What hospitality operators should know about the new tipping act
A recent study has revealed that only 28% of hospitality companies are currently compliant with the new legislation
As of 1 October 2024, the Employment (Allocation of Tips) Act is being enforced, bringing significant changes to the way hospitality businesses must handle tips and service charges. This new legislation mandates that all customer tips be passed directly to staff without deductions.
A recent study has revealed that only 28% of hospitality companies are currently compliant with the new legislation, leaving more than 90,000 businesses across the UK needing to change their practices. With the industry already facing rising operational costs and a high rate of closures, many business owners are concerned about the additional financial burden these changes will bring. The new tipping law, while aimed at fairness and transparency, has sparked debates over the costs of compliance and how businesses can best prepare for the changes.
An overview of the Employment (Allocation of Tips) Act
Under the new law, all tips, gratuities, and service charges must be distributed to employees in full, without any deductions, except for the standard tax and National Insurance contributions required by HMRC. This means that hospitality businesses can no longer withhold portions of tips to cover costs such as payment processing fees or distribute tips unevenly across multiple venues.
The Act also requires businesses to have a written policy on how tips are allocated, which must be made available to all employees, including zero-hour and agency workers. Additionally, employees now have the right to request information on how tips are distributed, and any failure to comply could lead to claims being brought to employment tribunals.
While many businesses already comply with these principles, the new law has exposed widespread practices of deductions that need to change. According to the recent “Tipping Point” report by software company Three Rocks, nearly two-thirds of hospitality businesses still deduct a portion of tips, whether to cover operational costs or take a profit share. This means that 63% of UK hospitality businesses are not compliant and must make swift changes to avoid hefty fines and legal repercussions.
What compliance will cost hospitality businesses
One of the most concerning findings of the study is the financial impact the new tipping laws will have on hospitality operators. The report estimates that nearly one in five businesses will face increased costs ranging from £60k to £360k per year in order to comply with the new rules. In fact, 83% of respondents expect to incur at least £12k annually in additional costs, as businesses can no longer use a portion of tips to offset expenses like card processing fees.
This increase in costs comes at a time when the hospitality sector is already under significant pressure. Data from CGA by NIQ and AlixPartners shows that more than four hospitality businesses have been closing every day in 2024. Recent discussions about a potential smoking ban at hospitality venues also threaten to pile further pressure onto businesses, leading many to fear that these new tipping regulations could push them over the edge.
A step-by-step guide on how to comply
Given the potential financial impact and legal risks, it is crucial for hospitality businesses to reassess their written policies to align with the new Act. Below are several key steps that businesses should take to prepare:
Pass on 100% of tips to staff: The first and most important step is to stop making any deductions from tips, whether for card fees, administrative purposes, or other business expenses. Tips must go entirely to the staff who earned them, and businesses should be prepared to cover any additional costs from their own budget.
Establish a written policy on tips: Every hospitality business must have a clear, written tipping policy that details how tips are allocated and distributed among staff. This policy must be transparent and accessible to all employees, including agency workers and those on zero-hour contracts.
Ensure fair distribution: Tips must be allocated fairly across all employees, including kitchen staff, cleaners, and other behind-the-scenes workers, not just front-of-house staff. Businesses should consider creating or reviewing existing schemes to manage the distribution of tips in compliance with the new rules.
Communicate with employees: The Three Rocks study found that less than half of hospitality workers have been informed about their employer’s tipping procedures. Clear communication with staff about how tips are managed and how the new law will affect them is essential to maintaining trust and morale. Employees also need to understand their rights under the new law and how to request information if they believe there’s an issue.
Review and update payroll systems: For tips paid via card or service charges added to bills, businesses need to ensure their payroll systems are capable of handling these payments, including making the correct deductions for tax and National Insurance.
Keep detailed records: Businesses must maintain records of how tips are allocated and distributed for a rolling period of three years. These records must be available upon request from employees or agency workers and should be kept up-to-date to avoid legal disputes.
Costs and compliance – the industry’s response
The financial impact of compliance has caused some in the hospitality sector to propose alternatives. The Three Rocks report revealed that nearly half of operators and 59% of hospitality workers would support the introduction of a “Tipping Standard Practice” – a formal, uniform system for distributing tips that could help make tipping more predictable and transparent for both businesses and workers.
While the majority of workers support the new legislation, the report also highlighted dissatisfaction with the way tips are currently handled. More than a third of employees were unsure about how their tips were distributed, and many felt they should be receiving more. This suggests that clearer and fairer tipping systems could lead to higher employee satisfaction and potentially even reduced staff turnover.
Additionally, the study revealed a shift in customer behaviour, with 73% of customers supporting an “American-style” tipping system where service charges are automatically added to bills, even for smaller services – like serving drinks. This trend could influence how businesses handle tipping in the future, potentially easing the financial burden of compliance with the new laws.
The Employment (Allocation of Tips) Act 2023 represents a significant shift in how tips are managed in the UK’s hospitality sector. While these changes are aimed at protecting workers and ensuring transparency, they also pose challenges for businesses that must now adapt to new regulations and absorb additional costs.
For hospitality operators, compliance is not optional; failure to follow the new law could result in hefty fines, legal disputes and reputational damage. Though the costs of compliance may be high, the benefits of building a fairer and more transparent workplace could ultimately pay dividends in the long run.
