The Tipping Act – planning and technology are the key to being ready

New legislation to come in from 1st Oct

The Department for Business & Trade published the Code of Practice on Tipping, setting out guidance on how tips can be distributed when the new law comes into place from 1st October, which is a three month delay from what we previously expected.

You will now have longer to prepare for a transformative shift in the hospitality industry, as new legislation is set to revolutionise tip handling from this summer. In this article, we explore the anticipated challenges for Hospitality and Leisure employers, with tips on how to prepare for the change. With insights into the pending Code of Practice and practical steps to take, this article is your guide to proactively adapting to the upcoming tipping landscape. Don’t miss out — explore the key strategies and be ready for the tipping transformation!

New allocation of tips legislation

The hospitality industry has long awaited the introduction of the Employment (Allocation of Tips) Act 2023, which comes into effect on 1st October 2024, which is 3 months longer than initial guidance stated. Our advice is to use this time to get prepared!

The new legislation has been introduced to ensure fairness and transparency in the distribution of tips and will mean employers will legally:

  • Ensure all tips which they received are paid to worked without any deductions
  • Ensure all tips are fairly distributed between workers no later than the end of the following month after receipt from the customer

All businesses will therefore need to review the processes they have in place for tips received and distributed.

The tronc system

Currently, employers can either handle tips themselves through payroll, or opt for a tronc system where tip distribution is managed externally. Tronc systems offer benefits. For employers, relinquishing control over tip distribution can be advantageous, while employees receive a higher net pay due to exemption from national insurance contributions.

For instance, with a £100 tip, an employee taxed at the basic rate could receive £72 via payroll versus £80 through a tronc system. Employers also save 13.8% on national insurance with a tronc system. Tronc schemes require their own payroll scheme, managed by a tronc master who oversees tax deductions and payments to HMRC. Outsourcing the operation of the payroll scheme is an option, with Menzies offering this service.

The digital shift

According to the government’s statistics, deductions of 3-5% from tips remain commonplace within the hospitality sector Added to this, as we have moved towards a cashless society, particularly during the pandemic, there has been mounting pressure on the government to address this issue. Around 80% of tips are now paid by card, making it easier for businesses to retain a proportion before passing the rest to staff.

There’s no doubt that digital tips have changed the reward atmosphere, losing the camaraderie and instant satisfaction that used to come with sharing out the cash pot at the end of the night. There has also been a loss of transparency for employees with the value of tips potentially hidden and often not closely related to their actual service performance on the night. This is an issue for hospitality leaders who want staff to feel rewarded and appreciated.

Moving towards transparency

The aim of the new legislation is to deliver back a level playing field and ensure that 100% of tips will pass to staff, with no deduction allowed by employer for any costs of processing. There will also be no pooling and sharing tips across sites and tips must be paid to employees no later than the end of the month following the month in which they were paid by the customer. Staff will have the right to information on their earnings and employers need to be ready to provide statements on tips earnings.

Non-customer facing workers who contribute to the overall guest experience can be included in a share of service charges. Agency workers are entitled on same basis as employees.

Facing the challenge

All of this presents a huge challenge to H&L employers who haven’t yet made any changes to how they manage their tips processes There are many practical steps that H&L employers can take.

Getting ready

  • Introduce a clear recording system for how tips are managed – either using new technology or updating your current processes
  • The use of technology can be key to allowing you to comply with the new regulations, and tip recording and payment systems can accurately connect the payment of the tip directly to the staff member from all sources, and provides them with details of where and when the tips originated
  • Talk to your tronc master and jointly review any changes in how the tronc master will be informed about the value of tips available for distribution. Staff should have authority over tip distribution, with decisions implemented by the tronc master, independent of business management influence
  • Assess the impact on your cash flow if tips are retained for a period and help you balance peaks and troughs in takings
  • Talk to your payroll provider and make sure they are ready to support the change
  • Check employees’ contracts of employment and make any updates to comply with the legislation, such as payment timescales and removing any employer charges
  • Understand what tips to include as not all tips are under the scope of the Tipping Act – if a worker receives and keeps a cash tip, with no employer control or involvement, the tip is out of scope for the Tipping Act and the Code of Practice
  • Tips are taxable income for the employee and unless there is a qualifying Tronc system in place, employer’s national insurance will also be due on these tips

For Tronc schemes, there are specialists out there (see our links below) who can offer their expertise.

Conclusion and next steps

Embracing these changes positively, the priority is to provide employees with a rewarding experience for their service, fostering employee retention. As the tipping landscape undergoes a transformation, readiness, proactive engagement and technology adoption will be pivotal in navigating the new era of tip allocation. Explore the key strategies outlined in this article and ensure you’re prepared for the tipping transformation.

For more information and resources, you can refer to TiPJAR’s New Legislation Guide, Deputy, and the government code of practice..

Please contact Karen Gibb at Menzies, if you would like to find out how Menzies can help you with legislative compliance or implementing new processes.

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