How new tipping legislation will affect your business

21 March 2023 by

With new gratuity handling laws coming into force, The Caterer's Tipping and Payment Summit discussed their impact on both operators and customers

The new tipping legislation will mean that operators must pay staff 100% of tips in an overhaul of gratuity practices that will make it illegal to withhold any money from workers. The Employment (Allocation of Tips) Bill is progressing through the House of Lords and is anticipated to come into force in 2024.

The legislation risks adding an additional administrative and cost burden to operators. As such, Peter Davies, managing director of WMT Troncmaster Service, advises businesses to start planning now.

"Although there's time, businesses need to start looking at this seriously," he says. "Now it's been through the Commons, we know the general direction of travel: the principal, for example, that all of the money must go to the staff is unlikely to be changed. The only thing that could change is the practical details."

Under the legislation, "employer received tips" are defined as all discretionary service charges and card tips that pass through the employer, or cash tips where an employer "exercises control" and the employee is required to pool cash. Only informal cash tipping that goes directly to the worker falls outside the scope of the legislation, says Davies. However, the new rules won't affect previous arrangements agreed before the laws come into force, for example, where employees have agreed to a reduced salary in exchange for a share of tips and service charge.

"The bill says the actual amount paid by the customer must be paid to workers. And any deductions that have been made from that amount – whether by an employer or another third party – must be disregarded. Whether that's to cover costs such as credit cards, fees and commissions, bank charges, payroll cost or any other administration," says Davies.

"Now, this is like to be quite a considerable financial cost to some businesses. According to the government's own figures, the costs of credit card permissions on tips and service charges is approximately £140m per year. That is a cost which businesses will now have to cover themselves."

The only deductions allowed are Income Tax and, if the business doesn't run a tronc system – an independent pay arrangement that ensures a fair distribution of tips – National Insurance contributions. Money cannot be withheld from staff longer than the end of the following month from which it was paid.

In its current state the bill also requires that agency workers receive a share of tips in line with directly employed team members and prevents funds gathered across multiple sites being pooled. Operators must also provide all workers with a written policy detailing how employer received tips are paid to staff in full. Workers will also have the right to see written records detailing how much tips and service charge has been generated at a place of business they work.

Any grievances can be taken to an employment tribunal, which have the power to award compensatory order of up to £5,000. Thetribunal will be able to give a similar order to every other affected worker, even if they have not brought a claim to the tribunal themselves.

"So now for a business the risks of not doing this properly and not complying with this legislation are much greater, because it will only take one worker to go to a tribunal and demonstrate their claim, and an employer will face a claim against all the workers," notes Davies.

More fudge

During The Caterer's panel discussion operators voiced mixed feelings about how the new rules will work in practice. Dan Brod, co-owner of the Beckford Group, has 180 employees across different sites – not all of which operate tronc systems. He is sceptical about the changes. "We're all under massive cost pressures at the moment and it's a very difficult time. I think in general it's probably even worse than during the pandemic, when there was government help, because of irresolvable cost pressures. And actually, what this is, is just another cost pressure."

He adds: "I can see what the government is trying to do – they're trying to look after employees so it is a better place to work. I appreciate there are bad operators out there. But we, who are trying to do the right thing, are trying to balance very small nuances to make the costs add up and look after the staff and I don't think this is going to be helpful. My takeaway is this basically compels people to use an advisor."

James Snowdon, co-owner of the Palmerston in Edinburgh, opened the restaurant 18 months ago and set up a system where everybody receives the living wage, staff work 44 hours a week or fewer and tips are distributed equally. "There is a bit of a tronc system for those in the senior team, but for everyone else they get a fair share of the tips. No matter who you are, it's split equally," he says.

While he says the new legislation won't make a huge difference to him, he is also doubtful about its impact. "From the day it comes into play, you've got to operate that way. But those who have been doing it the wrong way forever can still get away with it. So ultimately, it clears things up, but it's not [going to] help everyone."

Paul Foster, chef patron at Salt in Stratford-Upon-Avon, doesn't have a service charge. "I prefer having a system where we pay a good wage and then tips are a bonus."

He says: "Staff get 100% [of tips] split equally, whether it's a pot washer or my head chef or the restaurant manager. And it's all based on the shifts they work; it's a very honest and open system, so a lot of the changes won't affect us. There will be some that will – in terms of how often we pay, as we pay them on a two-monthly basis. It's not something I'm particularly concerned about for Salt."

However, he is opening a restaurant in London soon where there will be a service charge. "A lot of this information I'm going to have to go through and some of it is quite concerning on how it's going to change the system."

Changing the charge

In an ideal world all three panellists would prefer that the sector adopted a no service charge policy. "The whole notion of tips actually makes hospitality be not perceived as a proper career," says Brod. "And that is why I don't like it. It's an extra thing if you've gone above and beyond, but making it form part of people's fundamental pay is absolutely negative to the perception of it being a proper career."

He adds: "It would simply be much better if there was no service charge at all, or no tips, but that would be very difficult to achieve because everybody would have to do it at the same time. It's like a nuclear arms race: you all have to disarm at once. If one place is doing it and another isn't, it's not a level playing field."

Snowdon says when he started his career in Edinburgh service charges didn't really exist. "Whereas when I moved to London I thought it was quite dishonest when you'd say to someone: ‘I'm going to pay you £40,000 a year. However, your actual salary is £22,000 and the rest is this thing called service charge'… It kind of felt that you're not investing in people [especially] when they said, ‘we're going to give you a pay rise, but it's coming from service charge'."

Foster agrees. "It would make it so much simpler... you could then charge the correct amount for your food and drinks so you can cover all of your costs and your overheads. It simplifies your business model in that respect. Staff costs are the biggest cost, so it would take that into account [upfront]. Then, if a customer wishes to leave a tip, that is on the customer and there's no pressure."

Customer psychology needs to change for it to work, he added. "They might be paying more for the dish, but they don't have to pay the service charge at the end of the meal, so they really are paying the same amount of money," he says. "Obviously that's never going to happen, because it's gone way too far to pull it back. In an ideal world that's how things would work: open, honest, no grey areas."

But for now, as the legislation progresses through Parliament, the advice to operators is to keep a watchful eye on the new rules and the code of practice, which will be published next year. Irrespective of current tipping practices.

Tipping bill questions answered

Peter Davies, managing director of WMT Troncmaster Services, answers the burning questions on what the new legislation means for your business

What happens to existing arrangements?

Absolutely nothing. The legislation is not retrospective and it will not affect arrangements that have been agreed between an employer and an employee before the day the legislation takes effect. Anything that is already in place doesn't have to be changed for the legislation. What it means is that it will be no longer be possible to enter into new arrangements like that.

When do you pay National Insurance?

If you have a valid tronc arrangement, that is not subject to National Insurance – employees' or employers'. If you choose to deal with the tips and service charge outside of a tronc arrangement, for example, if the business controls and manages it itself, then National Insurance is due. Once the legislation comes through, the employer National Insurance cost will be a hard cost to the business and they will not be able to net it up or recover it from the tips pool. So, dealing with outside the tronc arrangements could get more expensive.

What about staff working at different sites or at head office?

The money can only be paid to staff working at that particular site. If people work at different sites, they will be able to receive a share of the money from all of the sites at which they have actually worked… However, there is an exception that allows workers in a "non-public place of business", for example, people in head office, in production units or dark kitchens – to receive a share of the money generated at a trading site.

What about agency workers?

When receiving tips and service charges, agency workers must be treated in an identical manner to a directly employed worker. The operator must pay that money over to the agency and they will have to pay the worker within the same time frame and make no deductions except income tax and National Insurance.

Can I allocate tips based on performance?

The legislation doesn't talk about the rationale or the criteria that is used to share the money out. So, if the employer or the troncmaster decides they want to have an element of performance, they will still be able to do that as long as it is all paid out within the time period to the people who worked at the place of business.

View a recording of the full Tipping and Payment Summit here

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