NEW laws come into force today making it illegal for bars, restaurants and hotels to use tips to make up minimum pay.
The government said the change would promote "fairness" for staff, despite claims it will cost the hospitality industry an estimated £100 million and thousands of jobs.
Bob Cotton, chief executive of the British Hospitality Association, said individuals working in the industry would also be worse off through having to pay national insurance on more of their wages.
Estimating 5,000 jobs could go as a result, he told the BBC: "It is going to cost businesses in excess of £100 million.
"In the short term it will put jobs at risk."
But Business Secretary Lord Mandelson said customers would be "amazed" to discover that any tips they left could be used to top up wages.
He added: "When I leave a tip, I don’t expect it to be used to make up the minimum wage.
"I want it to go to the person who has served me as a thank-you for their service - this is a basic issue of fairness.
"Tips are meant as a bonus, not a tool to boost pay to the basic minimum."
A code of practice will be published aimed at providing "clarity" for customers and staff as well as businesses from tomorrow.
The change comes into effect on the day that the national minimum wage rises by 7p an hour to £5.80. For 18 to 21-year-olds, the rate increases by 6p to £4.83 per hour.
Derek Simpson, joint leader of Unite, which has been campaigning to close the tips loophole, said: "There is an urgent need for the hospitality industry to be transparent in how they handle the tips and service charge money left for staff.
"The new code will help consumers see where the money left for good service is going.
"We want to see all employers sign up to the code and ensure that their staff and customers can be confident that staff are treated fairly."
The new law on tips will be enforced by Revenue and Customs officers.