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What does the tipping law mean for your hospitality business?

On 1 July 2024, a new tipping law comes into effect. It will make it illegal for employers to withhold tips from hospitality staff.


The changes are part of the Employment (Allocation of Tips) Act 2023 and will apply to any business that accepts and manages tips – primarily the hospitality sector, including restaurants, bars, and cafes.


Tips must be allocated fairly between all workers, including those on zero-hour contracts.

As a restaurant or bar owner, you need to be aware of the changes as it may mean the way you currently handle tips could soon be unlawful and you need to act now.


What are the changes?

Cash tips are already protected, and this new legislation will go further to cover card payments.


Currently, when staff receive tips from customers, some business owners keep these tips and invest them back into their business.


The new law on tips says:

  • Employers must pass on tips to workers without any deductions.

  • Employers need to provide their employees with a policy of how they distribute tips, including any deductions they make and why. Anyone should be able to access this policy and it should also be on public display in your bar or restaurant.

  • Employers must keep a record of the allocation and distribution of tips for three years from the date received.

  • Employees can request a copy of this record, and employers have four weeks to respond. Employees will be able to request this once every three months. They could use this evidence against you to bring forward a tribunal claim.

  • Employers need to have a fair process for resolving issues and concerns from staff who feel they haven’t received the right share of their tip.

  • Employers should have a process for dealing with customer requests about how you manage tips and service charges.

  • Employees should be able to explain your policy on tipping and where to direct customers for more information.


The draft code of practice is being consulted on until 22 February 2024, so there are likely to be updates before the new law is introduced in July.


Following this, the government will publish further guidance to help employers and their workers interpret the legislation.


Why are there changes to the tipping law?

The government is introducing new tipping laws to help prevent businesses from pocketing tips.


Following media coverage of the unfair distribution of tips, the tipping law issue was first discussed in 2016.


Many hospitality workers earn the National Minimum Wage or Living Wage and rely on tips to survive.


The government estimates that the changes will allow more than two million hospitality workers to keep £200 million a year in tips.


What the changes mean for your hospitality business

For hospitality businesses that have previously used tips to boost their revenue or held back a reserve to pay staff evenly over the year, the changes may impact profitability and/or cash flow.


Businesses will also want to prepare for how they're going to display tipping practices and communicate changes to staff and customers.


What employers need to consider when dividing tips

Employers are expected to use a ‘clear and objective’ set of factors to decide how tips are distributed among staff.


Tips don’t necessarily have to be distributed evenly between all staff for a variety of reasons, including:


  • Individual performance

  • Seniority or length of employment

  • If a customer wants to tip the employee who served them

  • Type of role (e.g. front of house workers may be more deserving than other roles)

 

What happens if you break the new rules? 

An employer could be taken to an employment tribunal if they break the new rules. This could mean compensation and fines, so it’s important to know what you need to do and act now to comply with the new laws.


What is a tronc?

A tronc is a system some hospitality businesses use to pay employees their share of tips. A ‘troncmaster’ is an independent person in charge of deciding how the money is divided. They run payroll and report to HMRC.


Using a tronc can help your business reduce how much tax you pay. As it is managed independently from the directors/owners ,it can mean the tips are excluded from National Insurance contributions (NICs). If you manage the sharing of tips yourself, you’ll be responsible for NICs as well as income tax.


The National Living Wage increase

Alongside the new tipping law, on 1 April 2024, the National Living Wage will increase from £10.42 to £11.44 per hour.


It’s important to plan now and look at how both changes will affect your restaurant or bar.

It may be necessary for employers to update employee contracts to reflect the changes.

 

You need to act now, to ensure you are compliant by the time the changes happen.

As specialist hospitality accountants, we are experts in changes affecting the hospitality industry and help our clients stay compliant.


Get in touch today, to discuss how your business may be affected.


There is more information on the government website.


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