New Law on Tips: Are You Ready?
The Employment (Allocation of Tips) Act 2023, effective as of October 1, 2024, has introduced essential rules on how tips should be managed in the hospitality industry. The Act covers all businesses that accept tips and service charges – including pubs. As of October 2024, every ‘qualifying’ tip received must be allocated fairly among workers. A ‘qualifying’ tip is defined as tips received directly by employers, associated persons, etc. (e.g. tips or service charges paid to an employer using a credit or debit card) and worker-received tips which are subject to employer control (e.g. where the employer directs that tips are shared amongst other workers). Employers are responsible for this distribution and for keeping records to show compliance and failure to comply could lead to not only to complaints from staff but, more seriously, Employment Tribunal cases.
If you own a pub, restaurant, or any place where tips are collected, this law impacts you. Here’s a simple breakdown to help you understand what’s required and turn these rules into an advantage for your business.
Key Points to Understand:
- Fair Distribution of Tips: All tips – whether they come from card payments, mandatory service charges, or other gratuities paid through the employer – must be distributed fairly. This includes tips paid by customers through electronic means. The Act does not interfere with existing tipping practices where tips are paid directly to workers in cash and kept or informally pooled by the workers themselves, i.e. where the employer does not exercise control or significant influence over the tips
- Site-Based Tip Pooling: One important rule to note is that tips must be pooled only within each site. If you run multiple locations, you cannot distribute tips across different branches. The tips at each site belong to the staff who worked at that location.
- Who’s Eligible: Not all individuals who work in your pub or establishment are eligible to receive tips. The Act specifically excludes self-employed individuals and contractors, as they do not have employment contracts. Only employees and workers (including agency staff) with formal contracts can participate in the tip-sharing scheme. Even if you want to distribute tips to contractors, the law sees this as taking money away from workers, which could lead to legal trouble.
- Written Policy is Essential: You must have a written policy that outlines how you handle tips. This ensures transparency and accountability, giving your employees confidence that the tips are being distributed fairly.
- Record-Keeping is Crucial: The law requires employers to keep detailed records of every tip distributed for at least three years. If your employees ever question the fairness of tip distribution, you need to be able to show clear records to resolve the issue.
- Workers’ Rights: Employees now have the right to bring complaints to an Employment Tribunal if they believe their employer is not following the rules laid out by the Act. This makes it more important than ever to ensure that your tipping practices are above board.
How Compliance Can Benefit Your Business
While the new legislation may seem like a burden at first, it’s actually a great opportunity to improve your business. Complying with the Act can lead to significant National Insurance (NI) savings when implemented correctly through a compliant tronc scheme.
A tronc scheme is a tax-efficient way to distribute tips, where a “troncmaster” (often a senior employee or a third-party service) oversees the fair distribution of tips. With proper advice, this could lead to savings for your business on NI contributions, allowing you to reinvest in employee benefits, recruitment, or improving customer service.
Moreover, fair and transparent tipping practices can have a positive impact on employee morale. Workers who feel that their efforts are being fairly rewarded are more likely to stay with your business, reducing staff turnover and boosting overall productivity.
Here’s a simple checklist to help you stay compliant:
- Create a Written Tip Policy – Make sure it’s clear and accessible to employees.
- Set Up Transparent Records – Record all tip distributions for at least three years.
- Keep Tips Separate by Site – If you have multiple locations, manage tips separately for each one.
- Consider a Tronc Scheme – This can help you save money on National Insurance.
- Regularly Review Your Practices – Make sure you’re always aligned with the law.
Don’t Risk Falling Behind – We’re Here to Help
Navigating the complexities of the Act can be daunting, especially when you’re busy running your business. But you don’t have to figure it out on your own.
At Everett King we can help ensure your tipping policies are in line with the new legislation and identify potential NI savings through a properly structured tronc scheme. By taking the right steps now, you can avoid costly Employment Tribunal claims and improve staff satisfaction at the same time.
Contact us today for a free, no-obligation consultation. Let’s work together to ensure your tipping practices are compliant and your business is benefiting from every possible advantage!