New Legislation Makes it Unlawful for Employers to Withhold Tips from their Staff.
In a move that will likely result in a cash boost for over two million workers, the Government has recently backed legislation that will mean staff in service and hospitality industries will benefit properly from their tips.
Background of the New Law
Since at least 2014, there have been reports of unfair tipping practices in major restaurant chains and other outlets which led to debates in Parliament and discussion amongst hospitality leaders. This led to a number of proposals including a 2015 call for evidence of Tips, Gratuities and Service Charges, and subsequently a more formal 2016 Government Consultation.
The Employment (Allocation of Tips) Bill, which was a private members’ bill introduced by Dean Russell MP, will prevent businesses from keeping tips and service charges. So far, the Bill has passed its second reading in the parliamentary law-making process and so whilst it is not yet law, it is well on its way to amending the Employment Rights Act 1996 and will insert new legal obligations on employers. During a time of increasing prices, this will come as a welcome move for many.
It has been argued by supporters of this move that the gradual move towards a cashless society, which became more prevalent in the wake of the COVID-19 pandemic, exacerbated the problem of service-based and hospitality based businesses keeping cashless gratuities for themselves. Indeed, the Government Department for Business announced in September 2021 that 80% of all UK tipping now happens by card rather than cash.
What does this mean for businesses?
However, looking to the other side of the coin, this may, as UK Hospitality Chief Executive Kate Nicholls points out lead to “onerous levels of red tape” and elements which need to be reviewed including the length of time necessary for businesses to adapt. However, there is yet much to do and it is anticipated that a new Code of Practice will be published by the government in due course to provide guidance on how tips and gratuities should be distributed.
The new legislation will likely see employees:
Going forward Employers are likely to be required, and are advised, to have a written policy on how tips are allocated.
However, it is anticipated that it will still be possible for employees to pool tips for tronc systems (a separate organised pay arrangement sometimes used to distribute tips, gratuities and service charges) to be operated independently of the employer. Tips, gratuities and service charges paid via an independently controlled person or “Tronc-master” in this way, mean that they are exempt from National Insurance Contributions if it is not paid directly to the employee by the employer or does not represent money paid previously to the employer. Any scheme controlled by the employer will be responsible for payment of National Insurance Contributions in the usual way.
For the avoidance of any doubt, regardless as to how tips, gratuities and service charges are distributed, it is clear that they will be subject to PAYE tax in the usual manner.
With new legislation surrounding the allocation of tips and service charges likely to be coming in soon, it is vital that businesses and managers are kept up to date about how to ensure their compliance with new legislation.
If you would like further advice in relation to the new obligations of employers or any other aspect of employment law please contact us at email@example.com or call 01543 263456.
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