Here’s a tip - changes are afoot in the hospitality trade!

What is the new Legislation?

Since 1 October 2024, businesses that pay tips to their employees need to ensure they have considered how the changes set out in the Employment (Allocation of Tips) Act 2023 might impact their business. The Act sets out the following:

• 100% of tips, including card and cash payments, and service charge must be allocated to staff members.
• Tips must be fairly allocated amongst staff in line with the guidance provided in a Code of Practice and additional guidance.
• It is now unlawful for an employer to alter an employee’s regular wage (hourly rate or salary) in return for a share of tips.
• Any guaranteed tips’ value (and any tips received via a Troncmaster or in cash) does not count towards meeting National Minimum Wage requirements.
• Agency workers are entitled to a share of tips similar to employed staff. They are also subject to the same regulations concerning fair distribution and prompt payment. Employers are required to transfer their allocated tips to the relevant recruitment agency, who must then distribute these amounts to their workers. These must be paid to the Agency worker no later than the end of the following month in which they were earned.
• Tips collected at a particular site must be distributed among the staff working at that site exclusively other than in specific circumstances.
• Employers and independent Troncmasters are obliged to publish a clear policy regarding their tip allocation and retain these records for three years.  Employees are entitled to request their personal tip statements, and the site tipping policy provided they contain no other employees’ personal data.
• As with Agency staff, tips must be paid in full to employees no later than the end of the next calendar month after they are received.
• Tronc arrangements and their tax implications remain the same, as long as the arrangement of allocations and payments is compliant with the new rules (i.e. paid in full, on time and allocated fairly).

What are the implications of getting it wrong?

Non-compliance with the new legislation and Code of Practice can lead to employment tribunal and prosecution. Tribunals have the authority to award employees up to £5,000 compensation where an employee is found to have incurred a financial loss due to the employer’s failure to pay tips incorrectly or not at all.

What does a business need to do?

• Check out the new legislation and understand what it means to your business. There is non-statutory guidance available to support employers.
• Review tipping policies and practices across the business to ensure clarity around how tips are collected, distributed and reported.
• Provide clear and open communication to employees relating to the new changes and provide training where necessary.
• If you already have a tronc system in place, review this to make sure it complies with the new regulations and consider whether it is still suitable for your needs.
• Implement a system to record and retain tipping records, which is a requirement of law, to allow employees access as and when requested.

Are there any alternatives?

A tronc arrangement is used to pool and distribute tips/service charges among staff.

A correctly implemented tronc arrangement can also reduce national insurance costs as payments made through a tronc arrangement are not liable to employee or employer NIC which can increase employee take-home pay and be a considerable saving for employers.

Depending on what a business requires, there are several types of Tronc arrangements available, the most common being:

• In-house – managed by someone or several people within the business, separate from management, to agree and manage the fair distribution of tips. 
• Third-party – an external provider manages the system on behalf of the business
• Hybrid – a mix of in-house and an external provider to manage and distribute the tips internally via in-house payroll but with the added expertise of an external Tronc master to oversee legal obligations and requirements.

How our Employment Tax advisors can help

Earlier this year, we were approached by a client. They did not operate a tronc arrangement and as such all their employees were receiving tips after deduction of income tax and Class 1 NIC.

Our first task was to develop a comprehensive understanding of the client’s business, venue types, and current procedures for distributing service charges. This analysis helped their senior stakeholder team assess the unique challenges and risks involved with different implementation options and created a shared understanding of the requirements of groups of staff and the issues that might arise from various implementation options.

Taking this as a basis, our employment tax team helped the client to make an informed decision on structuring the Tronc implementation and consulted with them and then the troncmaster on executing the process while minimising disruption to the business. We provided detailed guidance and materials for the Tronc implementation process, including:

• the preliminary design and structure of the Tronc arrangement.
• preparing communication and FAQ materials for employees.
• helping to draft the details of the new processes for distributing tips and dealing with potential staff complaints.
• carrying out post-implementation checks to ensure that the new arrangement fully adhered to the Employment (Allocation of Tips) Act 2023 and the connected Code of Practice.

As a result, the client is now successfully operating their new Tronc arrangement and thousands of their employees are set to receive over 20p more for every £1 of tips received.

The new legislation and Code of Practice puts employers under closer scrutiny by employees who now have rights to access tipping policies and allocations and take their employer to the tribunal should they feel that tips are being unfairly allocated. 

We also expect HMRC to pay increased attention to the operation of troncs going forward and therefore it is now a good time to check that processes are in place to avoid any compliance and/or employee issues going forward.

Get in touch with our tax experts

We have considerable experience reviewing tipping policies to ensure compliance with the new rules and implementing tronc systems within the hospitality sector. Please get in touch with us, if you want to discuss how our tax specialists can support you and your business.

Contact us today