The New Tipping Act: What You Need to Know
Posted by Emily on 13th Sep 2024
A significant change is horizon for workers in the UK’s hospitality and service industries. The Employment (Allocation of Tips) Act 2023, set to come into force on 1 October 2024, aims to bring more fairness and transparency to how tips are distributed to employees. This new law ensures that 100% of the tips and service charges left by customers go directly to the staff who earned them, a move supported by most consumers.
According to a survey by RSM UK, 80% of consumers believe that all tips should go directly to the staff. Despite this, only 20% think hospitality workers receive the total amount. The new legislation will close this gap, ensuring businesses can no longer withhold employee tips.
Why Is the Tipping Act Necessary?
In many industries, especially hospitality, tips are crucial to employees’ income, often supplementing wages that hover around the minimum wage level. Until now, some businesses could keep a portion of tips or service charges to cover other costs, such as credit card fees or unpaid bills.
This new Act ensures that workers are fully rewarded for their service without diluting their earnings. As a result, around two million workers across various sectors are expected to take home an additional £200 million annually. This significant boost to income could make these industries more attractive for workers, addressing ongoing labour shortages.
What Does the New Law Require?
Starting in October 2024, businesses must comply with a new set of rules regarding tip distribution. The Act requires that all tips, whether paid by cash or card, be passed directly to the staff without any deductions. Employers are also required to:
- Publish and communicate a written policy on how tips will be allocated.
- Pay all tips to staff within one month of receiving them.
- Keep clear records of how tips are distributed, making this information available to employees upon request.
These new regulations apply to all workers on zero-hours contracts and agency staff.
How Will This Affect Employers?
Businesses in the hospitality sector—and beyond—must adjust their systems to ensure they comply with the new law. This includes reviewing how tips are handled and whether they need to be updated or new policies.
One option is tip pooling, where all tips are collected and distributed equally among staff. Alternatively, businesses may opt for hybrid pooling, where a portion of tips goes directly to the staff member who earned them, and the remainder is shared among the team. Regardless of the method chosen, fairness and transparency must be at the core of any tip distribution system.
Employers must act now to avoid any issues once the law is enacted. Failure to comply with the new regulations could lead to employees filing claims at employment tribunals, potentially resulting in compensation payments of up to £5,000 per worker.
What rules are actually changing?
| Previous Rule | New Rule |
| Employers have control over tip allocation. | Employers can still use discretion over tip allocation, but must allocate tips fairly under the new Code of Practice. |
| No obligation for employers to publish a tip allocation policy. | Employers must publish and distribute a clear policy on tip allocation and keep records of all tips for three years. |
| Employers can alter an employee’s hourly rate or salary to take account of their share of tips. | Employers cannot alter an employee’s salary or hourly rate, and tip income does not count towards the employer meeting national minimum wage laws. |
| Employers can save tips from busy periods to supplement tip income in quieter periods. | All tips must be paid no later than by the end of the calendar month after they are received. Agencies must pay agency workers tip income following the same rules. |
| Employers could use tips from one venue to pay employees working in a different one | Employers cannot use tips received in one venue to pay employees working in a different one. |
| Employers can deduct tip income to cover administration fees such as card transaction fees. | This is banned because 100% of tips must be allocated to staff members. |
A Fairer System for Workers
The introduction of the Employment (Allocation of Tips) Act marks a positive shift for workers in industries that rely on tipping. It is designed to boost employee morale by ensuring that those who deliver excellent service are fairly rewarded.
By eliminating withholding tips, the government hopes to encourage a more positive working environment in sectors that have long struggled with staffing issues. It also reassures consumers that the tips they leave go precisely where they intend—to the hard-working staff who provided them with excellent service.
What Should Employers Do Now?
With the clock ticking until October, businesses need to start preparing now. Employers should:
- Review and update their tipping policies to align with the new legislation.
- Ensure all staff are informed of how tips will be handled going forward.
- Put systems in place to track tips and provide transparency to employees.
Financial adjustments should be made for businesses that have previously relied on tips as part of their revenue stream. Employers should assess the impact on cash flow and make necessary budget changes.