A new law on tipping, the Employment (Allocation of Tips) Act 2023, will require operators to pay staff 100% of tips. The legislation received Royal Assent in May 2023 and is expected to come into force in 2024.
The new law will make it illegal for hospitality businesses to withhold “employer received tips” from workers, such as discretionary service charges, card tips processed by the employer, and cash tips where the employer exercises control and the employee is required to pool the cash.
The bill stipulates that the full amount paid by customers must be given to workers, and any deductions made by employers or third parties should be disregarded. These deductions can include credit card fees, commissions, bank charges, payroll costs, and other administrative expenses.
This new law on tipping could impose significant financial burdens on businesses, with credit card permissions alone estimated to cost approximately £140 million per year, which operators will have to cover themselves.
The only allowable deductions are Income Tax and, in cases where a tronc system is not in place, National Insurance contributions. Employers are prohibited from withholding tip money from staff beyond the end of the following month from when it was paid.
Additionally, operators must provide written policies detailing how employer received tips are distributed to staff in full. Workers will also have the right to access written records specifying the amount of tips and service charge generated at their place of work.
According to government analysis, an estimated £200m is held back from staff by companies withholding their tips. With the new legislation more than 2 million workers will have their tips protected. Business and trade minister Kevin Hollinrake stated that the new law ensures that employees receive fair pay for their work and gives customers confidence that their tips are going to deserving staff. To provide guidance on the distribution of tips, a statutory Code of Practice will be created.
Frequently asked questions
We’ve compiled a list of answers to the most frequently asked questions from businesses affected by the new law.
1What does the Act say?The Employment (Allocation of Tips) Act includes:
- A requirement for employers to pass on 100% of tips to staff with no deductions, other than those required by tax law.
- A statutory Code of Practice on Tipping setting out the principles of fairness and transparency that employers must have regard to. Where a tronc system is in place, this will be viewed as compliant with the Bill provided it is being run as the Bill intends.
- Requirements for employers to have a written policy on tips, to distribute tips in a way that is fair, transparent and consistent and to keep a record of how tips have been dealt with for three years from the date received.
- A right for workers to request information relating to their employer’s tipping record over a specified period during which they had worked for the employer, within the last three years. Employers will have flexibility on how to design and communicate a tipping record, but will need to respond to a request for information within four weeks.
- A requirement for tips that are distributed via a tronc to be paid no later than the end of the month following the month in which they were paid by the customer.
- A right for agency workers to benefit from the Act in the same way as workers.
2What deductions are allowed?The only allowable deductions are Income Tax and, in cases where a tronc system is not in place, National Insurance contributions. The full amount paid by customers must be given to workers. Deductions made by employers or third parties such as credit card fees, commissions, bank charges, payroll costs, and other administrative expenses are not allowed.
3When do businesses pay National Insurance?If a business has a valid tronc arrangement, that is not subject to National Insurance – employees' or employers'. If they choose to deal with the tips and service charge outside of a tronc arrangement and the business controls and manages it itself, then National Insurance is due. Once the legislation comes through, the employer National Insurance cost will be a hard cost to the business and they will not be able to net it up or recover it from the tips pool. So, dealing with it outside the tronc arrangements could get more expensive.
4When do employers have to pay tips to their staff?Employers are prohibited from withholding tip money from staff beyond the end of the following month from when it was paid.
5What happens to existing arrangements?The legislation is not retrospective. Existing arrangements agreed upon before the law's implementation will not be affected, such as agreements where employees have accepted reduced salaries in exchange for a share of tips and service charges. However, it will be no longer be possible to enter into new arrangements.
6What about staff working at different sites or at head office?The money can only be paid to staff working at that particular site. If people work at different sites, they will be able to receive a share of the money from all of the sites at which they have actually worked. However, there is an exception that allows workers in a "non-public place of business", for example, people in head office, in production units or dark kitchens – to receive a share of the money generated at a trading site.
7Can businesses allocate tips based on performance?The legislation doesn't talk about the rationale or the criteria that is used to share the money out. So, if the employer or the troncmaster decides they want to have an element of performance, they will still be able to do that as long as it is all paid out within the time period to the people who worked at the place of business.
8What about cash tips?Informal cash tips given directly to workers are not subject to the legislation. However cash tips where the employer exercises control and the employee is required to pool the cash are subject to the legislation.
9Does the new legislation apply to agency workers?When receiving tips and service charges, agency workers must be treated in an identical manner to a directly employed worker. The operator must pay that money over to the agency and they will have to pay the worker within the same time frame and make no deductions except income tax and National Insurance.
10What will happen to businesses that do not comply?Employees can escalate grievances related to tips to an employment tribunal, which has the authority to issue compensatory orders of up to £5,000. The tribunal can extend similar orders to other affected workers, even if they haven't filed claims themselves. Non-compliance with the legislation poses significant risks for businesses. If one worker files a claim at a tribunal and succeeds, the employer may face claims from all workers, magnifying the potential liabilities.
11What next?Now that the Act has received Royal Assent, confirmation of the date of commencement is expected to be announced later this year, with the Act coming into force in 2024. The associated Code of Practice will also be drawn up this year, following a formal consultation.
In the meantime while the Act awaits commencement, employers should review their policies and practices on tipping to ensure they are compliant with the changes coming into force.
Tipping is the customer's opportunity to reward people for delivering above and beyond expectation and goes a long way to enhancing workers earnings across the sector. We welcome news that the government have taken the step to protect employees' gratuity payments. It seems almost surreal that we have had to legislate to ensure that a few unscrupulous employers are unable to withhold tips. We are looking forward to working with government departments and stakeholders in developing a code of practice.
Michael Kill, chief executive of the Night-Time Industries Association (NTIA)
Fantastic hospitality experiences don't happen without a huge effort from our teams, both front and back of house, and tips are a generous way of customers showing their gratitude, while providing a welcome boost to employees' earnings. Tips are just one part of what makes working in hospitality a great job and career. We're pleased to support this new piece of legislation as it comes into law today and look forward to working with the government and other stakeholders on a code of practice that ensures a fair distribution of gratuities amongst all who contribute to providing great hospitality.
UKHospitality chief executive Kate Nicholls