For years, many restaurant owners struggled with how to handle tips fairly while covering business costs. Some but not all passed tips on in full, while the status of ‘service charges’ varied and was generally confusing to customers. So the last government tried to bring some clarity to this area with new legislation.
The Employment (Allocation of Tips) Act 2023 has been in force for over a year now. It sets rules on how tips must be managed. Restaurant owners must now follow strict standards on distribution, transparency, and record-keeping. In this newsletter, we outline what the law requires, how tips must be shared, the need for written policies and records, and the risks of non-compliance.
Staff must receive 100% of tips and service charges
The law now guarantees that workers keep the full value of tips, gratuities, and service charges. Employers can no longer use any part of these sums for business costs. The only deductions allowed are those required by law, such as tax. Importantly, tips cannot count towards the National Minimum Wage. Wages must be paid in full before tips are considered.
This change means restaurant owners should immediately stop any practice that reduces the value of tips, including deductions for card fees or breakages. All controlled tips, such as service charges added to a bill, must be passed to staff in full.
Fair and transparent distribution
And tips must be shared fairly among staff. The government has issued a statutory Code of Practice to guide employers on this. What is ‘fair’ can legitimately vary between restaurants, but the system that is adopted must be clear and applied consistently - and staff must be consulted when creating or updating it.
For instance, restaurant owners may decide to give more to front-of-house staff or base the distribution of tips on time worked by individuals. Kitchen and back-of-house support staff should also be considered, as they contribute to the customer experience, but they don’t have to be included in the distribution. The key point is that the process is fair and transparent and that all relevant staff are consulted on it.
Timely payments and a written policy
Employers must pay tips promptly. The deadline is the end of the month following the one in which the tip was received. For example, a tip collected in July must be paid by the end of August.
If your business regularly handles tips, you must also have a written policy. This should explain how tips are collected, distributed, and recorded. The policy must be available to staff, either in a handbook or on a noticeboard.
Record-keeping and enforcement
Restaurant owners are required to keep records of tips and their distribution for three years. Staff can request to see details of their share.
If an employee believes they have not received their fair share, they can bring a claim to an employment tribunal. The tribunal can order repayment and may impose penalties of up to £5,000 per worker. Non-compliance also risks reputational harm and increased staff turnover.
How 3CS can help
Understanding and applying the latest tipping rules can feel overwhelming. 3CS works with restaurant owners to create compliant policies, set up fair distribution systems, and train managers on the new standards. Contact us today to find out how we can support your business.
