With the rapid move towards a cashless society, with the vast majority of payments in restaurants made via contactless or credit cards, this pressure has only intensified.
The result is the Employment (Allocation of Tips) Act 2023, which comes into force on 1st October 2024. This overhauls the way that restaurants, pubs and other hospitality businesses deal with tips and service charges.
The Act is the latest in a series of law changes on how employers handle tipping. The new Act outlines not just how tips and service charges should be distributed, but also introduces a new requirement for record-keeping which may well mean big changes for some businesses.
Alongside the Act is a Statutory Code of Practice, which employers must abide by when it comes to tipping and service charges.
All tips and service charges must go to staff
Under the new law, it will be unlawful for a business to withhold any tip or service charge from their employees. From 1st October, employers must pass on 100% of all tips and service charges to staff, without any deductions – this includes credit card charges or admin fees. The only exception to this is tax.
Tips must be fairly distributed
Tips and service charges must be distributed fairly to all workers, including agency staff, who should be treated equally with directly-employed staff. This must happen no later than the end of the month following that in which the tip or service charge was paid by the customer.
You must have a written tips policy
This will be the biggest change for many hospitality businesses: you must have a written policy, available to all staff, which clearly states how tips and service charges are both collected and distributed. This can be part of your staff handbook or a separate document.
The policy needs to include details of who will is responsible for managing tips; how tips will be divided and distributed, and matters such as whether staff are entitled to receive their share of tips when they are on holiday, sick leave, maternity or paternity leave, etc.
The requirement to have a policy in place applies to any business where tips are left ‘more than occasionally’ – which is likely to take in almost all hospitality businesses.
You must keep a record of all tips
The new law requires employers to keep a written or electronic record of every tip, including the amount, when the tip was left, how much it was, and how it was distributed – and this record must be kept for three years from the date the tip was left.
All employees have the right to see this record, so it must be kept in a way which is accessible to staff. Workers have a right to request a copy of their tipping record, to enable them to bring a claim to an employment tribunal should they believe they are not receiving the tips to which they are entitled. If these records are not available, it is highly likely that a tribunal will rule in default in favour of the employee.
Troncs
The new Act will still allow for tips to be managed through a tronc system. This is where the allocation and distribution of tips is overseen by a troncmaster (who cannot be the employer or a member of senior management). The advantage of this system is that where a tronc system is in operation, tips are exempt from Class 1 employers’ and employee’s National Insurance.