Tipping points: a hospitality industry guide to the Tipping Act 2023

How restaurants can prevent and manage chargeback with a few easy tips

In May 2023, the UK government amended the Employment Rights Act of 1996. This amendment is the Tipping Act 2023, which is expected to come into effect on 1 July 2024. This legislation will change the way in which employers handle tips and gratuities that they receive from their customers.

In this post, we will provide an overview of the Tipping Act 2023 and how it will affect businesses in the hospitality sector.

What is the Tipping Act 2023?

The Employment Allocation of Tips Act (AKA Tipping Act 2023) comes into effect from 1 July 2024. It is a piece of legislation that determines how employers will manage employer-received tips. These are tips that are paid by the customer to the employer, rather than one specific member of staff, and are paid into the company’s tronc. In the digital age, many tips gifted within the hospitality sector are employer-received tips as the customer selects an amount to tip via the restaurant POS. These tips are then deposited into the business bank account and distributed among employees accordingly.

The alternative to this is employee-received tips. These are given directly to an employee, and the employee is entitled to keep them in their entirety. Employee-received tips are therefore not affected by this legislation.

How will the Tipping Act affect your hospitality business?

The draft code of the Tipping Act outlines the requirements for employer compliance regarding the tips or service charges they receive from customers:

  • 100% of tips must be distributed among staff. Service charges must not be used to cover administrative costs borne by the business

  • Tips cannot be allocated between different sites. Tips must be distributed among employees within the venue in which they are paid

  • Tips must be paid to staff by the end of the [i]following[/i] month after they were paid by the consumer. For instance, tips paid in March must be paid to employees by the end of April

  • Agency workers must be included in the distribution of tips. This can be via the company’s payroll or using the agency as an intermediary

  • Tips must be distributed fairly among employees

How can businesses make tip distribution fair?

While most of the above is fairly cut and dried, as well as being good practice for employee engagement and ethical operations, the last point is open to some interpretation. While the draft code specifies that tips must be distributed fairly, this does not necessarily mean that tips must be distributed equally among all employees.

Rather, employers are obliged to make sure tips left by customers are distributed in a way that recognises the excellent service that made the customer want to leave the tip in the first place.

The draft code suggests that employers should justify their distribution of tips based on clear and objective factors such as:

  • The type of work carried out (i.e. front or back of house)

  • The performance of individuals or teams

  • Basic pay

  • Seniority

  • Level of responsibility

  • The intentions of the customers

Naturally, business leaders will want to avoid favouritism or discrimination in their allocation of tips, but will also want to ensure that those responsible for creating an excellent customer experience are duly rewarded.

Therefore, the Code of Practice states that employers have an obligation to:

  • Be open and transparent in how tips are allocated

  • Have a written policy in place outlining tip management that is available to all employees

  • Involve their teams in forming a consensus on how tips should be allocated

  • Keep a record of all tips received and distributed to each employee that is kept for three years from the date of the tip being paid by the customer

How can Square help simplify Tipping Act compliance?

Once you and your team have decided on a clear and specific policy for how tips are allocated, Square can help simplify your obligations under the Tipping Act. With Square, it’s quick and easy to accept tips from customers either as a percentage of the bill or a discretionary amount. Service charges can be calculated and applied instantly, and tronc management is effortless.

By eliminating the propensity for human error or discrimination, Square’s robust automations make it easy for hospitality businesses to comply with the Tipping Act.