New legislation, effective since 1 October 2024, is forcing employers to clean up the way they handle tips, ensuring staff keep what they earn.
For lower-paid workers the financial benefit is clear, but the new rules have caused worry and confusion for some employers.
Minimum wage hikes have been tough for owners of small firms who now have to write and enforce a policy on tips. However, the Tipping Act 2023, which covers England, Scotland and Wales, doesn’t necessarily mean hours of extra admin. In fact, smart online systems are making it easier to distribute gratuities more fairly as it now includes tips taken by card payments.
We explain how small businesses that embrace the new rules of the game could gain an advantage when workers take home more tips.
Levelling the playing field
While most businesses try to handle tips fairly, some have withheld them, becoming reliant on gratuity to help foot their wage bill or cover other overheads. Not only have workers missed out but some customers have been reluctant to tip, uncertain about who the money would go to.
The challenge
Those who previously scooped up workers’ tips and used them to top up wages now risk being taken to an employment tribunal for failing to follow new legislation. This, combined with the increase in employers’ National Insurance Contributions, could make it difficult for small firms to hire extra staff.
A win for workers
Wherever they choose to work, staff are legally entitled to the minimum wage – tips should be earned on top. “Everybody’s in the same boat when it comes to tips, service charges, and what you are and are not allowed to do,” says Ben Thomas, CEO of tipping software platform TipJAR.
Gratuities can be a vital source of extra income for workers and a lifeline for those struggling to support their families. However, keep in mind that tips count towards taxable income. Low-paid workers receiving Universal Credit payments could see their benefits reduced as their income from work increases.
A win for small businesses
Earning extra cash in tips is likely part of what makes hospitality careers attractive to job seekers. Now employers have to pass 100% of tips to staff, service sector roles could become more appealing, potentially easing recruitment struggles.
Tips are also a powerful incentive that businesses can use to increase staff retention, not just for workers in customer-facing roles. It means staff are more likely to stay and gives them a better experience of their time in hospitality, Thomas adds.
A clearer process speeds things up
The new law requires workers to receive tips promptly. Digital tools can make this easier for business owners, including owners of small businesses who may have avoided administering tips because sharing them fairly seemed too complicated.
The challenge
Running a manual tronc (a central pool into which tips are paid to be distributed between staff) can take hours of work and you may have to hire an accountant.
Pricing structures differ between platforms; some charge fees of between 2.9% and 5%, others charge a fixed £100 per month.
A win for workers
The law requires businesses to pass tips to workers by the end of the following month after they receive the gratuity, so the reward for delivering good service lands in workers’ pockets sooner, easing financial strain.
“Hospitality often attracts people who are not financially resilient… having access to that secondary income stream on demand is just so powerful,” says Ben Thomas.
A win for small businesses
Systems like TipJAR and EasyTip give owners time back to spend on other business activities.
Margaret Warburton-Vaughan co-owns Clouds Beauty, a salon in Oldham, Greater Manchester, with her daughter, Hannah. Most of the tips they receive come in cash and are placed into named pots on the counter, but some clients tip by card, providing team members with an extra £30 to £50 per week.
“What we’ve always done is taken [tips paid by card] out of our petty cash and put it in the pot,” says Margaret. This created extra bookkeeping work for her every quarter. “Any tips like that get recorded manually, so it does cause extra administration,” she explains.
Margaret and Hannah opted for salon software Phorest to pass tips directly to team members. Though cheaper software is available, Margaret is happy to pay around £220 a month for additional functionality. Phorest also enables clients to book appointments and order gift cards.
“The [tip money] goes straight to the bank account of the therapist who’s done the work. We’ve always done what the law has said, but now we’ve got the software to aid us,” Margaret explains.
» MORE: How to start a beauty business
Transparency creates a better work culture
The law requires firms to make the distribution of tips transparent, which could improve staff engagement and job satisfaction.
The challenge
Tips are often shared between all staff, according to the hours they worked. While the Tipping Act doesn’t require tips to be distributed equally, it requires that the policy is fair and accessible to all employees. But sharing tips between staff working different hours or in different parts of the business can get complicated, causing tension.
A win for workers
A tipping policy applied consistently and fairly to all workers can avoid uncomfortable conversations, creating happier work environments.
Thomas says the new law gives staff “real confidence” that tips and service charges will come to them, instead of being swallowed up by the business. Customers may also be more confident that their server will receive the money, tipping more generously as a result.
A win for small businesses
Workers respond positively to transparency and businesses could see improved output as a result.
Thomas thinks the swift distribution of tips will benefit the hospitality industry as a whole: “The connection between delivering that great performance and getting the reward will now be locked in.”
With transparent systems and digital tools in place, small business owners can save time and money, while boosting morale and improving customer service, so it pays to play by the rules.
Image source: Getty Images
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