There are big changes coming for all hospitality staff and operators next month when the new Employment (Allocation of Tips) Act 2023 comes into effect. It is a welcome piece of legislation with fairness at its heart, and although welcomed by operators and trade bodies, there are some big costs attached for employers who will now be legally bound to pay all the costs involved in administering the new legislation as well as the full tax burden.
Although employees will see salary increases due to the value of tips rising, because this is now treated as earning in the normal way, PAYE and national insurance payments will rise for employees too – up by an estimated 32%.
However hospitality industry businesses are being warned they could also face the possibility of employment tribunals. Jez Howson, Employment Tax Director at accountancy firm Azets, explains, “Employers must review their current arrangements for administering tips and ascertain what needs to be done to ensure compliancy with this new legislation.
“There is absolutely no time to lose as no transition period has been built in from 1 October when this new employment law comes into force – meaning employers must have made the required changes in advance.
“It must be stressed that if a worker raises a concern that the allocation of tips and gratuities is not fair or feels that they are being discriminated against, whether deliberate or not, they are able to raise a claim with the employment tribunal which, if successful, could result in compensation payable of up to £5,000.
“As this new legislation falls within employment law legislation, the risk will solely sit with the employer. This risk cannot be discharged to a third party such as a troncmaster – someone appointed by a business to be responsible for sharing tips to staff via a tronc scheme.
“Our advice to businesses is to seek professional help to understand and act upon the new legislation, host employee consultations, identify potential risks and to implement a tronc scheme.”
“Such a scheme – the word originating from ‘tronc des pauvres’ (collecting boxes for the poor) in 1920s France – is a pay arrangement which allows hospitality and leisure businesses to fairly share tips and service charges given by customers to staff. “
If an employer decides how tips are allocated, the payment of them is subject to both PAYE and Class 1 National Insurance Contributions (NICs).
“When an independent troncmaster is appointed to decide how any tips and gratuities are distributed and to manage the allocation and payment of those tips, they are not considered earnings for NICs purposes and therefore only attract PAYE. Therefore, appointing a troncmaster can provide savings of both primary and secondary NICs.”
Jez added, “Appointing a troncmaster does not remove the obligation on the employer to ensure that the method of distribution is fair and reasonable – as required by the Employment (Allocation of Tips) Act 2023. There is a fine line between the employer directing how tips are allocated, which would jeopardise the NICs advantages, and ensuring the method of allocation applied by the troncmaster is fair and reasonable.”
The costs are significant. The total cost to the industry in Scotland is estimated to be between £100m and £200m and every operator will take s share of that cost. It will affect everyone – businesses and staff alike. The government itself estimates that nearly a fifth of operators may see annual costs increase by £60,000 to £360,000 as a direct result of covering the administrative expenses currently deducted from tips.
Of the operators we have spoken to, the cost impact was thought to be between £40k and £180k or an additional 2-3% for tronc costs alone (around £5-£6 per to run per employee). On top of that, there will also be additional PAYE and NIC costs – to both employers and staff.
Absorbing these new expenses may be difficult for some smaller businesses. The risk is that by not considering the additional cost burden, operators might have no option to either reduce wages to offset these costs, cut staff numbers or increase prices.
In some cases they may opt to close altogether. Here is a summary of what you need to know about tip management and what the new legislation means:
Cash Tips – which go directly to employees: Employees must report these tips in their self-assessment tax returns. No National Insurance Contributions (NIC) are due in this case. These tips cannot be shared. If these tips are shared in any way, they must go through the new process including the compliance and audit procedure and they are a part of taxable income.
Tips Collected by Employers: Tips which are pooled and distributed by employers are subject to PAYE (Pay As You Earn) and both employee and employer NICs.
Tronc Systems: Tips are subject to PAYE but not NICs. This is advantageous as it reduces the employer’s NIC burden. Expect costs to rise by 2-3% and remember that no costs of tronc can be reclaimed by any business.
Credit card payments: A tip paid on a credit card cannot be dispersed to staff as cash – it must be pooled for sharing across all staff. All card processing fees will be by the operator.
It will also be unlawful to alter an employee’s regular wage (hourly rate or salary) in return for a share of tips. Moreover, any guaranteed tips’ value cannot count towards meeting National Minimum Wage requirements.
Employers have to have a written policy on how tips are allocated to workers If you are in any doubt about what is required there is no time waste. It comes into effect in October. Contact your financial advisors.