Staff tips – rules for small businesses

If you run a hospitality business, hairdresser, or anywhere else that gets tips from customers, it’s your responsibility to make sure staff get everything they’re owed. 

The Employment (Allocation of Tips) Act 2023, otherwise known as the Tipping Act, has made it mandatory for employers to pass on all tips to employees without any deductions. 

In this article we explore everything business owners need to know about tipping. 

What is the Employment (Allocation of Tips) Act 2023? 

Also known as the Tipping Act, this law makes sure all tips and service charges go to hospitality staff or any employees who have been given tips by customers. 

This issue was first consulted on in 2016 after media highlighted malpractice and unfair distribution of tips.

While cash tips were already protected by law, this newer legislation covers card payments in an increasingly cashless society.

Many hospitality workers earn the national minimum wage or living wage and rely on the additional boost from tips.

What do employers now need to do with tips?

To comply with UK law surrounding tips, employers must:

• pass on all tips to workers without any deductions
• pay these tips to employees within one calendar month
• keep a record of all tips – workers will have the right to request to see this as it will allow them to bring credible claims to an Employment Tribunal
• create a written policy on tips – this will let staff know whether you encourage tips, and how they are managed and distributed

You’re also not allowed to alter an employee’s salary or hourly rate – earnings from tipping won’t count towards earning the national minimum wage. Tips must be allocated fairly between all workers, including those on zero-hour contracts – though the Employment Rights Bill will be scrapping these types of contracts entirely. 

Under the legislation, if an employer breaks the rules they could be taken to an employment tribunal. This could mean compensation and fines, so it’s important that you’re on top of what you need to do to comply with the laws.

How should employers divide tips?

Employers don’t necessarily have to distribute tips evenly between all workers. However as we’ve mentioned, they do need to be distributed fairly and you need to create a written policy explaining how you do this. 

Some of the things you’ll need to consider when creating your policy for distributing tips are:

• differences in role (e.g. front of house workers may be more deserving of tips than those working behind the scenes)
• performance at an individual or team level
• length of time working with the employer or level of seniority
• customer intention (e.g. if a customer wants to tip a specific employee who served them)

There are several collection and distribution methods to choose from. For example, if an employee is tipped £10, you could:

• let the worker to keep the entire £10 as their tip
• add the £10 to a staff box, to be informally shared with the workforce
• add the £10 to a tronc system, to be formally shared with the workforce (this is particularly useful if you’re dealing with card tips)

However you choose to deal with tips, you’ll need to make sure you communicate this properly to employees using your tips policy. This could be done during induction –  you could provide a physical copy at this time and also display it on staff notice boards. 

What is a tronc – and how can it help your business?

A tronc is a system sometimes used to pay employees their share of tips and service charges in the hospitality sector. A ‘troncmaster’ will be in charge of deciding how the money is divided. This can be a member of staff other than the owner, or even an external accountancy firm or payroll business. 

Using a tronc can help your business manage your tax implications when it comes to tips and gratuities. It’s helpful as a tronc on a payroll can mean the tips are excluded from National Insurance contributions (NICs), whereas if you manage the sharing out of tips yourself, you’ll be responsible for NICs as well as income tax.

Are tips subject to tax and National Insurance?

All tips are subject to tax and National Insurance. When and how this is paid depends on how you choose to handle tips. 

If your employees are given tips without running them through payroll or a tronc system, they’ll be responsible for reporting their extra earnings to HMRC and paying both tax and NI contributions on them. These tips should still be recorded. 

However if tips are collected and then distributed via payroll, you’ll need to ensure income tax and NICs are deducted alongside the rest of their pay. But if you use a tronc system, they may not be subject to National Insurance contributions. 

Tips and employment claims 

The Tipping Act adds “qualifying tips, gratuities and service charges” to the definition of wages. This means an employer can be open to a claim for unlawful deductions from wages if they don’t handle tip distribution fairly. 

Employees can also make a claim if they believe that employers haven’t been keeping correct records or don’t have a clear enough tipping policy. 

Do you have any more questions about tips? Let us know in the comments.

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