The summer might be coming to a close, but tips and gratuities are a core part of many industries all year round.
The Employment (Allocation of Tips) Act 2023 is now in force and has tightened the way that tips and gratuities need to be managed to avoid becoming non-compliant.
If you are not familiar with the changes, here is a refresher to make sure you keep on the right side of the regulations and your employees.
Who owns the tips?
The short answer is your staff.
Under the new framework, tips legally belong to the employees who earn them, and employers can no longer divert those sums for general business use.
This might seem like a simple thing, but it does have potentially large ramifications for businesses that are unprepared.
Who earned the tip and how do you give your employees their fair share are all things that you will need to give some serious thought.
If poorly managed, front-of-house staff or customer-facing roles can be unfairly rewarded over those who work equally as hard behind the scenes.
The best way to avoid potential conflicts is to create a fair, transparent policy that all employees need to sign.
Many businesses pool tips and then distribute them according to an agreed formula.
Whether that’s a points system that rewards hours worked, or a split based on customer engagement, either works provided that your employees are happy to sign up.
Make sure the policy is included in contracts or staff handbooks, and obtain written acknowledgement from employees so everyone understands how splits are calculated.
Whatever method you choose, name a troncmaster for each site and set out their responsibilities.
What exactly is a tronc, and what does the troncmaster do?
A tronc is the formal mechanism for pooling tips, service charges and gratuities before distribution.
The troncmaster administers the tronc separately from payroll, but must ensure that the payments are properly reported and subject to tax and National Insurance as appropriate.
The troncmaster needs to keep accurate records of collections and payouts and to liaise with payroll when sums are processed.
Each site should have one named troncmaster who has the capacity and the time to manage the additional administrative burden.
Tips are part of an employee’s income and are therefore subject to Income Tax and National Insurance Contributions.
Unlike in other countries, you cannot use tips to make up an employee’s National Minimum Wage or National Living Wage obligation, as employers must still pay the statutory minimum from their own funds.
It is also essential that you distinguish between voluntary tips and mandatory service charges.
Service charges controlled by the business are generally subject to VAT, whereas genuine voluntary tips are outside the scope of VAT but should be shown as voluntary on customer receipts.
How can I stay payroll compliant?
If you haven’t already, write and publish a clear tips policy.
The next step is to name your troncmaster, remembering to allocate one per site that operates with tips and gratuities.
Train your teams so staff know how tips are collected and recorded, and make sure your payroll is set up to capture these payments correctly.
Where tips are taken directly by staff, introduce a log system and regular reconciliations so nothing goes unrecorded.
Review receipts and point-of-sale procedures to ensure voluntary tips are clearly marked and service charges are processed through your accounts with the correct VAT treatment.
Tips reward great service and boost morale, but only if they’re shared fairly and handled lawfully.
If you want any help figuring out the best way to handle tips or troncs, then our experts are here for you.
Keep your business in tip-top condition by speaking to our team today!
