Businesses must pay workers 100% of tips under new law

In an overhaul of tips and gratuity practices, a new law being introduced this year will make it illegal for employers to withhold tips from workers.

The new rules will allow more than two million workers to keep a total of £200 million a year in tips, according to government estimates.

Tips and service charges must go to employees

All tips and service charges must go to hospitality staff under the new law.

This issue was first consulted on in 2016 after media highlighted malpractice and unfair distribution of tips.

While cash tips are already protected by law, this new legislation will go further to cover card payments in an increasingly cashless society.

Many hospitality workers earn the national minimum wage or living wage and rely on the additional boost from tips.

When is the new tipping law coming in?

These changes will be included in the Employment (Allocation of Tips) Act 2023, which was originally part of a public consultation in 2016.

The rules are due to come into effect on 1 July 2024 in England, Scotland, and Wales.

What does the legislation say?

The new law on tips says:

• employers must pass on tips to workers without any deductions
• a draft statutory code of practice sets out how tips should be distributed in order to demonstrate fairness and transparency
• employers should have a written policy on tips and record how they manage tips
• workers will have rights to request information about an employer’s tipping record – this will allow them to bring credible claims to an Employment Tribunal

The legislation will apply to hospitality businesses, including restaurants, bars, and cafes. Tips must be allocated fairly between all workers, including those on zero-hour contracts.

The draft code of practice is being consulted on until 22 February 2024, so there are likely to be updates before the new law is introduced in July. Meanwhile, the government says further guidance will be published this year to help employers and their workers to interpret the legislation.

What employers need to consider when dividing tips

The draft code of practice explains that employers don’t necessarily have to distribute tips evenly between all workers.

Some of the reasons for this could include:

• a difference in role (e.g. front of house workers may be more deserving of tips than those working behind the scenes)
• performance at an individual or team level
• length of time working with the employer or level of seniority
• customer intention (e.g. if a customer wants to tip a specific employee who served them)

It’s important to note that employers are expected to use a ‘clear and objective’ set of factors to decide how tips are allocated and distributed among staff.

What does this mean for businesses?

Under the new legislation, if an employer breaks the rules they could be taken to an employment tribunal. This could mean compensation and fines, so it’s important that you’re on top of what you need to do to comply with the new laws.

This could impact cash flow for some hospitality businesses that have previously used tips to boost their revenue.

Businesses will also want to prepare for how they’re going to display tipping practices and communicate changes to staff and customers.

UKHospitality Chief Executive, Kate Nicholls, said: “We’re pleased that the code of practice recognises the variety of different business models within hospitality and that [it] is not too prescriptive.

“We’ll be working closely with the Department of Business and Trade to provide feedback from members and ensure the final date of implementation allows businesses ample time to digest the requirement under the code of practice.”

What is a tronc – and how can it help your business?

A tronc is a system sometimes used to pay employees their share of tips and service charges in the hospitality sector. A ‘troncmaster’ will be in charge of deciding how the money is divided. They’ll need to run payroll and report to HMRC.

Using a tronc can help your business manage your tax implications when it comes to tips and gratuities. It’s helpful as a tronc on a payroll can mean the tips are excluded from National Insurance contributions, whereas if you manage the sharing out of tips yourself, you’ll be responsible for NICs as well as income tax.

Find out more about tips at work on the UK government website.

Have you got any questions about the new tipping legislation? Let us know in the comments.

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Photograph: Monkey Business/stock.adobe.com