Understanding the 2023 Tips Code of Practice: What Small Businesses Need to Know
In May 2023, the last Conservative government introduced a new Tips Code of Practice aimed at ensuring fair distribution of tips to workers in various sectors, particularly hospitality. This new legislation, that came into effect on the 1st of October 2024 is designed to protect employees’ rights to keep the tips and service charges they earn and to prevent unfair practices by employers. For small businesses, particularly in industries like restaurants, bars, cafes, and hotels, understanding and adapting to this new code is critical.
In this blog post, we’ll explore the key aspects of the Tips Code of Practice and its implications for small businesses in the UK.
As with all the “legal” posts on this site, this is a general post and does not constitute legal advice – please check with your professional advisers to make sure that you are following the law correctly it it applies to you.
What Is the 2023 Tips Code of Practice?
The 2023 Tips Code of Practice (or Tipping Act) was a response to longstanding concerns that workers in the hospitality sector, such as waiters, bar staff, and hotel workers, were not receiving their fair share of tips. In some cases, businesses were withholding or distributing tips in a way that left staff with less than they earned.
The core aim of this new code is to ensure greater transparency and fairness in how tips are distributed. Under the new legislation, tips and gratuities paid by card or cash, as well as service charges, must go directly to workers. This means employers cannot withhold tips to cover costs or redistribute them in a way that benefits the business more than the employees.
The law also introduces the following measures:
- Fair distribution: Tips must be distributed fairly among all employees, including those not directly interacting with customers, such as kitchen staff.
- Transparency: Employers must clearly communicate their tipping policies to both customers and employees.
- Record-keeping: Employers are required to keep records of how tips are distributed, which must be available for employees to review if requested.
- Time limit for payment: Tips must be distributed within a reasonable time frame, typically by the end of the month following when they were received.
The government has backed these changes with enforcement mechanisms. Workers can now raise grievances if they feel tips have been unfairly distributed or withheld, and businesses found in violation of the code could face fines or other legal consequences.
How Does This Affect Small Businesses?
For many small businesses, particularly in the hospitality sector, tips can make up a significant portion of an employee’s income. Therefore, complying with the new Tips Code of Practice is not just a legal requirement, but a crucial part of maintaining good employee relations and protecting your business’s reputation.
Here’s how the new code impacts small businesses:
1. Adjusting Internal Policies
Small businesses will need to review and potentially adjust their internal policies on tipping. Many employers have historically used tips to cover certain costs or redistribute them through a “tronc” system—a pooling arrangement where tips are collected and then divided among employees.
Under the new code, businesses must ensure that any tronc systems are transparent and fair. If you have a tronc system in place, it’s important to clearly define how tips are shared and ensure that employees understand the process. It’s also worth revisiting any service charges added to customer bills, ensuring that these too are passed on to staff.
For some small businesses, this may require additional administration to ensure that tipping policies comply with the new rules. The added burden of tracking tips and maintaining accurate records could be challenging, particularly for businesses with small or overstretched teams. However, keeping thorough records is essential for legal compliance and employee trust.
2. Staff Morale and Retention
Fair distribution of tips can have a direct impact on staff morale. For employees, particularly those in customer-facing roles, tips often represent a significant portion of their income. When staff feel that tips are being unfairly withheld or distributed, it can lead to dissatisfaction and high turnover rates—issues that many small businesses cannot afford.
By adhering to the new Tips Code of Practice, small businesses can foster a fairer and more transparent working environment. This could lead to higher employee satisfaction, better retention rates, and improved overall productivity. Workers who know they are receiving their fair share of tips are likely to feel more motivated and appreciated, which can have a positive impact on customer service.
3. Customer Perception
Customers are often unaware of what happens to the tips they leave, whether in cash or by card. The new legislation encourages greater transparency around tipping policies. This is a positive change for customers who want to ensure that the extra money they leave for good service goes to the people who provided it.
For small businesses, this means that being upfront about your tipping policies can enhance your reputation. Displaying information about how tips are distributed (e.g., on menus, receipts, or websites) can reassure customers that their tips are going to the right people. A transparent approach not only builds trust with employees but also with your clientele, potentially leading to repeat business and customer loyalty.
4. Increased Administrative Responsibilities
While the new code aims to create a fairer system for distributing tips, it does place some administrative burdens on small businesses. Employers will need to:
- Keep accurate records: This includes documenting how tips are collected, pooled, and distributed.
- Implement a clear tipping policy: The policy should be communicated to all staff and available for customer review.
- Ensure timely payment: Tips need to be distributed to employees within a specified time frame, requiring efficient payroll processes.
For small businesses without dedicated HR or payroll departments, these new responsibilities may seem overwhelming. However, setting up clear systems from the outset can help ease the burden. Investing in payroll software or outsourcing to a payroll service might be a smart option for businesses struggling to manage these changes.
5. Legal and Financial Implications
Failing to comply with the new Tips Code of Practice can have serious consequences. Workers who believe their tips have been unfairly handled now have a clear route to challenge their employer, and businesses found in violation could face penalties.
Additionally, bad publicity resulting from complaints or legal actions can have a lasting negative impact on a small business’s reputation. It’s crucial for businesses to stay informed about their obligations under the new legislation and seek legal advice if necessary to ensure compliance.
What Should Small Businesses Do Now?
- Review current tipping practices: If your business collects tips, either in cash or via card payments, make sure you’re complying with the new code. Look at how tips are distributed and ensure that any pooling systems are fair and transparent.
- Communicate with employees: Speak with your staff about the changes, explaining how tips will be handled moving forward. Ensure that they feel comfortable with the system and understand how it works.
- Update customer-facing information: Consider adding information about your tipping policies to menus, receipts, or your website. This helps manage customer expectations and shows your commitment to fairness.
- Keep thorough records: Ensure that you have a system in place for tracking tips, as this will be essential if any disputes arise.
Final Thoughts
The 2023 Tips Code of Practice represents a significant shift in how tips are handled in the UK, particularly for small businesses in the hospitality sector. While the new rules may present some challenges, they ultimately aim to create a fairer, more transparent system for workers. By ensuring compliance with the new code, small businesses can not only avoid potential legal issues but also enhance staff morale, improve customer trust, and protect their brand reputation.
Small businesses should view these changes as an opportunity to strengthen their relationships with both employees and customers, ensuring that everyone benefits from a fair tipping system.