In recent years, there has been a consistent direction of travel towards more transparency and less employer discretion on how tips should be distributed. Since October 2024 employers have needed to ensure that workers receive in full all tips, gratuities and service charges (which we shorten to “tips” throughout this insight).

The Employment Rights Act 2025 introduces more robust obligations for employers, aiming to put “more money into working people’s pockets”. Earlier this year, the government launched a consultation which looked at how they could implement the Act’s new requirement to consult about tipping practices. The government have now responded to the consultation and published an updated draft statutory Code of Practice.

We look at what the current law is, what is expected to change, and practical steps employers can take now to prepare.

What should employers already be doing?

Employers are required to pass all qualifying tips on to workers. This includes all employer-received tips and tips where the employer exercises control over how they are shared. This would include, for example, discretionary service charges automatically added to a customer’s bill.

It doesn’t matter how the tip is paid – it could be by card, cash or an app. It is the level of employer influence over distribution that determines whether or not a tip qualifies. So, cash tips pocketed directly by staff will generally fall outside the rules, but cash tips distributed by the employer at the end of a shift would likely be caught.

Tips must be allocated fairly

Qualifying tips must be distributed “fairly” between workers at any work site, including permanent staff, zero hours workers and agency workers.

Distributing tips fairly does not mean that all workers at a particular location need to receive the same amount. For example, an employer may decide that front of house roles should receive a higher proportion based on their level of interaction with the customer. Relevant factors when determining allocation could include the role, seniority, level of pay, how workers are engaged and customer intention.

Most employers will choose to allocate tips via a tronc – a special arrangement to distribute tips where an independent troncmaster is responsible for allocation. The troncmaster could be a member of staff or an external payroll or accountancy firm.

No deductions

Tips must be passed on to workers in full. This means that employers cannot make any deductions, other than in limited circumstances, such as for income tax. There is also a National Insurance exemption that can apply where tips are not allocated “directly or indirectly, to the employee by the employer” – we consider this more below.

The prohibition on deductions means employers need to swallow the cost of card processing charges or troncmaster services.

Records

Employers must keep a record of all qualifying tips received, setting out how it has been allocated. Records must be maintained for three years.

Tipping policy

Employers who often receive tips must also have a written tips policy, setting out whether the employer requires customers to pay tips and how tips are allocated. The Code of Practice also recommends that the policy sets out the steps an employer has taken to ensure tips are handled fairly and transparently.

The policy must be made available to all workers. Employers can choose how they wish to share the policy, for example it could be shared by email or uploaded on an intranet system.  

What else will employers need to do?

The Employment Rights Act 2025 introduced the following additional requirements for employers:

• To consult with trade union or elected representatives or (if none) workers directly, before producing the first version of their written tips policy.
• To repeat this consultation every time the policy is reviewed, with reviews needing to be carried out at least every three years from when the policy was first implemented.
• To make available to all workers an anonymised summary of feedback received in consultation.

The changes are expected to come into force in October 2026 (although the exact timings are unknown).

A draft updated Code of Practice has also been published, reflecting the new obligations. It also adds some clarifications to help employers determine what is a qualifying tip and the factors to be considered to allocate tips fairly. For example, the draft Code:

• Recommends that those workers who are included in the distribution of tips should be those directly providing the service at the relevant site. This could include those who interact with the customer but also those who prepare or handle food or drink.
• Suggests employers exercise caution where a minimum tip is allocated to certain workers, recommending that pre-determined commitments be avoided. Instead, employers should focus on objective factors.
• Consider the operation of a tipping scheme as a whole, rather than individual circumstances, when considering fair allocation.

The updated Code of Practice is also intended to take effect in October.

What do the changes mean for employers?

The changes undoubtedly increase fairness for workers, by giving them a greater voice in decisions about tipping allocation. However, the changes come at a cost for employers.

The 2024 changes already created a financial cost for employers by requiring employers to solely absorb the cost of processing tips. Tips are most commonplace in hospitality where profit margins can already be tight.

Many employers will already have a tipping policy in place. If this policy is reviewed in light of the upcoming changes, this will prompt a need to consult with staff.

The draft Code is very clear that consultation should not be a “paper exercise” but must be a genuine consultation process building in enough time for workers to fully participate. Employers can take an approach that is proportionate to their business, which could include group meetings or other methods, such as worker surveys. But for multi-site employees, the administrative burden is likely to be significant.

Consultation may not always be an easy feat, particularly for large, multi-site employers with different cohorts of staff.  Pay is emotive and it is likely that different groups will want to argue for a greater proportion of the tips. The draft Code states that employers would “ideally [achieve] broad agreement in the workplace”. Employers will need to listen to all views when making decisions about their tipping practices and will need to balance conflicting opinions to ensure a happy, stable workforce.

The requirement to publicise an anonymised summary of views aired during consultation could also lead to tensions in the workplace if some views are not ultimately adopted. Employers will need to be prepared to proactively explain their reasoning and the factors taken into account when settling on their tips policy.

There may also be tax implications. Employers will  need to consider the impact of consultation on the National Insurance exemption. To date no official guidance has been issued on the point, but in our view, where seeking to rely on the exemption, employers should ensure the consultation should be limited to which tips qualify, broad principles of fair allocation and categories of workers who should benefit.  They will need to ensure that allocation decisions are made by the troncmaster, and outcomes should be communicated in writing to the troncmaster, while ensuring the troncmaster retains independent discretion over individual allocations – a potentially tricky tightrope to navigate.

These changes also cannot be viewed in isolation from the other changes expected to be implemented next year. The hospitality sector is going to be significantly impacted by other complex and burdensome changes – including the new guaranteed hour and shift scheduling regimes. Although the tipping changes are less problematic, they are yet another recurring compliance obligation for employers to grapple with.

How can employers prepare?

To give themselves a head start, here are some tips for employers likely to be impacted by the changes:

• Audit your tipping arrangements. Understand how tips are currently allocated and what factors were considered when deciding on the distribution method. Employers should also audit their current record keeping to ensure tipping data is adequate and kept for the required three years.
• Ensure your tips policy is up to date and accessible. Although there is no need to share this with customers, the draft Code of Practice does encourage employers to do so. It can enhance customer confidence and possibly encourage greater tips if customers have visibility over where the money goes. Employers should consider if they will go this far but, as a minimum, employers should make sure their policy is easily available to all workers.
• Begin to engage with staff about how their tips are distributed (if you’re not already). The current Code of Practice already recommends consultation and, although only a small sample size, the respondents to the consultation suggest the majority of employers are already doing this.
• Start to consider how and when you will consult with your workers. For employers with numerous locations, you’ll need to consider this for each individual place of work. Consultation will need to cover all impacted groups of staff to ensure everybody is properly represented. Employers should also consider if the process could be streamlined – could this consultation form part of other collective discussions about pay?
• Consider the impact of consultation on the National Insurance exemption, and set practical limits on the extent to which employers must involve themselves in tipping policies, without inadvertently overstepping the mark and impacting the National Insurance treatment.
• Consider if your staff need any training on how to talk to customers about tips. The consultation reminds employers of the importance of ensuring that any automatically added tip is well communicated to customers, being clear whether it is optional or mandatory.

Ultimately, ensuring compliance with the current law will put employers in a good position to get on top of the upcoming changes.

Read more about the government’s response to strengthening the law on tipping and the draft updated Code of Practice.