The tips collected by employees working in the hospitality industry make a significant contribution to the amount of money each worker takes home so it’s important that companies have clear and consistent policies for how tips are shared. The UK government has also introduced a new law, Employment (Allocation of Tips) Act 2023, which changes the legal requirements for companies where tips are a critical component to the pay structure.
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What is Tip Pooling?
Tip pooling is also known as tip sharing or tip splitting. It involves collecting all the tips received from customers into one large pot (a tip pool) and then sharing them fairly and equitably among all employees rather than individuals keeping their own tips. Tips are usually shared out on a weekly or monthly basis and the method used to apportion the right amounts to each employee should be clear to each employee.
There are different tip pooling systems for ensuring the fair distribution of tips:
Tronc system: often used in the UK, this is an organised pay arrangement to distribute tips, which can be simple or use a more complex points system. A tronc point system ensures compliance with national insurance requirements.
Hybrid tip pooling system: with a hybrid system, the employee may keep some of their own tips and share the rest.
Points system: some companies assign points to employees which can be linked to their role, performance and length of service. The number of points each employee has is used in tip management to determine the percentage of the tip they receive. Using a points system can create a sense of competition among staff which promotes excellence in customer service.
Hours worked: this system uses a simple formula where the total tips are divided by the total hours the whole team has worked, with individual employees receiving a percentage based on hours worked. Using an hours system can reward employees who work longer hours than others.
Shifts based: splitting the working day into shifts is another way to share tips. Under this system, staff on the same shift (for example, an evening at a restaurant) share tips from the same shift period.
Role based: differentiating the amount of tips received based on the role employees perform can allow companies to reward those staff who are front of house, although this can have a negative impact on the staff whose work is not directly seen by customers but still needs to be high quality. For example, a waitress may be customer facing but the chef’s work is just as important for the whole customer experience.
Benefits of Tip Pooling
Tip pooling has several benefits for organisations where gratuities make a significant contribution to overall pay.
- Improves Collaboration and teamwork – pooling tips encourage employees to work together and support each other to provide the best customer service because they all benefit from getting more tips.
- Increases sense of responsibility – when the tips an individual receives impacts their colleagues as well as their own pocket, this can lead to employees taking more ownership and having a stronger work ethic as they want to do things better to benefit both themselves and others.
- Reduces staff turnover – by improving employee satisfaction, a tip pooling system can reduce the turnover of staff. A more stable staff means employees are more likely to know what they are doing and be able to provide excellent customer service, which in turn promotes customers to give more tips.
Tip Pooling and the Law
From October 2024, the Employment (Allocation of Tips) Act 2023 makes it a legal requirement that workers receive the full tip from a customer within a specific timeframe. Organisations must also have a policy to ensure fair and transparent tips and tip income distribution.
What is the legal definition of a tip?
Tips are categorised as ’employer-received’ and ‘worker-received’. In addition to direct payments, tips can include stamps, tokens, vouchers, or anything with monetary value that can be exchanged for goods, services, or money.
What are the requirements for paying tips?
The ‘Tipping Act’ requires that all payments be made to employees by the end of the month in which the customer paid the tip and without any deductions for administration. Employers cannot alter an employee’s salary or hourly rate because of their tips. Earnings from tips do not count towards the national minimum wage requirement.
However, employers do not have to ensure that employee tips are evenly distributed. As long as it is clear how tips are distributed between employees, organisations can use tip pooling systems that reflect differences in roles, performance (at an individual or team level), length of service and even what the customer intended with the tip.
What is the ‘Code of Practice’?
Companies that use tips as part of their pay structure should have a Code of Practice (COP) which details exactly how tips are distributed between employees, and when and how they will be paid. The COP needs to be written and accessible to all employees. The employer must also keep a record of all the tips received and how they have been allocated to individual employees for up to three years. Workers can request this information, including the total amount of tips paid and the amounts paid to them, and they have 12 months to raise a dispute at an employment tribunal if they think they have been treated unfairly.
What types of employees are included under the act?
The new legislation covers all types of workers, including agency workers and those on zero-hours contracts. Anyone working in hospitality – bars, restaurants, cafes and hotels, guesthouses and B&Bs – are included, but it also extends to any businesses where tipped employees are part of the structure, such as hairdressers.
Are tip credits allowed under the legislation?
Tip credit is when the earnings from pooled tips are counted towards the minimum wage. Under the new legislation, tip credits are not allowed because the tips cannot count towards the employee’s wage.
How to Manage Tip Pooling
If tip pooling is part of the way you reward your employees, considering the following tips (no pun intended) can be a good reminder of best practices:
- Make your Code of Practice easy to understand and accessible to all employees. Ensuring everyone reads the policy at the start of their employment can help you avoid issues when the tip pools are divided.
- Ensure you are communicating well: clarifying with each employee how they will receive their portion of the tips earned pays dividends in the long run. Regular open communication about the tips builds trust, helps individual employees feel supported and valued, and reduces potential disputes or conflicts.
- Regularly review the policy to ensure it is fit for purpose and rewards all employees fairly and equitably. Don’t avoid making adjustments when necessary.
- Emphasize the value of employee feedback in the creation of the tip policy: while it’s often impossible to please everyone, creating a policy that is fair and equitable must cover the needs and contributions of all employees. Taking on board feedback and making some adjustments is usually part of the process of creating a system that works well.
