UK faces new tips legislation

New legislation regarding tips and gratuities will come into effect from 1 October.

The new rules make it unlawful for employers to withhold tips and service charges from staff and will protect more than two million hospitality workers.

The consultation process for the legislation revealed that an estimated £200 million (US$263.6m) was being kept from staff.

The rules state that employers must: allocate tips fairly and transparently; have a written policy on how tips are allocated to workers; and distribute 100% of tips to workers by the end of the month following which they were received.

Jez Howson, employment tax director at accountancy firm Azets, said: “Employers must review their current arrangements for administering tips and ascertain what needs to be done to ensure compliancy with this new legislation.

“There is absolutely no time to lose as no transition period has been built in from 1 October when this new employment law comes into force – meaning employers must have made the required changes in advance.

“It must be stressed that if a worker raises a concern that the allocation of tips and gratuities is not fair or feels that they are being discriminated against, whether deliberate or not, they are able to raise a claim with the employment tribunal which, if successful, could result in compensation payable of up to £5,000 (US$6,590).

“As this new legislation falls within employment law legislation, the risk will solely sit with the employer. This risk cannot be discharged to a third party such as a troncmaster – someone appointed by a business to be responsible for sharing tips to staff via a tronc scheme.

“Our advice to businesses is to seek professional help to understand and act upon the new legislation, host employee consultations, identify potential risks and to implement a tronc scheme.”

A tronc is a pay arrangement that allows businesses to fairly share tips and service charges.

If an employer manages its business’ tips, they are subject to tax and Class 1 National Insurance Contributions (NICs). However if an independent ‘troncmaster’ is appointed, they are exempt from NICs.

Howson added: “Appointing a troncmaster does not remove the obligation on the employer to ensure that the method of distribution is fair and reasonable – as required by the Employment (Allocation of Tips) Act 2023.

“There is a fine line between the employer directing how tips are allocated, which would jeopardise the NICs advantages, and ensuring the method of allocation applied by the troncmaster is fair and reasonable.”

UK hospitality businesses are also facing an end to business rates relief in the coming months.