6 experts discuss potential impact of new Employment Allocation of Tips Act on hospitality sector

The Employment Allocation of Tips Act – mandating that staff must be given 100% of tips, gratuities, and service charges from customers – came into force on 1 October 2024. In addition, businesses must craft a specific tipping policy, and workers have a new right to request a copy of their tipping record. In the UK, currently, there is no legal obligation to tip – however, 10 percent of the bill is the standard service charge in high-end hotels and most restaurants in the UK.

PayCaptain – a cloud-based payroll software solution – collaborated with its partners at GRTFL, TiPJAR, and Plain Numbersto discuss the new law and share insight into how it might change tipping practices going forward.

Simon Bocca, founder of PayCaptain, commented: “Lots of workers in the hospitality sector rely on tips to supplement their pay – before this law came into effect, many were powerless to do anything where employers decided not to pass on service charges from customers. Some employers have not been fully transparent with their employees on what happens with tips – the new legislation requires full transparency, this can then be shown on their payslips alongside all other pay elements to give the employees confidence they are being paid fairly and correctly, building trust and enabling them to feel in control of their pay, which leads to better financial wellbeing”.

The Department for Business and Trade estimates that these changes will mean around £200 million will be received by workers that would otherwise have been retained by these employers. It is also estimated that more than three million service workers in England, Scotland, and Wales should benefit from the law.          

Impact of new law

Mason Potter, co-founder at GRTFL, shared: “Tipping has become a challenge in a cashless era, affecting owners, staff, and customers. For a lot of people, tips can equate to 30-50% of their take-home each month in some cases. Having the knowledge that that’s been distributed fairly and transparently gives the industry some strength that it needs from a retention perspective. The new law means more money being put back into the pockets of hospitality workers, which is a massive positive. The new law also seeks to standardised processes, weeding out bad practices – however, some previously fair equitable schemes are now being classed as unlawful, putting potential strain on the bottom line for some businesses.

Dan Hawkie, CCO at TiPJAR, added: “This new legislation will make a real difference to the lives of so many people – we’ve always believed that staff should get 100% of their tips, and it’s incredibly rewarding to see this principle become law across the entire industry. The new tipping legislation is not just a legal obligation but a powerful opportunity for operators to build stronger, more motivated teams. Seeing this legislation become a reality feels like a huge victory for all the hardworking staff out there who rely on tips”.

Legislation comments

Mike Fisher, Head of Sales and Partnerships at PayCaptain, commented: “The main issue which brought in the new law is that some businesses have been taking a percentage of tips to cover other aspects (such as breakages, credit transaction fees, etc.) – when employers have been covering overheads with tips, this means that employees have been short-changed. However, businesses are now going to have to find this money from elsewhere to cover these aspects… hospitality has barely recovered from the pandemic, so this could be difficult, and we could see more establishments close as a result”.

Corroborating this sentiment, TiPJAR notes on its website that they’d have loved an agreement between card issuers and the DBT on how transaction fees/processing fees could have been reduced or removed from the scope of the legislation, as this is an additional cost that the operator is burdened with. Hawkie added: “One of the most contentious subjects in the legislation is about ensuring 100% of funds are paid out no later than the end of the following month when those tips were received. For seasonal businesses, this can have a big impact on them where they used to reserve funds to smooth the payment process to cover quieter periods in the business – this will no longer be possible”.

Tronc schemes

Potter added: “Tronc schemes are highly favoured by new legislation, as they go hand-in-hand with what the legislation is trying to achieve – fair and objective practices, and offering independence and standardisation. There is a common misconception the troncs take money from business when they actually put more money in the pockets of and benefit team members. Other benefits include cost savings, transparency, legal compliance, efficiency, and better financial management”.

Hawkie added:“One of the biggest benefits of having a compliant tronc scheme is the national insurance contribution savings. However, there are many more benefits in having a tronc scheme that is set up to drive success, including having more engaged team members, better customer service levels, and appropriately incentivised team members to increase upsells. Implementing a tronc system also ensures compliance, efficiency (when choosing an automated solution), employee satisfaction, and other financial benefits”.

Compliance with new legislation

Hawkie added: “Even this week, we are still getting inbound leads from businesses looking into last-minute compliance with the Employment Allocation of Tips Act. While recent news has opened up a lot of eyes to the new law, many businesses were not fully aware of what the new law would mean for them, so we do have empathy for these operators who were not able to plan ahead of time. Even if already compliance, many enterprise businesses are now looking for ways to get a competitive advantage on management.“ As the deadline has passed, it’s important to get on top of this now if you haven’t already… Timing is of the essence, and having a policy in place and consulting with the team is imperative to ensure compliance”.

Importance of easy-to-understand payslips

Bocca added: “Hospitality has a very diverse workforce, and while low numeracy and maths anxiety are contributing factors to not understanding their payslips, there are other elements to consider too (such as English not being first language, and comprehension of ‘technical’ financial terms that might lead to people not engaging with or understanding their payslip). Poorly designed traditional payslips further compound the problem.“ PayCaptain has become the first payroll provider in the world to partner with Plain Numbers – in a programme designed to give workers the confidence to understand their payslips. Interactive payslips are graphical payslips that break down payments and deductions for employees – employees can click on ‘Help’ icons for more information on how their deductions have been calculated so they know exactly how their pay has been worked out. ‘Help’ icons provide more information on pay elements and deductions (including tips and tronc), and also explain tax, NICs, student loan and pension calculations directly on the payslip”.

Ben Perkins, Director of Partnerships & Services at Plain Numbers shared: “Approximately half of adults in the UK have the numeracy skills expected of a primary school child, so it is not surprising that many of us are baffled by standard payslips. The new law creates an important moment in the journey for hospitality workers and as with any change there’s the possibility of confusion. It is increasingly important to be aware of and understand the impact of any changes to your pay—such as what you’re expected to receive and what you’re entitled to—as wages, tax, and National Insurance can all be affected by the new law. In the hospitality sector, where shifts—and therefore income—vary, payslips are often harder to understand than in standard salaried roles. This issue disproportionately affects those on lower incomes, yet it’s an often-overlooked perspective”.

Anna Buckle, Director of Operations and Impact at PayCaptain, added: “Those on zero-hour or variable-hour contracts are more likely to be in a financially tricky situation. The number of different pay elements on their payslip is larger (including things like holiday, uniform deductions, tronc, hourly rate, overtime, etc.) which can cause overwhelm or information overload – this is the reason we worked with Plain Numbers to make it as simple as possible”.

For more information, visit: https://www.paycaptain.com/partners/plain-numbers