Starting October 1, 2024, the new tipping legislation mandates that employers must distribute 100% of tips and gratuities to their employees without making any deductions.

John Grant, an employment law expert at Wright, Johnston & Mackenzie LLP (WJM), has created a practical guide to help businesses and employees navigate the complexities of the new legislation. The Employment (Allocation of Tips) Act 2023, also known as the Tipping Act, will protect over two million workers, particularly in the hospitality sector, ensuring they receive a fair share of tips.

This new law also amends the Employment Rights Act, updating the definition of wages to include tips, gratuities, and service charges. Employers must now implement a written policy on tips and maintain records of how tips are handled. While employers still have control over how tips are collected, they must follow the new guidelines or face financial penalties.

Here are John Grant’s key recommendations to help businesses comply with the new regulations:

1. Get Your House in Order

Ensure your business has a clear policy that aligns with the new Code of Practice on fair and transparent distribution of tips. Keeping detailed records on how tips are managed will help avoid legal issues. It’s essential to uphold employees’ rights to fair tips and allow them access to these records upon request. Non-compliance can lead to claims being brought to employment tribunals, potentially including unlawful wage deduction claims.

2. Be Aware of Costs

While the law benefits employees and HMRC, employers should prepare for potential costs related to implementing these changes. Businesses must have the infrastructure in place to manage the distribution of tips in compliance with the new regulations before the law takes effect.

3. Same Rules Apply for Tronc Schemes

Whether or not a business uses a tronc scheme to distribute tips, the employer remains responsible for compliance. Employers should ensure that all tips are passed to staff without any deductions for administrative fees, leading to increased take-home pay for employees.

4. Employees Should Expect Tax Changes

With tips now counted as taxable income, employees should expect changes to tax codes and other financial documents such as payslips. There may be impacts on tax thresholds for income tax and National Insurance, as over two million workers benefit from these protections.

5. Settling-in Period for the Hospitality Sector

Given the wide range of businesses in the hospitality industry, the pace of compliance will vary. While larger chains are likely already preparing for the change, smaller independent pubs and restaurants may take longer to adjust. Although some leniency may be expected initially, businesses will still be required to comply with the new law, and enforcement will increase over time.

With the Tipping Act set to improve transparency and fairness for workers, it’s crucial that businesses take steps now to meet the new legal requirements and avoid potential penalties.