October ‘Tip Act’ Deadline Could Send UK Businesses Rushing to Embrace Digital Payments

The payments landscape can be — and frequently is — shaped by both innovations and regulations.

And with the news that businesses in the United Kingdom have just two weeks left to prepare for the Oct. 1 enactment of the Employment (Allocation of Tips) Act 2023 (referred to as “the Tipping Act”), companies that pay out tips to their workers are wondering whether innovations like instant payments and account-to-account (A2A) payments might help them comply with the new rules.

The Act addresses two primary concerns: ensuring that all tips received are allocated to workers and establishing a statutory Code of Practice for the fair and transparent distribution of these funds within one month following the month in which the tip was received.

U.K. employers will no longer be able to make any deductions for administrative fees, such as credit card charges or till shortage, per the Act.

The move comes as a response to longstanding issues within the hospitality, leisure and service industries, where employees have often seen their tips reduced by management fees or not distributed fairly — and it introduces a new right for workers to request information relating to an employer’s tipping record, empowering employees to challenge unfair practices.

As the Tipping Act prepares to take effect, both employers and employees in the U.K. are poised for a significant shift in how tips and other worker payments are managed — making it critical for businesses to adapt to these new requirements.

Read more: Check-In Time: Hospitality Welcomes Real-Time Payments

UK Implements Legislation to Ensure Fair Distribution of Tips

For employers, the new U.K. law necessitates a review and possible overhaul of current tipping practices. Businesses in the hospitality sector must now establish transparent policies for tip distribution and prepare to implement systems that comply with the statutory Code of Practice. This includes maintaining accurate records of tips received and how they are allocated among staff.

According to the PYMNTS Intelligence 11-nation study on “How the World Does Digital,” everyday individuals around the globe are embracing a digital-first economy. Digital-native generations like Gen Z and zillennials will fast-track that reality for the businesses they work at — meaning that instant digital payouts could become the new standard for restaurants and other service industry businesses.

Separate PYMNTS Intelligence shows that 62% of restaurant workers prefer same-day tips, and 37% want their tips immediately, statistics that reflect a broader move toward cashless transactions across the sector.

As the U.K. regulations are implemented at the start of October, instant payment solutions capable of calculating tip pools or shares and sending payouts directly to employees’ banks of choice could help businesses seamlessly comply with the upcoming requirements.

And not just that, but digital solutions can also help businesses streamline their own operations and unlock new efficiencies.

“What we’ve seen is that operators have been spending close to an hour each shift actually doing the calculations, dividing up the cash tip pool, trying to understand what each and every employee is making,” Justin Roberts, co-founder at Kickfin, told PYMNTS CEO Karen Webster during a conversation with Drew Edwards, CEO at Ingo Payments.

“Tipping is here to stay and getting more complicated than ever. And this expectation of instant and choices is just getting started, trending up and to the right,” Edwards said.

Read more: Instant Payments Emerge as Balance Sheet Boost for Independent Restaurants

Payments Innovations Poised to Transform Service Industries

Under the Tipping Act, it is possible for an employer to arrange for the “fair allocation” of tips by an independent operator who will pool the tips and distribute them among the workers.

The PYMNTS Intelligence report “Small Business Real-Time Payments Barometer: Restaurants Edition” found that the number of restaurant small and medium-sized businesses (SMBs) now sending instant payments surpasses those that send checks or use ACH payments to deliver their funds.

At the same time, open banking can play a role in the future of worker payments. The integration of technologies like A2A transfers and pay-by-bank services, promises quicker, more efficient transactions. But a PYMNTS Intelligence report, “Can Banks and FinTechs Bridge the Divide to an Open Banking Future?,” created in collaboration with NCR Voyix, shows why the future of open banking hinges on how effectively banks, FinTechs and other stakeholders navigate and address the challenges of this transition.

Of course, there could be a whole different issue facing U.K. operators. PYMNTS Intelligence found that, as discussed in “Tipflation Is Changing Spending Habits of 1 in 6 Consumers,” consumers across all income groups are cutting back on spending due to tips driving up the cost of goods and services.

Data showed that 29% of consumers say tipping has gotten out of hand as it seems they are universally being prompted at the point of sale to sign off on some level of suggested tipping. A full 17% of respondents to our surveys said that they have actually cut back on spending on items — including food and delivery — because the tipping aspect makes things cost too much.