If you have a business where your staff receive tips, gratuities and service charges (“tips”) there are important changes in force from 1 October 2024.
The Employment (Allocation of Tips) Act 2023 (Tips Act) has been brought in to regulate tipping to ensure that tips are allocated fairly and transparently between workers, including eligible agency workers. A new statutory Code of Practice and an accompanying non-statutory Guidance Note for employers have also been brought into force.
These changes are particularly relevant to those in the hospitality sector. Around 80% of tipping now happens by card payment, rather than giving cash directly to the staff member and the new Tips Act has been brought in to help regulate this.
It is estimated that the Tips Act will affect about 2 million workers in the hospitality sector who work in pub, cafes and restaurants. Those workers will often be on the minimum wage and a significant proportion of their earnings can be made up of tips. Cash tips will generally become the legal property of the relevant workers. The crucial difference with tips paid by card is that these are paid to the employer and become the legal property of the employer. Some employers are not passing on all or only some of the tips paid by card to their staff. The Tips Act is intended to stop this happening and for tips to be paid in full to the workforce. Although, it is worth noting that tips cannot count towards the National Minimum Wage.
What is covered by the Tips Act?
It applies to all “qualifying tips, gratuities and service charges”, and applies to the full amount paid by the customer (so any card reader fees should be disregarded).
- Tips / Gratuities: spontaneous payments offered by the customer, either by cash or card payment.
- Service Charges: amounts added to a customer’s bill before it is presented to them, often a percentage.
It is important to note that tips paid directly to workers are only ‘qualifying’ tips if they are subject to the employer’s control, such as where the policy is for all tips to be shared amongst all workers.
The Tips Act applies to all employer-received tips and certain worker-received tips. Not all tips fall within the scope of the Tips Act and are covered by the Code. For example, if a worker receives and keeps a cash tip, with no employer control or involvement, the tip is out of scope for the Tips Act and the Code.
Tipping apps are a grey area, but where this involves operating according to an employer’s instructions (as is often the case) then this will fall within the scope of the Tips Act. Employers will also not be off the hook if an independent tronc operator is used. To maintain a fair allocation of tips, an employer must act to rectify a situation if it becomes aware of an independent tronc operator acting in an unfair or improper manner, otherwise an employer may be liable for claims against it.
Fair allocation and payment
Employers must ensure that the total amount of the qualifying tips, gratuities and service charges is allocated fairly between the workers. This means 100% must be paid less deductions that are required under tax law.
In the majority of cases, the fair allocation must then be paid to the workers no later than the end of the month following the month in which the tip/gratuity/service charge was paid by the customer. For example a tip left on 15 July must be paid by 31 August at the latest. There are some variations to this for where an independent tronc operator manages the tips, tips are paid to eligible agency workers, and non-public places of business.
What is a fair allocation?
Along with the Tips Act, a statutory Code of Practice on Tipping has been introduced setting out the principles of fairness and transparency to which employers must have regard. Failure to comply with the Code will be admissible in evidence at an employment tribunal and the tribunal will have to take it into account.
The Code sets out some key principles and suggestions:
- There may be reasons to have different proportions for different workers.
- All workers involved in the service should be considered, including agency workers.
- There should be a clear and objective set of factors set by the employer, such as the role, payment, hours worked, performance, seniority, length of service or customer intentions.
- Employers should avoid indirect or unintentional discrimination.
- It may be helpful to consult the workers and review the approach regularly.
What else does the Tips Act require?
Written Policy
Employers are required to have a written policy on tipping where tips/gratuities/service charges are paid on more than an occasional and exceptional basis. The policy should set out written guidelines and the factors for determining the fair allocation and made available to all workers.
Record keeping
Where tipping is on more than an occasional and exceptional basis, employers must keep records of how every tip has been dealt with and must keep this information for three years. Note that workers have a right to request this information over the period during which they worked for the employer during that timeframe.
Non-statutory Guidance
A guidance note has also been published on 27 September, which gives helpful guidance to support the new Tips Act. This includes:
- Agency workers: Employers must take agency workers into account when considering the distribution of tips. Agency workers may not always receive an equal share of tips in comparison to an organisation’s own employees depending on the particular circumstances, however they should not be unduly disadvantaged as a result of their employment status.
- Multiple sites of operation: Employers should not pool tips received across multiple sites or branches.
- Scope of workers: All workers directly involved in providing a service to customers should be considered.
The guidance also sets out a brief tipping policy template, however we can assist you with producing a more detailed version of this to suit your particular business needs.
What are the risks if you get it wrong?
If tips are not paid in line with the new Tips Act, this could be an unlawful deduction from wages for which the worker may have a claim against you.
Workers also have new rights to bring in an employment tribunal for a breach of obligations under the Tips Act.
Failure of Distribution:
- Where there is a failure to fairly allocate and pay tips.
- It is notable that there is a 12-month limitation period for claims where the employer has not allocated and paid tips fairly. (Time limits for employment tribunal claims are often three months).
Failure of Information:
- Where there is a failure to comply with the written policy and record keeping obligations. The limitation period for claims where information obligations have not been complied with is three months or three months of the most recent failure to comply (in the event of multiple failures).
If a claim under a worker’s new rights here is well-founded the employment tribunal must make a declaration to that effect. If a tribunal makes a declaration, the employer may be required to pay the worker compensation of up to £5,000 for financial loss suffered and to comply with the requirements of the Tips Act.
In addition to awarding compensation and making a declaration, the employment tribunal can make an order relating to how the employer deals with qualifying tips, gratuities and service charges. This includes requiring the employer to make payments to other workers, even though those workers are not parties to the tribunal proceedings and have not brought any claims themselves.
Where a complaint is made to the employment tribunal on the basis of the written policy and record keeping requirements not being met, the time limit is three months from the date of the failure or longer if it is not reasonably practicable to comply with that time limit. Again, the employment tribunal may make a declaration that the complaint is well-founded and order the employer to comply, along with ordering compensation of up to £5000 for financial loss suffered.
What should employers be doing now?
Now that the new Tips Act has come into force, employers should be reviewing their policies and practices on tipping. This is to ensure they are compliant with the changes. This includes ensuring that there is a well-drafted and compliant policy on tipping in place.
Stephens Scown regularly advises employers in the hospitality sector and supports employers in implementing these changes. If you require assistance then do contact our Employment Law team.