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Employers in the hospitality industry must be aware of new laws on tipping that came into force this month. It means 100% of tips and gratuity must be given to staff under the laws.

Cash tips were already protected by law. But the Employment (Allocation of Tips) Act 2023 means card payments are also now protected.

According to the government, the new laws on tipping mean 2 million workers will be benefit. It says they will be able keep a total of £200 million a year in tips that it says didn’t reach their pockets. 

The issue surrounding unfair distribution of tips was first revealed in 2015 following a media investigation. It found that Pizza Express was boosting its profits by taking a fee from a communal tip pot, known as a ‘tronc’. 

From 1 October 2024, the laws came into effect in England, Scotland and Wales. It was originally due to come into force from July.

What do new laws on tipping mean to businesses?

It is important for businesses not to ignore the new laws. If an employer breaks them they may be taken to an employment tribunal. It could mean fines and demands to pay compensation.

Some hospitality businesses that haven’t given 100% of tips in the past may find their cash flow is affected. Businesses should ensure they have a written policy in place about tips. If you have not yet done so, make sure you do that soon.

Also, it is important you understand the laws and do not delay on ensuring the tips are paid correctly and within the rules.

What is the new legislation?

Hospitality and other sectors that add service charges need to be aware of the new laws on tips. This includes restaurants, bars and cafes. It also affects businesses that accept tips, such as hairdressers.  

It says that:

  • Employers must pass on tips to their workers without any deductions.
  • Tips must be paid within one calendar month.
  • Workers will have rights to request information about an employer’s tipping record. 
  • A written policy is required about tips and they should record how they manage them.
  • Employers cannot alter an employee’s salary or hourly rate to allow for tips. Earnings from tips do not count towards earning the national minimum wage
  • A record of all tips must be kept as workers have the right to request to see it.
  • A draft statutory code of practice sets out how tips should be distributed. This was released in April to support the new legislation and to promote fairness and transparency.

Tips must be allocated fairly between all workers, which includes those on zero-hour contracts. 

What to consider when dividing tips

While the draft code of conduct says tips must be allocated ‘fairly’ it also says that doesn’t mean they should be distributed evenly. 

For example, front of house workers might be more deserving of tips than those behind the scenes. Or, if a customer asks for a specific employee who served them to be tipped, this should be reflected in the allocation of tips. You may also wish to distribute the tips so that those who perform better receive more of the tip. Also, you may want to give more to employees who have worked with you for longer for their loyalty.

What about a tronc system?

Tronc systems are often used to give employees their share of tips and service charges. It is often used by hospitality businesses. 

Appointing a ‘troncmaster’ means they decide how to divide the money. The ‘troncmaster’ will need to run payroll and report payments to HMRC. 

Using a tronc helps your business manages tax implications when it comes to gratuities and tips. This means that tips are excluded from National Insurance Contributions (NICs). If you manage sharing the tips yourself, you will be responsible for NICs as well as income tax.

If you would like to know more about the tronc system, the new laws on tipping or other accountancy questions, contact our team today.