Posted: 10/9/2024
The Employment (Allocation of Tips) Act 2023
Do you have clients in the hospitality and leisure industries? If yes, are you up to speed with the requirements of The Employment (Allocation of Tips) Act 2023?
From 1 October 2024, your clients may look to you for guidance on how the Act applies to them and for practical help when working out how to allocate tips.
The Employment (Allocation of Tips) Act 2023, was expected to come into force on 1 July 2024. However, the effective date was postponed until 1 October 2024 – and given the change in government this date could be subject to further change so be alert.
From 1st October 2024 new rules will apply to employees, workers and agency staff. This change is expected to help around 2 million people working in the hospitality, leisure and services sectors, where tipping is commonplace and often makes up a large part of the employee’s income.
The legislation will make it illegal for employers to withhold, from their employees, tips and discretionary service charges added to the bill. This change will affect those businesses where the employer receives the tips directly into the business bank account following customers paying their bill using credit or debit cards.
It also applies to cash tips received by the business from customers. 100% of tips and discretionary service charges received by the employer MUST be paid out by the employer, in full to the employees through the payroll as earnings.
Under the new legislation:
- All “qualifying” tips must be paid out by the end of the month following the month in which they were collected
- All “qualifying” tips means
- those received by the business and distributed plus
- those received directly by the worker where the business decides on or controls their distribution
- Employers must pass on tips to workers through the payroll without any deductions other than PAYE tax and NI deducted. In addition employers NIC must be paid on the tips.
- Employers must have a written policy setting out how tips will be allocated which employees can see
- Employers must keep a written policy of how tips are allocated and make this available to employees if requested
- Employees will have a right to make a request for information on an employer’s tipping record
- There will be a right for workers to take their employer to an employment tribunal if the new rules are broken
All tips received must be allocated fairly to the workers at each place of business. “Fairly” is not defined by the Act, however the statutory code of practice suggests a set of criteria that includes hours worked, when tips received, performance and seniority should be used. The employer must also maintain records showing the total tips received and how these have been allocated for a minimum of three years. Employees will be able to request sight of these records.
If an employer fails to comply with their obligations under the Act an employment tribunal can order the employer to revise any allocation of tips or make a payment directly to the employee and pay compensation for financial loss of up to £5,000 per claimant. A claim can be made by a worker up to 12 months from when the employer failed to comply with the legislation.
Points to consider with clients before changes introduced 1 October 2024:
- Does employer have a clear tips policy
- Are staff and customer aware of the policy
- Is the tronc* set up and operated correctly
- If no tronc scheme is in place, should one be set up to save NIC
- What is the likely impact on cashflow for the business with tips and gratuities going to staff
- How easy will it be to separate and record tips and gratuities paid by customers to ensure fair distribution to staff
Other related points
Tips paid directly to workers
Tips paid directly to the workers by the customer, where business has no control or influence on the distribution, are not affected by the legislation. These must be reported by the worker on their self assessment tax return.
*The TRONC system – The word “Tronc” is believed to come from the French “tronc des pauvres” meaning a wooden box left in a church to collect money for the poor.
The tronc system is a special pay arrangement used to allocate tips, gratuities and service charges to employees. The system is run by a Tronc Master – not the employer – usually the head waiter or manager. The tronc master registers the Tronc scheme with HMRC and is responsible for filing RTI returns and paying HMRC. They act independently of the employer allocating and paying out the tips and service charges.
The tips paid out to employees under the tronc system are treated as earnings. The tronc master, not the employer, is responsible for deducting 20% tax under PAYE. This tronc scheme is separate from the employer’s own PAYE scheme.
Under the tronc system the payment of tips by the tronc master does not attract national insurance contributions where:
The tronc master is deciding how to allocate the tips to the employees
The employer does not pay the tips directly or indirectly to the employees
The employer has no say in how the tips are allocated to employees
From 1 October 2024 if an employer has an existing tronc system in operation for cash tips then the tronc master can continue to run the tronc provided the employer is not involved in the allocation or payment of the tips. If you would like to know more or have any questions you would like to ask Alexandra Durrant FCA of Aspiring Training Limited is here to help. Alexandra is also your district society treasurer.