About Paperchase

Paperchase is the leading global hospitality accounting firm. For over 35 years, Paperchase has provided bookkeeping and financial advising to restaurants that drive profitability.Founded in London, the firm now has a global footprint, serving over 3,000 restaurants worldwide. Paperchase’s teams ensure smooth day-to-day financial operations and provide management with the comprehensive, timely, and accurate reporting they need to make key decisions that allow a business to thrive. Whether you’re running a large group of fast-casual eateries, a single-location Michelin-star restaurant, or anything in between, Paperchase supports teams of all sizes with time-tested processes and reporting. To learn how we can help your business, click here.

Employment (Allocation of Tips) Act 2023

To keep wages fair and honest, the UK government has passed the Employment (Allocation of Tips) Act 2023, also known as tronc legislation. Tronc schemes are used to pool and distribute tips, gratuities, and service charges among hospitality industry employees, but they have faced scrutiny for their history of inequitable distribution, leading to legal accountability. The new legislation, which goes into effect on October 1, 2024, enforces the distribution of 100% of tips and service fees to employees. Peter Davies, a troncmaster at WMT, summarizes the primary effect of the legislation: “Consumers and workers will now know that the money their guests pay will principally go to the team. Businesses are not allowed to keep any of the money for any reason. This will give teams more visibility and transparency over their pay.”

Legislation Summary

New Tronc Legislation

Previously, some restaurants would retain 20-30% of their tronc value to cover business expenses, including taxes, breakage, and even staff parties. The Employment (Allocation of Tips) Act prevents the retention of tips or service charges for any reason. The act states that transparent, written guidelines must be distributed to employees outlining the protocol of the system. In addition to a written manual of distribution, employers will be required to provide a record of all tips to their staff, which includes the specific allocation and distribution amount for each employee. To maintain visibility and compliance with the act, workers can dispute their tips in the Employment Tribunal if their employer fails to maintain the required records or refuses a request. Employment tribunals can change employer recommendations, make orders to repay workers, and issue compensatory awards.

Tips must be distributed to workers by the end of the subsequent calendar month. For example, if tips were collected in August, they would be distributed by the end of September. The Employment Act outlines tips and service charges distributed by credit card but does not account for cash tips unless they are collected in a scenario where an employer “exercises control,” such as through a cash pool. Additionally, the law states that all tips and service fees must stay within the individual establishment and cannot be shared between locations. Within these single establishments, the only deductions that can be taken from the tronc are income taxes instituted by the government.

Section 27H of the new regulation is changing the way establishments view their agency workers. Previously, agency workers were unable to receive tronc because they were not factored into a business’s payroll, but this addendum gives these employees the right to receive an allocated share of tips on the same basis as regular payroll employees. These workers cannot receive a lower share of the tronc because of their affiliation with an agency. Employers will be required to pay the agency directly, and that money will be allocated to the employee. Because the share of tips must be consistent between all workers, some argue about the practicality of this part of the bill, as it may result in agency employees receiving disproportionately higher earnings than directly employed staff.

A tronc scheme can be a useful tool to improve staff motivation and retain employees, in addition to offering a plethora of financial benefits. Businesses that use tronc can maintain exemptions from National Insurance contributions, saving money for both the employer and employee. For example, pooled tips of £20,000 a month could save £2,760 per month in the employers’ National Insurance if processed through a tronc. Compliance with the new legislation is paramount to preserving these employee benefits. In cases where an independent tronc arrangement is in place, there’s an automatic assumption of fairness. Adherence to a valid independent tronc system will fulfill an employer’s legal obligations and maintain the assumption of fairness.

Accounting for Tronc

A primary concern for many business owners is the potential impact of this new legislation on payroll and profit-and-loss statements. Collaborating with hospitality accountants like Paperchase can provide operators with valuable insights into these areas, enabling them to optimize financial performance in the face of regulatory changes. Your restaurant accountant should conduct a thorough review of your payroll records to determine the total tronc collected during each pay period. This information is then used to calculate the troncmaster allocation and distribute funds to employees based on predetermined percentages. These percentages may be subject to adjustment considering the new bill.

The tronc value sits on a separate line in a balance sheet, as it is a unique account. Each month, the tronc balance should be null, but this can differ if employers choose not to pay the full amount monthly. In the case of a balance, the tronc amount will act as a credit. Business owners must work with their bookkeepers to review the tronc line on their P&L in the wake of the October 2024 regulation. Operators who previously used retained tronc value to pay extra expenses will have to allocate these funds from elsewhere. To make up for lost money, restaurant owners may lower their service fees but raise menu prices, resulting in increased revenue for the business as money from the service fee goes directly to the worker. For example, if the standard service fee is lowered from 12% to 10% but the operator increases their prices, more money will go to the business.

How to Prepare

To stay prepared for the upcoming regulatory changes, owners and managers should carefully review their current tip policies. Assess the percentage of tips distributed to each employee and identify any disparities between roles. Implement a clear, written policy well in advance, allowing staff to familiarize themselves with the changes before they take effect. Restauranteurs should collaborate with their hospitality accounting teams to analyze existing tip allocation records and establish a structured system for tracking these metrics. Once records have been updated, owners should properly train their staff to handle operations under the new bill. Ensure your managers understand how to maintain compliant tip and payroll reporting after October 1.

Conclusion

The UK’s upcoming Employment (Allocation of Tips) Act of 2023 marks a significant step toward greater transparency and fairness in the hospitality industry. By mandating the full distribution of tips and service charges to employees, the new legislation aims to address concerns about the potential for tip withholding and ensure that all staff members receive a fair share of their earnings. However, implementing these changes will require careful preparation and adjustment on the part of business owners.

While the act provides clear guidelines, businesses must review their existing tip policies, establish transparent distribution procedures, and work closely with their accountants to understand the financial implications. By complying with the new legislation and leveraging the expertise of hospitality experts like Paperchase, businesses can not only maintain their compliance but also capitalize on the potential benefits of a well-managed tronc scheme.