Firms including restaurants, pubs, hairdressers and taxi operators are set to be impacted by the new law requiring 100% of tips to be shared between employees from Tuesday.
However, hospitality industry bosses have cautioned that the move could hit under-pressure businesses with an “additional cost”.
The law means that tips must be passed to employees by the end of the following month from when they were received.
It has said that distribution of these tips must be “fair”, in line with a government code of practice published earlier this year.
Agency workers will also be entitled to the tips as part of the rules.
From Tuesday, if an employer breaks the law and retains tips, a worker will be able to bring a claim to an employment tribunal.
It comes eight years after a Government report first suggested the policy could be introduced following a review.
This came after a raft of companies, particularly casual dining restaurants, came under criticism over their tips policies.
Pizza Express and Giraffe were accused of abusing a voluntary code of conduct, while Wahaca was criticised for deductions on certain employees’ tips, although these have all since changed their policies.
The Department for Business and Trade predicted that the new law will mean a further £200 million will be received by workers rather than their employers.
Kate Nicholls, chief executive of industry body UKHospitality, said: “The people working in hospitality are the lifeblood of our sector and these changes rightly ensure tips hard-earned through excellent service will end up entirely in their pockets.
“We completely support the changes coming into effect today, which will formalise what is already commonplace in the sector as businesses have been preparing for this legislation for a number of years.
“New rules naturally come with an administrative burden and businesses will see some additional cost as they work through them in practice.
“It’s another example of costs being placed on a sector that can least afford it, and we continue to urge the Chancellor to bring down hospitality’s cost burden at the Budget, primarily through taking action to avoid the billion-pound business rates bombshell set to hit the sector next year when relief ends.”
Justin Madders, minister for employment rights, said: “This is just the first step of many in protecting workers and placing them at the heart of our economy.
“We will be introducing further measures on tipping to ensure workers get their fair share of tips.”
Andrew Tighe, director of strategy and policy at the British Beer and Pub Association (BBPA) said: “This new framework will introduce a level playing field for all businesses, ensuring that those who were not already passing on all tips to their staff will now be required to.
“A greater degree of consistency and transparency when dispersing tips will benefit both existing and new staff alike.”
Unite general secretary Sharon Graham said: “The new legislation gives workers the tools to fight bad bosses who would unfairly deduct their tips.”