With the Employment (Allocation of Tips) Act 2023 set to take effect tomorrow, time is running out for hospitality businesses to prepare for significant changes in tipping practices.

This new legislation amends the Employment Rights Act 1996 to ensure all tips and service charges collected via card payments are distributed fairly and transparently to staff, with no deductions other than taxes. Businesses must act quickly to ensure compliance.

The specific wording provided by the Government in its Code of Practice is as follows:

1. Pass on all tips and service charges to workers without deductions, except in very limited scenarios, such as the deduction of income tax. This Code does not affect the provisions around tax in relation to tipping.
2. Ensure that tips are distributed in a fair and transparent manner when the employer takes control, or exerts significant influence, over their distribution.
3. Have regard to this Code of Practice on fairness and transparency of tip distribution when they are distributing or influencing the distribution of tips.
4. Maintain a written policy on how tips are dealt with at their place of business, and ensure this policy is made available to all their workers.
5. Maintain a record of all tips paid at their place of business and their allocation and distribution between each worker, to which workers have the right to request access.

If your business currently uses tips to cover staff expenses, such as meals during shifts, you will need to find alternative ways to manage these costs before the deadline.

How to manage this change

You must establish and share a tips and gratuities policy with your staff, which is compliant with the Government’s statutory Code of Practice for the Act, which can be found here.

Now is also the time to update your payroll processes so that you can accurately and transparently record tips, and then distribute them fairly in line with this new legislation.

Failure to act now could result in non-compliance, risking legal penalties, employment action, and financial strain on your business.

To summarise, key actions to take immediately:

• Develop transparent policies: Clearly outline how tips will be distributed among staff.
• Adjust payroll systems: Ensure tips are handled separately and that non-tax deductions are avoided to prevent penalties from HM Revenue and Customs (HMRC).
• Review NIC implications: Remember that tips managed through an independent tronc are not subject to National Insurance Contributions unless paid directly by the employer.

Many experts are recommending the creation of a tronc system. This is an independent pooled arrangement for distributing tips equitably amongst staff. Whilst it is not strictly necessary to have a tronc system in place, many hospitality operators are considering them as a viable means of staying compliant.

If this is something you are considering, now is the time to act. Appointing a troncmaster, who is independent of your management, could be crucial in maintaining compliance and ensuring fair tip distribution, but it will take time to create a tronc and instruct an expert in this area.

For expert guidance and to ensure your business is ready, contact our specialist payroll team today to benefit from our extensive experience in the hospitality sector.