New rules on staff tips - is your business ready?
The Employment (Allocation of Tips) Act 2023 is a major change to how tips must be paid to employees in the UK.
The new rules will be an added complexity, administration burden and cost for employers, in an already challenging economic climate.
Employers should take necessary steps now to ensure compliance with the forthcoming changes and to avoid potential employee disputes and reputational damage.
What is changing?
Under the new legislation:
- All tips and service charges must be paid in full to employees and cannot be subject to deductions by the employer. This includes all tips, whether paid in cash, cheque, by card or digitally.
- All workers, including agency workers and those on zero hour contracts, are protected by the new law.
- Employers must implement a written policy which sets out how tips will be distributed to staff in a fair and consistent manner, in adherence with a newly published Code of Practice.
- A record of how tips are distributed must be kept for up to 3 years, which employees can request to see.
- Tips must be paid to employees by the end of the month following the month in which the customer paid the tips.
When do these changes take effect?
- The new law is due to come into effect on 1 October 2024. There will be no transition period, so employers must be ready to comply with the changes no later than this date.
Who must comply?
- All businesses where employees regularly receive tips from customers, including hotels, bars, casinos and restaurants.
Points to consider
- There will be no transition period – Employers should invest time and resources now to introduce a compliant policy and update processes.
- It is key to involve staff in these changes, especially where a tronc is in place and tronc-master/tronc committee will need to be consulted.
- As is the case now, tips will not count as earnings for National Minimum Wage purposes, under the new rules. However, many lower paid workers do rely on tips to supplement their wages, especially given the rising cost of living. As such, many employers are already under pressure to keep remuneration packages competitive to retain key staff; whilst also managing the business' budget and cash flow.
- Currently, many businesses deduct a proportion of tips to cover costs such as bank charges, fees and administration costs. This will be prohibited from 1 October. Affected business will be faced with an additional direct cost and may have to decide whether to pass this on to customers.
- Employers may want to consider using a tronc to manage the distribution of tips, a key advantage of which is that tips paid out under a tronc will be exempt from Class 1 NIC.
- Existing tronc arrangements should be reviewed to ensure they are robust and compliant with the new rules.
- Non-compliance with the new rules can lead to employment tribunals, compensation due to employees and potential reputational damage.
Originally published 09 October 2024
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
