enforcement and routinely takes action against businesses of all sizes that it considers to be failing to pay workers fairly, even publishing a list naming companies that failed to pay minimum wage.
The reputational issues associated with non-compliance don’t stop there and can be just as damaging for the bottom line as penalties and fines. Information travels rapidly via social media and review sites, and any hint of non-compliance or payroll mistakes can quickly find its way into the public domain.
Customers and potential employees are increasingly conscious of supporting businesses that align with their ethical and legal standards, and a reputation for poor treatment of workers can have a lasting, negative impact on customer loyalty, as well as creating issues in retaining and attracting top talent.
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Running payroll in your restaurant
Running restaurant payroll is a complex process that includes a number of key considerations UK restaurant owners need to take into account.
Step-by-step breakdown
1. Collect employee information:
Restaurant payroll processes ought to begin before your employees have even been officially introduced to the team. Smooth onboarding provides a positive first touchpoint for the brand, and might even help to sway workers fielding offers from multiple employers.
Make sure that onboarding data collection includes confirmation of age, disability status and any benefits and allowances employees are currently collecting.
If employees are below the age for minimum wage requirements, make a note of the date at which they become eligible and be sure to set a reminder to update the system.
Internally, you should also have information available for each employee that details hours worked, hourly rate or salary, any bonuses they’re entitled to, and deductions for benefits or taxes.
2. Calculate gross pay:
Determine the total amount owed to each employee before deductions, for salaried staff this will likely be a fixed salary while for hourly workers you will need to multiply hours worked by their hourly rate.
3. Add overtime and bonuses:
Identify any overtime pay worked and add this to the gross pay total for each employee. Similarly, you will need to identify which employees are eligible for bonuses, commissions and tips this month and ensure that is added to their gross pay.
4. Deduct taxes:
Calculate and withhold income tax and NIC based on each employee’s earnings and tax codes, ensuring compliance with HMRC guidelines.
5. Account for deductions:
Subtract from each employee any additional deductions such as pension contributions and benefits (these might include health insurance or gym membership) or voluntary withholdings like charitable donations.
6. Calculate net pay:
The gross pay minus all deductions will provide the net pay – this is the amount employees receive in their bank accounts.
7. Generate payslips:
Provide detailed payslips for each employee detailing gross pay, deductions and net pay. Restaurant owners are legally obligated to distribute these accurately and on time.
8. Submit payments and reports:
Transfer paycheck amounts to each employee’s bank account via direct deposit and submit the required reports to HMRC and other relevant authorities, detailing payroll tax and contributions.
9. Record keeping
Restaurant owners are obligated to keep a record of payroll information, including payslips, tax filings and employee data.
9. Stay on top of regulations
Regularly reviewing changing regulations and ongoing government consultations will ensure you have enough notice to update your processes ahead of any upcoming legislative changes to restaurant payroll.
Essential resources and tools
The good news is that there are a range of fantastic resources available to owners and managers tackling restaurant payroll.
- HMRC provides a range of guides, tools and updates on payroll, taxes and regulation.
- Advisory, Conciliation and Arbitration Service (ACAS) features guidance on labour laws, including information on payroll and working hours.
- The Employment Standards Agency exists to protect workers, and has a number of resources available detailing workers rights.
- Fourth’s experts routinely provide their insight into incoming legislation and its impact on the hospitality sector.
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Common mistakes and how to avoid them
Payroll is a hugely complex process, and a restaurant environment only adds to that complexity. There are a number of errors that are commonly made and being aware of them is the first step in preventing them from creeping into your restaurant payroll process.
Withholding the incorrect amount of tax for an employee can be an administrative headache for both you and the payee. Employers need to provide HMRC with an explanation demonstrating that the error was made in ‘good faith’, while the employee will need to manually correct an over or underpayment.
These types of restaurant payroll errors can be avoided by ensuring that tax codes are regularly reviewed and updated in line with HMRC guidance. A payroll system that automatically calculates tax can also help to reduce the instances of errors, as well as remove administrative burdens from restaurant owners.
Calculating overtime wrong is a very common issue. Automated ‘clocking in/out’ systems can simplify hourly tracking and are beneficial for ensuring that staff don’t breach overtime rules.
Misclassifying employees for the purpose of payroll, particularly if their situation changes – such as crossing an age threshold – is largely down to poor data practices.
Restaurant owners should have sufficient information on each employee and the job roles within the business to be confident of their classification. Regularly reviewing this data and monitoring for updates from HMRC is a must, as is seeking professional advice for complex cases.
Missed deductions or benefits should ideally be flagged by employees as soon as they notice the discrepancy in their paycheck. These errors will need to be rectified in the next payroll and HMRC notified. Creating a checklist of all possible deductions and benefits will help those running payroll to avoid making this mistake.
Late payments or payslips have a negative impact on the employee experience and can, in certain circumstances, breach workforce legislation. Establishing a consistent payroll schedule and understanding that it may need to take precedence over any ad hoc disasters a restaurant owner is dealing with at the end of the month, is essential.
Inventory issues or broken machinery is no excuse to delay payroll. Using payroll software and automating reminders can help you to stay on track.
Poor record keeping is easily avoided by establishing a process for record keeping. Store payroll records securely and in compliance with HMRC retention guidelines, and regularly audit your records to check they’re accurate.
Failing to keep up with legislation is an ongoing fear for many restaurant owners, particularly given how changeable the regulatory environment can be. Subscribing to newsletters, regularly reviewing the HMRC website and talking to other business owners are great ways to ensure you’re up-to-date with any incoming changes. Setting up a Google Alert on key phrases such as ‘UK payroll changes’ or ‘new workforce legislation’ can also help to make sure you don’t miss any announcements.
Calculation errors do happen – we’re all human – but are easily avoided by using payroll software, or even tools like spreadsheets or timesheets. If you are calculating payroll manually, consider including someone else in the payroll process to conduct a final check of all calculations.
Poor internal communication creates issues for employees at key dates in the financial calendar, such as the start of the new tax year. Making sure all employees are aware of any payroll process changes, new regulation or updates to their tax codes can help to head off any payroll-related queries or complaints.
Making restaurant payroll easier
There are a number of solutions for those looking to make restaurant payroll easier to manage. These include hiring expertise in-house, outsourcing to a qualified accountant, engaging a Professional Employer Organisation (PEO) or a payroll bureau.
For large restaurant groups, having an internal person dedicated to payroll is often the most cost-effective means by which to manage it. This specialist has the time to stay up-to-date on legislative changes and will understand the business and its goals.
However, for smaller businesses or those growing quickly, this is an expensive route and still leaves the owners liable for non-compliance.
Outsourcing to a qualified accountant ensures restaurants have access to expertise in tax regulation and financial management, reducing the risk of errors. Accountants cover a wide range of processes, meaning restaurant owners can also seek advice beyond payroll. That said, accountants are often expensive and are unlikely to fully understand the nuances of the business.
A payroll bureau is another outsourcing option well suited to more established businesses. Bureau’s like Fourth specialise in and handle payroll processing; we process over 400,000 payslips a month – calculating payroll, issuing payslips, submitting documentation to HMRC and managing reporting. As a group of certified payroll experts, payroll bureau teams are aware of updates to payroll regulation and take on the burden of monitoring changes and ensuring compliance. Fourth’s team are also accredited to the Payroll Assurance Scheme and certified with The Chartered Institute of Payroll, providing customers like Pizza Hut, Fuller’s and The Restaurant Group with additional peace of mind.
PEO’s are the third outsourcing option, and effectively operate as a HR department external to your business. They specialise in HR as well as payroll, ensuring compliance and reducing the risk of errors, they’re a good option for smaller businesses intending to scale quickly, since they can also handle onboarding processes.
Technology to the rescue
Given the complexities of payroll within a hospitality setting, managing restaurant payroll manually is rapidly becoming infeasible. Technology investments are the other obvious route for making payroll operations less arduous.
Time savings and increased accuracy are two of the main advantages of restaurant payroll software, but the right platform can also offer a host of other benefits.
From protecting sensitive information and enhancing security, to increasing scalability and providing access to reporting and analytics, leveraging technology to automate payroll processes is a game changer for many restaurants. Minimum wage, for example, differs between ages and a worker could move between age groups in the course of a week or even a shift. Systems like Fourth help to keep track of changes like these, providing automated reports that highlight any workers at risk of being paid incorrectly for the pay period. A batch update can then be run to quickly update the issues before the next pay run, dramatically reducing the risk of non-compliance as well as the time owners spend on restaurant payroll.
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Staying informed and compliant
Staying up-to-date with regulatory changes is a core responsibility of all restaurant owners and managers, particularly when it comes to running payroll. Tax codes, minimum wage, NIC and employment regulations are all subject to regular revisions that those managing payroll need to stay on top of to ensure compliance.
Failure to keep up-to-date with these changes can lead to serious consequences, including financial penalties and reputational damage.
Understanding when to seek professional guidance can help restaurant owners to avoid non-compliance, especially if they’re managing additional complexities introduced by a young workforce or initiatives like Investment Zones. Leveraging the expertise of external specialists means restaurant owners can be confident they’re interpreting and meeting their obligations correctly.
Payroll bureau’s like Fourth not only provide guidance on incoming legislative changes, but will also ensure that your restaurant payroll processes are compliant, taking the burden of running payroll off restaurant managers completely.
Conclusion
For those grappling with restaurant management – and all the various flaming torches they need to juggle – payroll can feel like a never ending saga. The imminent shifts in the national living wage, nuances in NIC calculations, and the revamped dynamics around Tronc payments are timely examples of just how much this landscape shifts year-to-year.
But payroll isn’t a battle restaurant owners need to fight alone, there are resources out there to suit every business – whether that’s technology tools that can help with the heavy lifting, or experts that can take over the running of payroll completely. Embracing these support systems frees restaurant managers up to focus on what they do best; serving great food and creating the very best experience for their guests.