A new report has revealed how the government’s Employment (Allocation of Tips) Act, set to come into effect on 1st October, will push hospitality operators to breaking point.
Eighty-three per cent of respondents expect to incur costs of at least £12,000 a year to comply, the equivalent of 118,690 UK operators. Nearly one in five (18%) claim costs could increase by £60,000 to £360,000 a year under the new regulations.
Despite hospitality closures slowing, these findings come at a worrying time for the industry, with more than four hospitality businesses closing in Britain every day so far in 2024, according to data from CGA by NIQ and AlixPartners. Recent reports of a potential smoking ban at hospitality venues also promises to pile more pressure on to businesses which are already struggling.
The Employment (Allocation of Tips) Act 2023 will require hospitality businesses to distribute 100% of customer tips and service charges to staff, with no exceptions other than standard-rate tax deductions.
The changes also make it mandatory for all hospitality businesses to have a written policy, accessible to staff, on how tips are dealt with at their place of work.
The report — Tipping Point: How new legislation will impact hospitality — commissioned by three rocks, a customer experience technology specialist for the hospitality sector, surveyed 1,000 hospitality businesses, 1,000 customers, and 500 staff in the UK to gain their insight into the new legislation and to understand feelings towards tipping.
The study included UK hospitality businesses of all sizes, from independent operators to national restaurant, pub, and bar chains.
The findings revealed that only 28% of operators are compliant with the Act, distributing tips among all staff without any deductions. The majority, two-thirds (63%) of businesses, currently take a percentage of tips from employees.
Twenty-nine per cent of those use these tips to cover costs such as processing fees, costs the business will now have to cover under the new Act, while over a quarter (28%) take a profitable share of the tips, money they will be unable to claim from October. This means that 63% of businesses will have to make changes to the way they operate to comply with the new legislation, which is equivalent to more than 90,000 hospitality businesses currently operating in the UK, according to latest government figures.
Speaking to 500 hospitality staff, the three rocks research uncovered that 42% of workers in the UK have never been told about how tips are distributed to staff, which equates to 756,000 employees, based on the latest government figures. When asked whether they were happy with how tips are distributed to staff, more than a third (37%) of staff said they were unsure but felt they should get more tips.
The study revealed that there could be a better and fairer alternative tipping process to the Employment (Allocation of Tips) Act 2023. Nearly half (44%) of operators would support the creation of a Tipping Standard Practice, an official tip amount implemented ‘across the board’ for customers and a standard process for businesses to distribute tips to staff.
Fifty-nine per cent of staff support the concept, with 27% saying it would make financial planning easier, and a further fifth saying it would be a fairer system for everyone. An overwhelming 73% of the 1,000 customers polled agreed it was a good idea.
The study also delved into tipping behaviour, revealing that nearly three-quarters (74%) of UK hospitality companies either already, or plan to, add a service charge as standard for smaller tasks, such as serving a pint, preparing a cocktail, checking people in or carrying luggage.
Nearly one in three operators will add a service charge of between five and ten per cent for such tasks, suggesting that the UK is heading towards an American-style service charge, where 20% is the standard gratuity for all types of service.
The British public also support the Americanisation of tips, with 73% of customers agreeing that people should tip when buying drinks at a bar, and more than a third (34%) saying they should tip bar staff between 10 and 20% for making their drinks.
Scott Muncaster, founder and managing director of three rocks, said: “The UK hospitality industry is struggling, and recent government intervention has done nothing to ease concerns from operators.
This new legislation, set to come into force in October, will massively increase costs as our research has shown. This, coupled with reports of an outdoor smoking ban proposed by the new Labour government, is cause for concern, and may push many businesses to breaking point in the final quarter of this year and beyond.”
