The Tipping Act is now live

The changes to the tips legislation, which came into force on 1 October 2024, have left businesses in the tourism, leisure and hospitality industry with questions. Although the guidance is detailed, there are several pitfalls to avoid with potential further costs, impact on margins and administrative burden adding to some of the difficulties already seen in the hospitality industry.

However, there are some positives. It’s important to note that only qualifying tips which are controlled by the employer are caught by the legislation and there may be benefits where a tronc system has been implemented for tips received directly by the employees, which could help you save National Insurance.

Following discussions with clients and businesses about the Tipping Act and Code of Practice, they want to know: “How is my business affected?” Below is a useful summary of the common questions being asked and some responses aimed to help you.

1. Does the guidance apply to all tips received?
   The guidance applies to tips, service charges and gratuities received where the employer is involved; in that they receive or control those tips.
   
   You should be aware that not all tips are under the scope of the Tipping Act 2023. For example, if a worker receives and keeps a cash tip, with no employer control or involvement, the tip is out of scope for the Tipping Act 2023.

2. Are non-monetary tips included in the Act?
   Yes, non-monetary tips such as tokens and vouchers are included if they are received or controlled by the employer.

3. What about service charges?
   Yes, service charges that are added to customer bills are included and must be distributed to staff in the same manner as tips.

4. How should tips be allocated to ensure fairness?
   Tips should be allocated based on factors such as hours worked, role and customer feedback. Employers must make sure that the distribution is transparent and justifiable.
   
   Tips collected at a place of business must be allocated to workers at that place of business and you should not pool tips from multiple sites. Non-customer facing workers can be included as part of the allocation as can directors.

5. When must tips get paid?
   Tips must be paid out by the end of the month following the month in which they were received. To comply with the rules, building up reserves to pay at a later date is not allowed

6. Can I make deductions from tips received to cover other costs?
   No, 100% of the tips received must be allocated and distributed to workers. You cannot deduct incremental costs such as admin costs or credit card charges. Therefore, passing on tips received via credit card will increase costs for employers.

7. Can employers opt out of issuing a tipping policy?
   No, employers are required to establish and maintain a tipping policy to ensure compliance with the Act.

8. Do I need a written policy?
   Yes. It’s important to have the published policy in writing which promotes transparency, fairness and compliance.
   
   It should be available to all workers and include whether the employer requires or encourages customers to pay tips, gratuities and service charges at the place of business and the basis of allocation of tips received.

9. What are the obligations towards agency staff?
   “Eligible Agency workers” are entitled to a fair share of tips, like direct employees. Employers must treat them the same as employees and include them in the tipping policy and distribution process. The legislation provides detailed guidance on the definition of the agency workers. This is a risk area for employers.

10. How can employees make sure they receive their fair share of tips?
    Employees should familiarise themselves with their employer's tipping policy and keep track of the tips they receive.
    
    Employees must be earning at least the minimum wage from the work they’re doing. They must not be topped up by tips to meet the minimum level.
    
    A worker, which can include agency staff members, can request records of their own allocation of tips but not those of another colleague or worker.
    
    If discrepancies arise, they can raise the issue with their employer or seek advice from a trade union or legal advisor.
    
    Employers need to provide a response in a timely manner.
    
    It’s important to consider the risk for your business as, due to the time restrictions, it’s likely that any successful complaint will have to be made good by the employer as the distribution for the relevant time frame is likely to have passed, adding yet another cost to the business.

11. What records should I keep?
    Records need to show the value of tips collected from customers and how much has been allocated to individual workers. These need to be retained for three years.

12. Do I need to change any employment contracts?
    Contracts cannot be changed to vary the amount of tips received and, as an employer, you must make sure that the minimum wage is being met before any tips are allocated.
    
    Both employers and employees should check their current contracts to make sure they comply with the new legislation.

13. What is a tronc and how does it work?
    One option for employers is to use an independent tronc scheme for tips handled directly by staff. A tronc is a system where tips are pooled and distributed by an independent tronc operator.
    
    Tips distributed through a tronc benefit from savings in National Insurance contributions (NIC) – although are subject to PAYE.
    
    With the introduction of the new Act, implementing an independent tronc scheme, or updating an existing one, can allow employers to comply with their obligation to distribute tips fairly.
    
    However, I should point out that employers need to make sure they meet the legal obligation of fair distribution under a tronc, whilst also maintaining the independence from the tronc that’s required from a tax perspective to access the NIC savings.

14. What happens if an employer fails to comply with the Act?
    Non-compliance can lead to legal action, including claims in Employment Tribunals. Employers may be required to compensate workers for any tips that were not fairly distributed, but employers cannot recover any amounts that have been overpaid to employees.

15. What benefits are there to this as an employer?
    Enhancing transparency and fairness can boost employee motivation and satisfaction. This improvement can translate into better quality of service and loyalty from employees as they feel more valued and fairly compensated for their work.
    
    Additionally, higher morale can help reduce staff turnover, a major challenge in the hospitality industry, resulting in savings on recruitment and training costs over time.

16. What should I do now?
    Initially there will some administrative time required to review current practices and get new systems in place.
    
    Review the legislation and the practical guidance above and evaluate the impact on employment taxes (PAYE, NIC) and any VAT implications on service charges.

Need help?

At Larking Gowen, we’re here to help. Please contact us with any questions on 0330 024 0888 or enquiry@larking-gowen.co.uk. Our specialist Tourism, Leisure & Hospitality team can also offer an initial free, no-obligation chat to help you, should you have further questions.

Jo Burton