Tips & Gratuities : What Hospitality SMEs Need to Know about the Tip Law
Tips, Gratuities & The Law: What Hospitality SMEs Need to Know
Introduction
In the hospitality industry, tips and gratuities are part of daily life.
But new legislation—the Employment (Allocation of Tips) Act—has introduced fresh rules to make sure tips are handled fairly.
If you run a small or medium-sized business in the hospitality sector, you now have legal responsibilities around how tips are collected, recorded, and shared.
This blog sets out the key requirements under the new law, explains how it affects your business, and provides a simplified flowchart to help you determine your responsibilities.
Why This Matters
Failing to comply with the new rules could lead to complaints, disputes, or even tribunal claims of unlawful deduction of wages.
Remember that employees who file a claim for unlawful deduction of wages do not need to have a minimum employment qualifying period so it is even more important for employers to make sure they get it right
But more importantly, fair tip distribution helps retain staff, build trust, and promote a positive workplace culture—essential for SMEs competing in a tough labour market.
What’s Changed?
The Employment (Allocation of Tips) Act is designed to make sure that 100% of qualifying tips go to workers and are distributed fairly. Key highlights of the legislation include:
✅ No deductions – You can’t take anything from tips except tax
✅ Fair distribution – Tips must be shared in a clear and reasonable way
✅ Written policy – Required for employers who regularly handle qualifying tips
✅ Record keeping – You must show how tips are received and allocated
✅ Employee access – Workers can request tip information (you must respond in 4 weeks)
What Counts as a ‘Qualifying Tip’?
A qualifying tip is one that:
- Is received by the employer (e.g. through card payments or a service charge), or
- Is given directly to a worker but the employer has control or influence over how it is shared (e.g. a pooled tips system).
Employer Obligations at a Glance
Obligation | Applies to You If… |
Written tips policy | You regularly handle qualifying tips |
Tip allocation records | You regularly handle qualifying tips |
Fair distribution of tips | You exercise control/influence over tip allocation |
Informing workers of exemptions | You only receive non-qualifying tips occasionally or not at all |
Worker access to tipping information | Workers ask for details of tip handling (you must respond within 4 weeks) |
Are You Covered by the New Rules?
Use the simplified flowchart below to determine what you must do:
Practical Steps for SME Employers
Here’s what you should do now:
- Assess Your Business Model
Review how tips are currently collected, whether by cash, card, or service charge, and whether you influence distribution.
- Decide If You Need a Tips Policy
If you handle qualifying tips regularly, you must have a written policy. This should explain:
- How tips are collected and allocated
- Who is included in the tip-sharing pool
- How often distributions are made
- Keep Proper Records
You must keep detailed records for at least three years showing:
- Total tips received
- How they were shared
- When and to whom they were paid
- Ensure Fairness
The law doesn’t prescribe exactly how tips must be split, but it must be demonstrably fair. Consider factors like hours worked, roles, and seniority.
- Be Transparent with Staff
Workers can request information on tip allocation. You must respond within four weeks. If you are exempt, inform workers in writing and explain why.
What You Need to Do Now
- Review Your Tip Collection Method
- Are you handling tips directly, or through a tronc?
- Do you decide how they’re shared?
- Put a Policy in Place
Your tipping policy should clearly explain:
- How tips are collected
- Who receives them
- How they’re divided and paid
- Keep Accurate Records
Maintain clear records for at least 3 years showing:
- Total tips received
- Those included in the pool
- Distribution method
- Dates and amounts paid
- Share Fairly
- Fairness isn’t defined in law—but best practice means sharing based on hours, role, or performance.
- Be Transparent
- If an employee requests information about tips, you must respond within 4 weeks.
Common Pitfalls to Avoid
❌ Deducting admin or processing fees from tips
❌ Excluding workers from tip pools without justification
❌ Using unclear or inconsistent tip-sharing systems
❌ Delaying tip payments unreasonably
Conclusion
For hospitality sector, this new law is a prompt to review how you handle tips—and potentially overhaul outdated or unfair practices. A little effort now can prevent major issues later and shows your commitment to fairness and transparency.
Need Help Drafting a Tip Policy or Keeping Records?
KeyHR provides tailored HR support for hospitality businesses. We can help you:
- Draft a compliant tipping policy
- Create simple record-keeping templates
- Train your managers on fair allocation
📞 Get in touch for a free consultation.
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