The Tipping Act obliges employers to comply with various requirements for qualifying tips.
- Businesses must allocate and distribute all qualifying tips, gratuities, and service charges to their workers in a fair and transparent way.
- Tips must be transparently distributed by the end of the month after the month in which the tip was paid.
- Businesses must keep a record, a written policy which is accessible to staff, of how every tip has been dealt with.
- Tax and social security implications need to be considered. This will depend on how they are distributed to workers.
Business Impact
The new law applies to any business that receives a qualifying tip from a customer. It will particularly affect businesses in the hospitality industry, no matter their size, and can include independent operators such as local coffee shops to national restaurant, pub and bar chains. The Act will also impact hairdressers, taxi companies, and other such businesses that regularly receive tips.
The UK hospitality sector is made up of approximately 143,000 businesses, employing around 1.8 million people, and has been under pressure due to rising costs and the cost of living crisis. Although closures are slowing from last year, the first quarter of 2024 saw four sites closing each day.
Make Sure You’re Compliant
A
new report reveals that two thirds (63%) of businesses currently deduct a percentage of tips from employees. 29% use this to cover costs such as processing fees, while 28% take a profitable share of the tips.
Under the new Act, this won’t be allowed and employers will have to distribute 100% of customer tips to staff, with no exceptions except for standard-rate tax deductions.
Companies who are not currently compliant with the new Act will need to change the way in which they operate. The report estimates this to be more than 90,00 businesses.
Using a Tronc
Tips and discretionary service charges can be allocated to workers through a tronc, which is a special pay arrangement that lets businesses fairly share this money given by customers.
As long as the employer arranges for qualifying tips to be allocated by an independent tronc operator, with no unauthorised deductions made, the new Act confirms the employer is treated as having ensured that these tips are fairly distributed.
Beware Complexity
The new legislation is complex and employers are advised to review their existing or proposed arrangements to ensure full compliance. Businesses may wish to draft their own bespoke tipping policy and to seek advice on the necessary legal issues arising.
To avoid complications, WorkSmarter’s HR Partners can offer customers bespoke advice and guidance about the new legislation in relation to their specific business.
Note: The content of this article is for general information only and does not constitute legal advice. Specific legal advice should be taken in any specific circumstance.
