How to get ready for the cost of the new tips bill

Operators will soon have to pass on tips to staff without deductions, so it will pay to be prepared, say Michael Powner and Laurence Whymark.

Following a devastating year, the hospitality industry is hoping to finally get back on its feet as the reopening of the economy continues. However, yet another challenge – unconnected to the pandemic – is on the horizon. New laws on tipping, expected to come into effect later this year, may be a nasty surprise unless businesses prepare now.

The Employment (Allocation of Tips) Bill will create legal obligations on employers to pass on all tips to their staff without any deductions. This could create new challenges for businesses, as such deductions are commonly made to cover payments such as credit card charges and payroll/administrative costs, before the tips are distributed among staff.

For the moment, there are significant incentives for employers and employees to retain the status quo. Currently, where tips are pooled (often known as a ‘tronc’), National Insurance Contributions (NICs) on those tips are not payable so long as the decision on the distribution is not made by the employer. The staff themselves must decide on who gets what, often via a staff member elected as ‘tronc-master’. The tax exemption remains as long as the employer does not determine the allocation of the tips.

With tax breaks estimated to amount to around £1.1b a year in the UK, there are clear benefits to the current system. The new legislation could therefore have a significant financial impact on the hospitality sector, including the very employees it is seeking to protect.

If deductions are no longer permitted to be taken from these monies, businesses could find themselves in a difficult position, faced with increasing prices for their customers or taking a financial hit themselves, which could in turn affect employee hours and wages. Employees themselves could even have to pay a third party to administer the payment of tips and thereby receive less money overall, negating the very point of these new laws. Well-resourced employers may choose to cover these costs themselves and ensure that employees receive 100% of their tips with no change to the current arrangements.

However, given the devastating effects of the Covid-19 pandemic on the industry, this seems an unrealistic expectation for the vast majority of the hospitality sector.

There is now a credible argument to scrap tips altogether and bring in a mandatory service charge across the entire sector. This argument states that the current system is flawed in that employees are not sure as to how much they will be paid due to the discretionary nature of tips, an insecurity which directly affects the recruitment and retention of talent into the industry. A mandatory service charge, although subject to NICs, would at least mean certainty for employees and lead to higher, directly paid wages. However, to be effective, it would require legislative change and there is currently no appetite to radically change a system which rewards service and still maintains important tax breaks for employers and their staff.

Whatever legislative choices are made later this year, there is still a long way to go for the hospitality sector to recover from the pandemic and many tough decisions lay ahead. One thing is for certain: ahead of the announcement on new tipping laws, employers should begin to make any necessary cost-saving preparations and think carefully about their approach to tipping.

Michael Powner is a partner and Laurence Whymark is a solicitor apprentice at Charles Russell Speechlys

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