New UK Tipping Law: What the Employment (Allocation of Tips) Act 2023 Means for Restaurants and Staff

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Employment (Allocation of Tips) Act 2023

To keep wages fair and honest, the UK government has passed the Employment (Allocation of Tips) Act 2023, also known as tronc legislation. Tronc schemes are used to pool and distribute tips, gratuities, and service charges among hospitality industry employees, but have faced scrutiny for their history of inequitable distribution, leading to legal accountability. The new legislation, which goes into effect on October 1st, 2024, enforces the distribution of 100% of tips and service fees to the employee. Peter Davies, a troncmaster at WMT, summarizes the primary effect of the legislation, “Consumers and workers will now know that the money their guest pay will principally pay to the team. Businesses are not able to keep any of the money for any reason. This will give teams more visibility and transparency over their pay.”

Legislation Summary

• 100% of all tips or service charges must be paid to the employee

• Deductions are not allowed for any reason (taxes, administrative costs, fees, etc)

• Employers must ensure all tips are distributed to workers no later than the end of the month, following the month it was paid by the customer.

• Tips must only be distributed within a “same place of business,” meaning that tips cannot be pooled and distributed between multiple locations.

• Agency workers have the right to be allocated a share of tips, but this must be paid for by the agency they work for.

• The employer must provide a written record of the following:

• A full breakdown of service charges available to the staff

• Proof that 100% of tips are paid to the staff.

• Assurance that the money is paid by the relevant date.

• Workers can bring any claims to an Employment Tribunal if their employer fails to provide the required records.

New Tronc Legislation

Previously, some restaurants would retain 20-30% of their tronc value to pay expenses in the business, including taxes, breakage, and even staff parties. The Employment (Allocation of Tips) Act prevents the retention of tips or service charges for any reason. The act states that transparent, written guidelines must be distributed to employees outlining the protocol of the system. In addition to a written manual of distribution, employers will be required to provide a record of all tips to their staff which includes the specific allocation and distribution amount for each employee. To maintain visibility and compliance with the act, workers can dispute their tips in Employee Tribunal if their employer fails to maintain the required records or refuses a request. Employment tribunals can change employer recommendations, make orders to repay workers, and issue compensatory awards.

Tips must be distributed to workers by the end of the subsequent calendar month. For example, if tips were collected in August, they would be distributed by the end of September. The Employment Act outlines tips and service charges distributed by credit card but does not account for cash tips unless they are collected in a scenario where an employer “exercises control” such as through a cash pool. Additionally, the law states that all tips and service fees must stay within the individual establishment and can’t be shared between locations. Within these single establishments, the only deductions that can be taken from the tronc are income taxes instated by the government.

Section 27H of the new regulation is changing the way establishments view their agency workers. Previously, agency workers were unable to receive tronc because they are not factored into a business’s payroll, but this addendum gives these employees the right to receive an allocated number of tips on the same basis that regular payroll employees do. These workers cannot receive a lower share of the tronc because of their affiliation to an agency. Employers will be required to pay the agency directly and that money will be allocated to the employee. Because the share of tips must be consistent between all workers, some argue the practicality of this part of the bill as it may result in agency employees receiving disproportionately higher earnings than directly employed staff.

A tronc scheme can be a useful tool to improve staff motivation and retain employees, in addition to a plethora of financial benefits. Businesses that use tronc can maintain exemptions from National Insurance contributions, saving money for both the employer and employee. For example, Pooled tips of £20,000 a month could save £2,760 per month in the employers’ National Insurance if processed through a tronc. Compliance with the new legislation is paramount to preserving these employee benefits. In cases where an independent tronc arrangement is in place, there’s an automatic assumption of fairness. Adherence to a valid independent tronc system will fulfill an employer’s legal obligations and maintain the assumption of fairness.

Accounting for Tronc

A primary concern for many business owners is the potential impact of this new legislation on payroll and profit and loss statements. Collaborating with hospitality accountants like Paperchase can provide operators with valuable insights into these areas, enabling them to optimize financial performance in the face of regulatory changes. Your restaurant accountant should conduct a thorough review of your payroll records to determine the total tronc collected during each pay period. This information is then used to calculate the troncmaster allocation and distribute funds to employees based on predetermined percentages. These percentages may be subject to adjustment considering the new bill.

The tronc value sits on a separate line in a balance sheet as it is a unique account. Each month, the tronc balance should be null, but this can differ if employers choose not to pay the full amount monthly. In the case of a balance, the tronc amount will act as a credit. Business owners must work with their bookkeepers to review the tronc line on their P&L in the wake of the October 2024 regulation. Operators who previously used retained tronc value to pay extra expenses will have to allocate these funds from elsewhere. To make up for lost money, restaurant owners may lower their service fees but raise menu prices, resulting in increased revenue for the business as money from the service fee goes directly to the worker. For example, if the standard service fee is lowered from 12% to 10% but the operator increases their prices more money will go to the business.

How to Prepare

To stay prepared for the upcoming regulatory changes, owners and managers should carefully review their current tip policies. Assess the percentage of tips distributed to each employee and identify any disparities between roles. Implement a clear, written policy well in advance, allowing staff to familiarize themselves with the changes before they take effect. Restauranteurs should collaborate with their hospitality accounting teams to analyze existing tip allocation records and establish a structured system for tracking these metrics. Once records have been updated, owners should properly train their staff to handle operations under the new bill. Ensure your managers understand how to maintain compliant tip and payroll reporting after October 1st.

Conclusion

The UK’s upcoming Employment (Allocation of Tips) Act of 2023 marks a significant step towards greater transparency and fairness in the hospitality industry. By mandating the full distribution of tips and service charges to employees, the new legislation aims to address concerns about the potential for tip withholding and ensure that all staff members receive a fair share of their earnings. However, implementing these changes will require careful preparation and adjustment on the part of business owners.

While the act provides clear guidelines, businesses must review their existing tip policies, establish transparent distribution procedures, and work closely with their accountants to understand the financial implications. By complying with the new legislation and leveraging the expertise of hospitality experts like Paperchase, businesses can not only maintain their compliance but also capitalize on the potential benefits of a well-managed tronc scheme.

Closing thoughts from Kalra Legal Group

We wrap up our discussion with final thoughts from Kalra Legal Group, a specialist employment law firm offering an expert opinion on the new tipping legislation from a legal perspective.

The tipping legislation places a clear focus on fairness and transparency. It is imperative that employers have these key principles at the forefront of their mind when deciding how to distribute and allocate tips to limit the risk of time-consuming and costly public Employment Tribunal claims. Employers should consider obtaining specialist advice from a Solicitor or a Troncmaster when reviewing or drafting their tipping policies to ensure compliance with legislation. Employers should also consider the code of practice on fair and transparent distribution of tips during this process, particularly section 23 which provides example factors for employers to consider when deciding how to allocate and distribute tips.

We have highlighted the inclusion of agency workers within the scope of the legislation as a very important change to consider for employers. This change has the potential to provide additional income via tips to several new individuals in the workplace (e.g. security guards, cleaners, etc.) that previously would not have been considered eligible for tips. Employers should review their contractual arrangements with these individuals when updating their tipping policy.

If you are an employer looking for support with the new tipping legislation contact us on 0330 221 0684 or [email protected] for support. Kalra Legal Group offer a free 15 minute consultation with an employment law specialist in their team where you can discuss your queries and obtain guidance.