A new report issued today reveals how the government’s Employment (Allocation of Tips) Act 2023 will push hospitality operators to breaking point, with 83% of respondents expecting 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 4 hospitality businesses closing in Britain every day so far in 2024, according to data from CGA by NIQ and AlixPartners.
The Employment (Allocation of Tips) Act 2023 comes into effect from 1st October and 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 leading 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 government 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 a mere 28% of operators are currently 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. 29% 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 hospitality workers in the UK have never been told about how tips are distributed to staff, which equates to 756,000 employees across the UK*, 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.
59% 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 1 in 3 operators will add a service charge of between 5-10 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 over a third (34%) saying they should tip bar staff between 10-20% for making their drinks.
Scott Muncaster, founder and Managing Director of three rocks, said, “The UK hospitality industry has been under immense pressure in the last few years.
“Beginning with the pandemic, then one of the biggest labour and skills shortages in decades, and now the cost-of-living crisis, operators need all the help they can get. This legislation, although introduced with good intentions, could push many businesses to breaking point as our research shows.
The reality is that increasing costs by tens of thousands of pounds a month isn’t viable for many in the current climate.
“Tipping has long been a sticking point for customers, staff and businesses, with many not knowing what to expect, what to give, or how to spread tips out among employees. The research shows that clarity and transparency is needed to help all three parties find a standardised process for tipping.”