The Tips Bill: Do Tips and Service Charges Go to Staff?

The Tips Bill forms part of the Employment Bill, helping to ensure fair rights and pay for all workers.

The Tips Bill was highlighted as a must to ensure fairness for workers for whom tips and gratuities play a part of their income. It came about due to some businesses not allocating tips and service charges fairly to staff. While government officials have stated that this was a minority of businesses, bringing the Tips Bill into employment law ensures lower-paid workers and service staff are legally supported and receive 100% of the tips they have earned.

Here, we’re breaking down what the Employment (Allocation of Tips) Bill is, what it means, and who legally owns tips and service charges.

What is the Allocation of Tips bill?

The Allocation of Tips Bill was passed in 2023 and is a law on tips that states employers must pass the full amount of tips and service charges onto the service staff without any deductions.

The Tips Bill ensures that all workers are paid fairly and that visitors to a restaurant or similar service-based establishment are assured that the tips they leave are passed onto the staff serving them rather than their employers.

The Employment (Allocation of Tips) Bill passed Royal Assent in 2023 and will be implemented in 2024.

Who do tips legally belong to?

Previously, employers could deduct from tips, especially if they were paid by card. While cash tips handed over to staff became their legal property and were protected by Employment Law, card tips would be paid directly to the employer, who then became their legal owner, meaning they could retain or deduct from them. As more people move to cashless payments, this means service workers are increasingly at risk of losing the money they make in tips to their employer.

Lord Robatham (Con), who sponsored the Bill, explained, “This is a very simple Bill, and the issue is one of fairness … Most businesses already allocate tips fairly to their staff, but, regrettably, a minority have not done so. “

Historically, while tips would sometimes go to the worker in full, they were often deducted or absorbed by the business – often with no way of the customer knowing. According to government analysis, an estimated £200m is held back by companies withholding their tips. The new legislation will protect the more than 2 million people who work in the hospitality sector.

The new Employment Tips Bill prohibits businesses keeping back money from discretionary tips, gratuities or service charges, ensuring that tips meant for staff are passed on in full. Once implemented in 2024, the Tips Bill states that all tips legally belong to the worker, whether they’re paid by cash or card. What constitutes a tip is also clarified and the new law covers discretionary service charges, cash tips, card tips and tips paid via apps.

 Does the service charge go to staff?

There is some confusion as to the difference between a tip and a service charge. In the past a tip was often regarded as the cash element given directly to staff and a service charge something added to the bill, which could be a discretionary or compulsory charge.

The service charge is usually separate from a tip, with some restaurants specifically stating that the service charge is not a tip – implying it is absorbed by the business rather than passed onto the worker.

For the purpose of the new legislation, and also for tronc schemes, whether it is called a tip, gratuity, service charge or something else entirely, if it is paid voluntarily by the customer, it is classed as a tip. So the key part is whether it is discretionary or not, and whether the customer understands this.

The new Tips Bill applies to discretionary service charges as well as tips. Once implemented, it ensures all service charges go to staff.

Do staff have to share tips and service charges?

The new Tips Allocation Bill ensures that 100% of tips and service charges are passed onto employees. However, it doesn’t specify how these tips should be divided, but rather that it should be ‘fair and transparent’. This may mean they are given to one worker who carried out the service or split between a team who worked together.

A key part of the new legislation is that employers must have a written tips policy and how they manage these tips, and that this must be clearly communicated to staff.

The law also states that employees have a right to request information about their employer’s tipping record, which will allow employees to bring credible claims to an Employment Tribunal.

What happens next with the tips bill?

The Bill is set to become law in 2024, best estimates are April with the new tax year. A code of practice will also be issued following consultation with stakeholders in the hospitality industry.

One thing is clear: companies with a compliant tronc scheme will be in a great position when this law comes into force. Tronc schemes have already been acknowledged as a tax-efficient and fair way of distributing tips. The guidance with this Bill indicates that troncs run by independent tronc operators, which have been set up before the law comes into effect, will likely be assumed to be fair and therefore not subject to change. Of course, it remains to be seen exactly how true this will be when the code of practice is available.

As with all new legislation, the code of practice will determine the detail of how it is applied, specifically if transaction fees such as credit card fees and fees to third-party troncmaster services can be taken out of the tronc fund or if the employer must cover them.

Whilst we wait for the granular detail the code of practice will hopefully give us, this new legislation is a significant step forward for employees in regulating the treatment of tips, levelling the playing field and creating clarity around the process. We look forward to the consultation phase with great interest.

Why wait when a tronc scheme supports a fair and ethical tips policy, and it saves you money too?

One thing that is sure is that a tronc scheme is a significant step towards compliance but unlike changes required by other legislation, there is no benefit to waiting until the law becomes live. The savings made through the National Insurance savings for employers and employees are significant and could be a crucial step to offset the spiralling costs affecting the industry and the general cost of living.

If you are curious to see the savings a tronc scheme could deliver, our Tronc Calculator can give you the answer in a few clicks.

If you would like to find out more about changes the new Tips Bill legislation will bring, check out our popular webinar and Tips Bill Guide.

If you want to discuss setting up a tronc scheme for your business, please contact us for an initial no-obligation chat.