The Employment (Allocation of Tips) Act 2023 ("the Tips Act") will come into force on 1 October 2024, imposing new obligations on employers to ensure that tips are allocated fairly among workers. The statutory Code of Practice on Fair and Transparent Distribution of Tips is due to come into force on the same date. These new rules include some important practical changes for employers in the hospitality, leisure and service industries to be aware of.
Key features of the Tips Act
Key features of the Tips Act that employers should be aware of include:-
1. Tips must be distributed fairly
The Tips Act requires employers to "fairly" allocate "qualifying tips" among workers within one month following the month in which the tip was received. "Qualifying tips" means those tips received by the employer or received by the worker and which are subject to an employer's control, which would include, for example, tips paid to workers where distribution is controlled by the employer.
"Fairly" is not defined by the Tips Act, however the statutory Code of Practice provides that fair allocation of tips should be determined by reference to an objective set of criteria which may include hours worked during the period tips were received, performance, seniority and customer intention. The Code of Practice is also clear that employers should give consideration to all workers involved in providing a service to customers, including agency workers.
Under the Tips Act, it is possible for an employer to arrange for the fair allocation of tips by an independent tronc operator who will pool the tips and distribute them among the workers. In this scenario, the employer is responsible for the fairness of the allocation of an aggregate amount to the tronc operator and the tronc operator will be responsible for the allocation of the aggregate amount between individual workers. If an independent tronc system is set up and operated correctly, the distributed tips should not attract employer's National Insurance contributions.
2. Employer deductions from tips
By virtue of the Tips Act, all qualifying tips must be passed on to workers and employers are no longer able to make any deductions for administrative fees such as credit card charges or till shortages. In addition, workers will be unable to contract out of or dilute their right to receive a fair allocation of tips, and any provision in their contract which seeks to do this will be void. However, where a worker has a contractual right to receive an amount representing qualifying tips under their contract, the entitlement to receive fair allocation of tips under the Tips Act can be discharged through the payment of the contractual tips.
Employers who have previously passed service charges and tips onto their employees will already be aware that these payments are subject to income tax and National Insurance, and that payments of tips should be made under the Pay As You Earn (PAYE) system. This continues to be the case, and is an allowable (and required) deduction. Employers who will be paying over tips for the first time may like to advise their workers that because the payments are dealt with under PAYE, the worker should not need to notify HMRC or the Department of Work and Pensions about the tip payments for their tax and/or universal credit position.
The Tips Act does not change the rules relating to tips and National Minimum Wage, meaning that employers remain unable to use tips to meet National Minimum Wage requirements. The higher rate National Living Wage has applied to workers 21 and over since 1 April 2024 (where it previously applied to workers 23 and over). As recent graduates look to join the workforce, it is a sensible time for hospitality employers to ensure that their payroll systems have reflected this change.
3. Requirement for written tips policy
Where qualifying tips are paid at an employer's place of business on more than an occasional and exceptional basis, the Tips Act requires employers to have a written policy setting out how tips are allocated which must be available to all workers at the place of business. The policy must state whether the employer requires or encourages customers to pay tips. If an employer considers that they only receive tips on an occasional or exceptional basis, they must advise their workers of this fact and give them reasons as to why this is the case. In practice, most businesses receiving qualifying tips will be required to have a written tips policy as the threshold of "more than an occasional and exceptional basis" is a low one to meet.
Those businesses which receive tips on more than an occasional or exceptional basis must keep a record of the amount of tips they receive and how they are allocated for a minimum of three years. Workers have the right to request these records for the period they have worked with the business and may exercise this right every three months.
Consequences of non-compliance
If employers do not comply with their obligations to fairly allocate tips within the timeframe set out above, workers will have 12 months to raise a claim in the Employment Tribunal.
If employers do not comply with their obligations to have written policies and keep records under the Tips Act, workers have three months to bring a claim.
If the Tribunal finds in the worker's favour in either of the above scenarios, it must make a declaration to that effect and may order the employer to pay the worker up to £5,000 to compensate for any financial loss attributable to the matter complained of.
In respect of claims regarding allocation of tips, a Tribunal may also make an order requiring the employer to make payment to their workers in addition to compensation. Under this provision, payment can be made to the worker who brought the complaint as well as all of the other workers who have been affected by the employer's non-compliance with the Tips Act. The Tribunal can also make orders requiring the employer to revise a tip allocation or make a recommendation regarding a tip allocation.
Comment
Interestingly, a London restaurant chain has already introduced a new tipping policy whereby it has banned tips paid by card and has instead introduced an optional "brand fee" of 15% which will go towards business expenses and will not be shared among its employees. The restaurant has increased employees' wages to compensate for the loss of tips and still allows cash tips. While this practice does not appear to fall foul of the Tips Act, it is likely to result in backlash from customers and employees. It remains to be seen whether other employers will adopt a similar approach, which arguably undermines the aim of the Tips Act to protect staff from exploitative tipping allocation practices.
The new obligations on employers under the Tips Act are broadly expressed, and will therefore apply to the majority of employers in the hospitality, leisure and services sectors. Employers in these sectors must make sure their policies and practices are compliant with the Act by 1 October 2024.
Next steps
Employers should take steps now to review their tips and troncs policy to ensure it complies with the new legislation.
If you have any questions arising in relation to this new legislation or require assistance to design or draft a new tips policy please contact a member of the DWF employment or tax teams or your usual DWF contact.
Authored by Iona Hamilton (Solicitor, Employment) and Amy Beard (Senior Paralegal, Tax and Private Capital)
