Tipping Legislation and Accepting Digital Tips

On the 1st of October 2024, the hospitality industry is set to change. The government has announced a new Statutory Code of Practice on Fair and Transparent Distribution of Tips, very similar to legislation that already exists in parts of Europe and just over the stream in Ireland.

It’s important that all hospitality businesses, big and small, get a policy and procedure in place to manage tips compliantly as, if Ireland is anything to go by, fines will be dished out to those in breach of the legislation with little to no grace period offered after the 1st of October.

Why Businesses Must Act Now

Tips have long caused headaches for business owners – they can take significant administration time, cause tax complications and if not managed properly, can lead to the dissatisfaction of staff and ultimately end up costing a business money from several angles. These complications have only increased with the number of card and digital transactions (and tips/service charges) increasing exponentially over the last 5 years.

Key Points of the New Tipping Legislation

What is the new legislation and how different is it, I hear you ask?
Well, to save you reading the 50-point, 28-page code of practice, here are the key takeaways you need to understand.

It is no longer acceptable to retain some, or all of the tips – even to cover the cost of managing administration, the MSC charge of digital tips, or the NI cost of paying tips through PAYE.

All staff, front and back of house, must be included within the business’s policy, including agency workers. Point systems and hierarchies are allowed within the policy, so tips can be weighted in favour of front-of-house staff (for example), but staff have to be made aware of the complete tipping policy.

All businesses must have a written policy that includes how tips are accepted, how they are allocated and distributed, and what steps the employer will take to ensure tips are handled fairly and in line with the Tipping Act.

All staff will now be able to request a record of exactly what tips have been collected, distributed, and when.

Tips and service charges must be allocated to workers at the site where the tip was received.

Tips must be fairly allocated and paid to workers no later than the end of the month following the month in which the tips were received.

Is This Legislation a Positive Move?

Is the legislation and the fact it’s coming in at government level a good thing? In my opinion, the short answer is yes. Wait staff in the hospitality industry tend to be the youngest and some of the most underprivileged employed workers in our society, and I think it’s fair there are now steps in place to protect that workforce and ensure they receive the reward that is often left as a direct result of the service they have provided.

That being said, it is easy to raise a case for an industry that is under as much pressure as the hospitality industry. The last thing they need is more legislation, administrative burdens, and risks of fines.

The Impact on Hospitality Businesses

That then begs the question – how difficult and how costly will it be for businesses to implement a compliant tipping policy and solution to manage tips and service charges?

The tipping policy itself simply needs to be written and understood by all staff – so it doesn’t have to be any more complicated than “the tips will be divided among all staff equally by the hours they have worked.” The challenge comes to the business owner when 95% of all tips are now left by card payment, and they have to sift through all transactions to report on what was a tip and what was the bill. Even if the Epos system can record that split, the tip was still charged MSC on the card payment, and now the tip has to be distributed, which can incur NI tax to the business.

How to Implement a Compliant Tipping Policy

So, what are the options to remove administration tasks, avoid tax implications and charges, and ensure compliance?

Tronc Systems

The Tronc system has been around for decades now and is great for ensuring that the business isn’t charged NI tax when paying tips out through PAYE. It also ensures the staff are declaring their total earnings. More and more troncs are coming into the market, and more and more of them are integrating with EPOS systems, which again removes the administration of reporting on tips. The downside of troncs is often the cost; many charge a monthly price to use the software and a cost per user.

Split Tipping Devices

There are now solutions on the market where the payment device physically separates the bill from the tip amount, meaning the bill amount lands in the business’s account, and the tip lands in a separate digital wallet owned by the staff. An awesome solution for tech-savvy businesses that saves on the costs of troncs and mitigates paying MSC on digital tips. Arguably the most cost-efficient solution available, however, because the tip is legally considered a cash tip, it is the staff’s responsibility to declare their earnings to HMRC.

Tap to Tip Solutions

These are stand-alone solutions that can come in the form of QR codes or physical payment devices that operate separately from the running of the business. These remove the administration of separating the bills from the tips, as the tips land in a separate account to then be split. A simple solution that works well in fast environments but doesn’t offer the same encouragement to leave a tip as the above methods or adding a service charge.

Conclusion: Hospitality’s Adaptability Will Prevail

There is an increasingly large number of options coming to market to manage tips and as with every solution, they all have positives and negatives. The key is to find a solution that works for your business both on the process side and the cost side.

What never ceases to amaze me is hospitality’s ability to adapt to whatever is thrown at it, and whilst this may seem to be a huge change for many, I’m sure it won’t be long before all hospitality businesses have adapted yet again to include great tipping technology that all parties: the business, the staff, and the consumer can reap the benefits from.