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

There have been long-standing concerns that some employers make deductions from tips, for example, for “administrative fees” or retain a proportion of tips. The Act regulates how employers allocate tips by introducing obligations to ensure that workers receive “tips, gratuities and service charges” (“tips”) in full and that tips are allocated in a fair and transparent way. Briefly:

• All tips paid by customers 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 customer paid the tip
• Employers need to have a written tipping policy and to keep records
• Allocation of tips can be done by an independent tronc operator
• Workers cannot contract out of their rights under the Act to receive tips that they have been allocated or consent to the amount being reduced
• Workers can bring Employment Tribunal claims for breach of the obligations under the Act
• The Act applies in England, Wales and Scotland and it introduces a new Part 2B into the Employment Rights Act 1996

The Code of Practice provides “overarching principles” on what constitutes fairness for the purposes of the Act and employers must have regard to the Code of Practice when designing and implementing their tipping policies and practices. Further Guidance is expected to be published shortly to accompany the Code of Practice.

According to Unite, the trade union for hospitality workers, the Act will impact over four million workers who receive tips and the Act’s implications are considerable for employers in the hospitality sector.

Qualifying Tips

It is important to understand that the Act only applies to “qualifying tips” and these are:

• All Employer-received tips; and
• Certain worker-received tips

Employer-received tips relate to tips paid by the customer which are either received by the employer (or an associated person) or by another person under a payment arrangement. 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 via an alternative electronic method such as through a mobile app.

Worker-received tips are tips paid by the customer which are received by a worker and not subsequently received by the employer or associated person. This largely relates to cash tips. Worker-received tips will only be a qualifying tip if they are either:

• Subject to employer control or the employer has significant influence over the distribution of tips, for example, where the employer directs that all tips are shared amongst workers or shared at the end of the shift; or are
• Connected with any other worker-received tips that are subject to employer control, for example where two workers at the same business receive tips at different times in a week

Consequently, not all tips are covered by the Act and subject to the Code of Practice. Where the only tips are worker-received tips that the employer has no control over or no involvement with, these do not fall within the definition of “qualifying tips”.

Fairness

The Code of Practice sets out the key principles of fairness and how these can be applied in developing and implementing a policy on the allocation of tips. It expressly states that allocating and distributing tips fairly does not necessarily require employers to allocate the same proportion of tips to all workers. However, employers should use a clear and objective set of factors to determine the allocation and distribution. The factors should be fair and reasonable for the specific business and the Code of Practice 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 during period when tips are received
• Individual and/or team performance
• Seniority/level of responsibility
• Length of time served with the employer
• Customer intention

Employers must ensure they avoid any form of unlawful discrimination when selecting and applying the factors and in particular, must avoid unintentional indirect discrimination. Further details and worked examples will be included in the future Guidance.

Regarding the allocation and distribution of tips, where the employer receives the tips directly they can pay their workers their share as part of the next payroll cycle. This must be paid no later than the end of the month following the month when the customer paid the tip. The Code of Practice gives an example – where a customer leaves a tip on 23 June, it must be distributed by 31 July at the latest.

Another option is for the employer to allocate and distribute tips by using a tronc which is an arrangement/system to distribute tips and this is very common in the hospitality sector. An independent tronc is someone independent of the employer such as an external accountancy firm or payroll business that manage the distribution of tips for the employer or it could be a member of staff chosen by the workers.

The principles of fairness and transparency still apply where an employer has chosen to use a tronc. The Code of Practice states that if the employer has a reasonable belief that the tronc is operating independently and fairly, the employer will be regarded as having complied with the Code of Practice. However, if the employer learns that the independent tronc operator is acting in an unfair or improper manner, they need to take action to ensure a fair allocation of tips. This could involve instructing the tronc operator to change its operation, replacing the tronc operator or terminating the arrangement. If they fail to take action, the employer may be regarded as having failed to comply with the Code of Practice.

Written Policy and Records

As mentioned above, tips must be allocated in a fair and transparent way. Accordingly, employers must have a written policy on how it deals with tips when qualifying tips are paid on “more than an occasional and exceptional basis”. This seems to be a low threshold.

This written policy must be available to all workers although the Act does not prescribe how to do this. The Code of Practice however has quite a lot of detail about how employers can circulate the policy. For instance, it can be provided either in electronic form or as a physical written document. If provided electronically, the policy could be emailed directly to staff or uploaded to a staff portal. Agency workers need to be provided with the policy too and it could be provided to them personally or provided to the agency for it to share with them.

If a physical copy of the policy is provided, this could be done during the induction process (not forgetting about agency workers) or displayed on notice boards for example.

The policy must be written in plain language and employers must provide an accessible format for any worker with a disability, on request.

The policy must include information on whether the employer encourages tips and how the tips will be dealt with, including allocation.

Where an employer is not required to have a written policy because for example worker-received tips are not qualifying tips, certain information must still be available to workers, including the fact the employer is not required to have a written policy and the reasons for this.

Where qualifying tips are paid on “more than an occasional and exceptional basis”, a record must be kept of all qualifying tips received at the place of business and the amount allocated to each worker. This record must be kept for three years beginning with the date on which the qualifying tip was paid.

Workers have the right to make a written request for the employer to provide records covering a specified period as long as they have worked for the employer at some time during that period. This is limited to one request per worker in a three-month period.

Comment

Employers who receive tips, gratuities and service charges should review their tip allocation systems, policies and record keeping in plenty of time before 1 October 2024 to ensure they are compliant with the Act and to protect themselves from any Employment Tribunal claims.

Even if there is already a written tipping policy, it would be sensible to review this taking into account the Code of Practice especially the factors relevant to the issue of fairness in the allocation and distribution of tips. It may be appropriate to consult with staff about the written policy (or on any changes to an existing policy). Although there is no obligation to do this, where staff are in broad agreement about the policy this is likely to be helpful for the employer in establishing fairness. As mentioned above, it is essential that workers and agency workers are aware of the policy.

Although the Code of Practice is not legally binding, Employment Tribunals will take it into account where there are disputes about tipping practices. Employers should therefore familiarise themselves with its provisions in the weeks ahead and the Code of Practice can be accessed here.

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

UPDATE: Since this article was written the Government has published non-statutory guidance for distributing tips fairly and this includes templates for a tipping policy and a request for a tipping record.