As summer approaches and tourists from all over the world come to Scotland seeking new experiences, an increase in the number of tips can be expected.
As this is the first summer since the Employment (Allocation of Tips) Act 2023 was enforced, you may not yet be aware of the changes to legislation.
If your business is set to make the most of the summer, you must stay aware of how to handle tips so that you do not risk becoming noncompliant.
What are the rules around paying tips to your employees?
Generally, tips belong to the employees who earned them.
Unlike previously, employees are now entitled to 100 per cent of the tips they receive.
However, where the nuance arises is in determining who earned what tips.
If a customer enjoys the food and the service and chooses to leave a tip, should only the waiter benefit from that, since they directly served the customer?
This is where establishing a clear written policy determining how tips are split between employees.
This can allow those working in your business in a non-customer-facing role to benefit from the work they put into making the customer’s experience satisfactory.
As an employer, you cannot make deductions from tips as these lawfully belong to the employees.
You can determine eligibility, and some businesses either use a points-based tip system where time worked equates to receiving a higher portion of the tips, or a percentage-based split determined by engagement with a customer.
In both of these regards, it is easier to pool all of the tips acquired and then distribute them fairly.
When this happens, it is best to employ the newly established tronc scheme.
What is a tronc, and who is the troncmaster?
A tronc is a form of tip jar wherein the tips, service charges, and gratuities are pooled before being allocated by the designated troncmaster.
Only the troncmaster can govern what happens to the tips, and it is their responsibility to ensure that records are kept and maintained.
The troncmaster has to operate separately from payroll but will need to process the payouts through payroll.
There is no restriction on who can be the troncmaster, but there can only be one troncmaster for each site.
Select a troncmaster who will be able to handle the increased administrative burden of managing the tronc.
The troncmaster should be named in the written policy you create outlining your business’s tips and gratuity policy.
Make sure that all employees sign a contract agreeing to the division of tips.
Having an open dialogue with employees about how tips are shared, and reviewing the policy regularly, can help boost employee satisfaction.
Some businesses allow employees to directly collect tips by using ID systems or logbooks, but this can present a challenge when recording and documenting tips.
All tips must be paid through payroll, which means they have to be accurately tracked and documented.
How to stay compliant when reporting tips
Unlike in the USA, tips can not be used as a substitute for salary in the UK.
This means that it is still necessary to pay employees the National Minimum Wage, or National Living Wage as appropriate.
Tips are, however, counted as part of an employee’s income and will be subject to Income Tax and National Insurance Contributions.
Depending on whether the tip is a service charge or a voluntary tip, it is affected by VAT in different ways.
Service charges fall under the scope of VAT at the standard rate.
This is due to the business having some degree of control over the money being requested.
Voluntary tips are outside the scope of VAT but need to be documented as such on a receipt to make it clear that this is the case.
All staff should be aware of the tip policy of your business so that they can assist in maintaining compliance and improve your record-keeping.
They should also know who the troncmaster is and how to raise issues with them should any arise.
Tips are a great way to reward employees for putting in the hard work and making your customers have a memorable experience.
We are on hand to offer advice and guidance on staying compliant with current policy and procedure.
