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New rules on tips: what do they mean for employers?

by August 14, 2024
August 14, 2024
New rules on tips: what do they mean for employers?

The main provisions of the Employment (Allocation of Tips) Act 2023 and the Code of Practice on Fair and Transparent Distribution of Tips come into force on 1 October 2024.

There have been concerns that some employers make deductions from tips, for example, for “administrative fees,” or retain a proportion of tips. Under the Act, employers must ensure that workers receive “tips, gratuities and service charges” (“tips”) in full and that tips are allocated fairly and transparently.

According to Unite, the trade union for hospitality workers, the Act will impact over four million workers who receive tips. Briefly:

All tips paid on or after 1 October 2024, over which the employer exercises control or significant influence, must be allocated fairly to workers, including eligible agency workers
Payment in full (less deductions required by law such as tax and NIC) must be made no later than the end of the month following the month in which the tip was paid
Employers need to have a written tipping policy and keep records
An independent tronc operator can allocate tips. A tronc scheme is a special pay arrangement that allows businesses to use for example, an external accountancy firm or payroll business to fairly distribute staff tips, gratuities, and service charges.
Workers cannot contract out of their rights and can bring Employment Tribunal claims for breach of the Act
The Act applies in England, Wales and Scotland

The Act only applies to “qualifying tips” which are:

All employer-received tips and
Certain worker-received tips

Employer-received tips are paid by the customer, either received by the employer or an associated person. This includes tips made by credit or debit card and paid into the employer’s bank account before being distributed to workers or where the tip is received through a mobile app.

Worker-received tips, such as cash tips, are paid by the customer but not subsequently received by the employer or associated person. The Act only covers such tips if they are subject to employer control or if the employer has significant influence over the distribution of tips, such as when the employer directs that all tips are shared amongst workers or shared at the end of the shift.

The Act applies to workers and eligible agency workers. Consequently, tips must be distributed fairly to eligible agency workers, too, although this can be done by their agent (where the agent has received the tips from the employer).

How can employers ensure tips are allocated fairly and transparently?

The Code of Practice provides “overarching principles” regarding fairness. Employers must consider these when designing and implementing their tipping policies.

Interestingly, the Code states that a fair allocation and distribution of tips does not necessarily mean paying all workers the same proportion. However, employers should use fair and reasonable factors to determine their tipping practices, and the Code gives examples:

Type of role/work, for example, distribution between front-of-house and backroom workers
Basic pay (and how workers are engaged)
Hours worked when tips are received
Individual and/or team performance
Seniority/level of responsibility
Length of service
Customer intention

Employers must avoid unlawful discrimination when selecting and applying the factors.

Independent tronc arrangements, where an external accountancy firm or payroll business manages the distribution of tips, are common in the hospitality sector. The principles of fairness and transparency still apply. If the independent tronc is acting unfairly or improperly, the employer must take action, such as instructing the independent tronc to change its operation, replacing the independent tronc, or terminating the arrangement.

Regarding transparency, employers must provide a written policy to all workers and eligible agency workers about how they deal with tips. It can be provided either in electronic form or as a physical copy. They do not need a written policy where worker-received tips are not qualifying tips. Even so, certain information must still be provided including that the employer is not required to have a written policy and the reasons why. Records must be kept for three years of all qualifying tips received and the amount allocated to each worker.

Workers can complain to the Employment Tribunal where the written policy and record-keeping obligations are not met and/or the employer has not fairly allocated and paid tips. The time limits for bringing the claim are three months and 12 months, respectively. In both cases, the Employment Tribunal can declare that the complaint is well-founded, order the employer to comply, and order compensation of up to £5000. Note that an eligible agency worker can bring the claim against the agent in addition to or instead of the employer.

Advice for employers

Before 1 October 2024, employers should review their tip allocation systems, record keeping, and written policy, especially the factors relevant to “fairness” in the Code. I recommend consulting with staff about the policy. Although there is no obligation to do this, if staff are in agreement with the policy, it will help the employer establish fairness.

The Code is not legally binding, but Employment Tribunals will consider it in disputes about tipping practices. Therefore, employers should familiarise themselves with the Code.

Finally, Unite recently launched its Fair Pay and Fair Tips campaign. This will focus on ensuring that hospitality workers understand their rights. Unite will “name and shame rogue employers who try to ignore or distort the new legislation”.

Read more:
New rules on tips: what do they mean for employers?

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