Employment (Allocation of Tips) Act 2023: common Tronc pitfalls

Following the introduction of the Employment (Allocation of Tips) Act 2023, businesses must distribute all qualifying tips to workers without deductions while ensuring fairness and transparency, prompting many to reassess and update their procedures.

To comply with this new legislation, many are opting for a Tronc Scheme which relies on a “Troncmaster” to gather and distribute the tips fairly.

As Tronc Schemes are typically managed by an independent party, it inherently ensures fairness, aligning with legislation.

Note: working with a third-party Troncmaster, keeping the division or disbursement of the Tronc separate from the employer, removes the requirement to pay National Insurance (NI), pension contributions, student loans or earning attachments on tips.

How are you fairing with the new legislation? If you're struggling, fear not! We've worked with our internal experts to better understand common Tronc issues, so you know what to avoid.

What did the Employment (Allocation of Tips) Act 2023 change?

Before unpacking the pitfalls, we believe, as a starting point, it will be useful to cover what exactly the Employment (Allocation of Tips) Act 2023 changed.

Under the act, businesses must abide by requirements such as:

• Giving the entirety of the tip to the employee, aside from mandatory deductions like tax
• Issuing all eligible tips by the end of the month following the one in which the tip was first received, with service charges, card gratuities and employer-influenced cash tips now defined as eligible tips
• Granting agency workers similar rights to permanent employees in terms of tip distribution
• Implementing fair mechanisms, such as a Tronc system, to ensure compliance and fairness
• Sharing your tipping policy with both staff and agency workers
• Maintaining records should a tribunal request arise, just as you would with other employment and financial documents

Without further ado, let's look at these pitfalls.

Pitfall one: running an independent PAYE scheme

While there's an option to run an individual PAYE system for your Tronc, our suggestion is to integrate it with your company's existing scheme.

Implementing a second PAYE scheme can lead to employees being perceived as possessing "additional employment", subjecting them to getting taxed a basic rate for this separate Tronc payroll.

Also, as HMRC can’t distinguish between "additional" or Tronc earnings, staff may be given a split tax code.

A split tax code makes payroll especially challenging given the variable nature of Tronc, often resulting in over or underpayment of tax.

Pitfall two: Taking money directly from the till

There was a time when workers could simply take cash from the till for their card/contactless tips.

However, regulation has mandated that all card tips go through the payroll system, irrespective of whether it's intended for a single person or a team.

So, if you now took cash out of the till for tips, both the employee and the company would be viewed as evading tax, resulting in penalties.

More content: Unpacking the Employment (Allocation of Tips) Act 2023

Read here

Pitfall three: selecting an internal Troncmaster

A Troncmaster is not allowed to be a business owner, director or an individual with the ability to hire.

As such, this eliminates most General Managers, Restaurant or Bar Managers and HR personnel.

A non-compliant Tronc runs the risk of an HMRC inspection where you could be held accountable for non-payment of National Insurance for up to four years in the past.

Additionally, when considering an internal Troncmaster, as well as potential non-compliance risks, the subsequent questions also arise:

• Do they have the availability?
• Do they possess the required knowledge?
• Are they willing to shoulder the responsibility?

Why was the Employment (Allocation of Tips) Act 2023 introduced?

The legislation aims to tackle issues regarding employers unfairly retaining or dividing tips.

Prior to the act being introduced, only cash tips were considered the employee's property.

This meant that credit card tips and service charges were technically owned by employers, frequently resulting in biased distribution.

Now, employers are required to fairly divide all eligible tips and service charges, with transparent policies and clear timelines + the Act prevents employers from using tips to supplement wages above the national minimum.

Ace your tipping compliance

Yes, the new law marks a positive change for workers, but it also brings along numerous intricate conditions which businesses have had to adapt to.

Those in the hospitality industry must re-evaluate their employment agreements, appoint a Troncmaster and overhaul their tip protocols.

If you're in need of assistance, feel free to reach out to us here to book a no-obligation call with one of our Tronc experts.

About Troncmaster: we provide independent Troncmaster services to companies in the hospitality sector – backed by HMRC, tax and payroll specialists, we understand the compliance requirements.