Unpacking the Employment (Allocation of Tips) Act 2023

Numerous pieces of legislation have rocked the hospitality landscape, yet The Employment (Allocation of Tips) Act 2023 stands out as one of the largest changes to date. 

This act, which received Royal Assent in May 2023, is set to become law on 1st October 2024.

The legislation dictates that businesses must distribute all qualifying tips to workers without deductions.

Additionally, employers must ensure fairness and transparency while dividing tips among workers.

Is your business ready for the changes?

What does the Employment (Allocation of Tips) Act 2023 change?

The Employment Act mandates workers must receive all tips, ensuring a fairer tipping environment.

It's projected that the new act could result in an additional £200 million in revenue being directly given to hospitality workers.

Under the act, businesses must abide by requirements such as:

• Giving the entirety of the tip to the employee, aside from mandatory deductions like tax
• Issuing all eligible tips by the end of the month following the one in which the tip was first received, with service charges, card gratuities and employer-influenced cash tips now defined as eligible tips
• Granting agency workers similar rights to permanent employees in terms of tip distribution
• Implementing fair mechanisms, such as a tronc system, to ensure compliance and fairness
• Sharing your tipping policy with both staff and agency workers
• Maintaining records should a tribunal request arise, just as you would with other employment and financial documents

All these changes will be integrated into Employment Law.

Note: workers will be able to request information on their tips distribution every quarter, and they have the right to take their employer to a tribunal if they believe their tips have been unfairly distributed.

Why is the tipping bill being introduced?

The Employment (Tips Allocation) Act of 2023 seeks to address complaints about employers unfairly retaining or dividing tips.

Previously, only cash tips were considered the employee's property, while credit card tips and service charges were technically owned by employers, often resulting in biased distribution and disparity.

Our recent research uncovered that 24% of people leaving tips believed the non-cash gratuities went to all front-of-house staff working at the time, and about 16.4% thought the tips went directly to their servers.

Furthermore, 77% of those leaving tips expressed interest in their destination, and 85% emphasised the importance of fair tip distribution. 

The updated law now requires employers to fairly divide all eligible tips and service charges, enforcing transparency policies and a clear timeline.

Additionally, the Act prevents employers from using tips to supplement wages above the national minimum.

What is fair tip distribution?  

Currently, the Statutory Code of Practice is drafted and is due to go live later this year.

Once live, it will establish more comprehensive parameters regarding what is seen as a “fair” sharing of tips.

Though fairness is subjective, the forthcoming legislation will provide some criteria that help define fair distribution, such as:

• Employee’s experience
• Responsibility
• Length of service
• Job role
• Seniority

Recent delays

Despite being initially scheduled for July, in April, the act saw its deadline pushed back to October.

During the April announcement, the Department for Business and Trade released an updated draft Code of Practice on the fair and transparent distribution of tips that delayed the July implementation.

This updated Code of Practice can be used in employment tribunals as it has statutory and legal effect.

Alongside the updated Code of Practice, the Government also published a response to the public consultation, setting out the feedback received and next steps.

There were not many responses to the consultation in the context of the number of businesses affected, and disappointingly there are few changes to the legislation where there is a lack of clarity or impracticality.

You can read what is available in the consultation response here.

What is a Tronc Scheme?

Tronc is derived from the French phrase "tronc des pauvres" which translates to collection box.

In the hospitality industry, Tronc describes a system that gathers and distributes tips to staff.

Those who manage the Tronc setup are known as Troncmasters.

By working with an external Troncmaster, employers separate the processing of the Tronc, and as such, eliminate the necessity to pay National Insurance (both for the employer and the employee), pension contributions, student loans or earning attachments on tips, whilst still being able to process everything through the one PAYE scheme.

This is not always possible with an internal Troncmaster as it’s difficult to demonstrate that the scheme satisfies the criteria required to meet the special pay arrangement.

The benefits of a Tronc Scheme

An effectively set up Tronc Scheme can ensure compliance, along with these other benefits:

• Avoiding unnecessary costs by eliminating Employer's National Insurance and Employee's National Insurance on qualifying tips
• Creating a fair and transparent system for distributing pooled tips
• Ensuring adherence to HMRC regulations
• Achieve greater staff engagement and morale

Looking for assistance? Book a no-obligation call with one of our tronc experts here.

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Tronc case study: the Biltmore Hotel, Mayfair

We spoke with the Director of HR at the Biltmore Hotel, Mayfair, about the act.

They told us the goal of engaging a Troncmaster (Troncmasters Ltd) was to ensure fairness and savings for the employee and business.

Complications arose because, at times, they have employees in more than one role in different areas of the business, so the Tronc system implemented was designed to consider this.

Sometimes, there have been changing service provisions; for example, the bar started to generate the same tronc as the restaurant as its own outlet.

With these nuances in mind, the Tronc compliance team at Troncmasters Ltd reviewed and redesigned the points system to reflect these nuances.

Defined terms

The act references a wide array of terminology, which can quickly get confusing.

Below are the basic definitions of some common terms you'll see:

Tip/gratuity is an uncalled-for and spontaneous payment offered by a customer in cash, as part of a cheque payment or as a specific gratuity on a credit/debit card payment.

Qualifying tip for this legislation, are all tips, gratuities and service charges which are paid through the employers, or which they exercise control or significant influence over.

A service charge is an amount added to the customer's bill before it is presented to the customer. A service charge can be discretionary or mandatory.

Tronc/Tronc system is a special pay arrangement used to distribute tips, gratuities and service charges.

The Tronc operator is the person/persons with the responsibility of operating the Tronc, independently of the employer.

Tronc members are those workers who are eligible to receive an allocation of tips, gratuities and/or service charges through a Tronc.

The Code refers to the Code of Practice that will be devised by the Government to provide details on how the new law will apply.

The Act refers to the Employment (Allocation of Tips) Bill.

Employment (Allocation of Tips) Act 2023 Frequently Asked Questions (FAQs)

Here are some FAQs regarding the Act.

Q: What should we do if we have multiple sites?

You must split out the fund per site and you must track exactly which staff work in which site so they can receive their correct share from that site fund.

Q: What do we do for non-public workers in the business?

You will need to work out a fair allocation for those workers in non-public areas of the business, such as a head office, reservations/customer service teams or prep kitchens.

Q: When must tips be dealt with?

Qualifying tips must be allocated to workers by the end of the month following that in which it has been taken.

Q: What happens to agency workers?

The law will apply to agency workers as if they were workers of the employer. The amount due may be paid directly to the individual or to the agent – either way without authorised deductions.

Q: Does this impact contractual rights?

If you have an agreement to pay a contractual amount of tips to an employee, that amount can be counted as part or all of their allocation under the new legislation.

Q: Do I need a written policy?

An employer must have a written policy on dealing with qualifying tips for the place of business and keep clean and transparent records of the allocations per pay period.

Q: Can we be taken to a tribunal?

Workers may make a complaint to an Employment Tribunal stating their employer has failed to comply with the act in regard to how and when qualifying tips have been dealt with. The complaint must be made within a year of the alleged infringement, or the employee must be able to convince the tribunal of a reason why it should still be considered.

Backing the worker

The new act marks a remarkable stride in backing employees.

That said, without proactivity, the act could impose extra burdens on the hospitality industry.

Although potential updates/changes may come in the near future, business owners and payroll experts should begin gearing up for the October launch.

Employers should brace themselves by going over their labour contracts, assigning a Troncmaster to supervise, revamping/developing tipping guidelines and determining their approach to data requests.

Looking for assistance? Book a no-obligation call with one of our Tronc experts here.