The way that tips, gratuities and service charges are to be distributed to employees is set to become fairer and more transparent, thanks to The Allocation of Tips Act 2023 — which is now to come into force on 1 October 2024.
Here, experienced employment lawyer and head of our leisure and hospitality sector team Lee Jefcott and associate Trishna Modessa-Parekh outline what the changes mean for both employers and workers — and why this presents both challenges and opportunities to attract and retain staff and customers alike.
Allocation of tips — ‘a mystery’
The allocation of tips and service charges in the leisure and hospitality sector has always been something of a mystery. Many employers do ensure that 100% of tips, gratuities and services charges are paid to staff, yet the process has been far from transparent — and some high-profile operators have suffered adverse publicity due to deductions being made for bank charges and other costs.
Up until 1 October 2024, there is nothing in law to prevent employers from making such deductions. While any monies paid directly to workers are workers’ legal property, many employers have a policy or contractual provision that requires tips to be pooled or returned to the employer. However, in an increasingly cashless society, most monies are paid directly to the employer and are therefore the employer’s legal property.
Many hospitality and leisure workers — particularly those in pubs, cafes and restaurants — rely heavily on customers leaving tips to top up their wages and compensate them for long and unsociable working hours. Yet, inevitably, not all businesses act fairly in allocating them.
Fair and transparent allocation
The new legislation will legally ensure that 100% of tips, gratuities and service charges are allocated to workers and distributed fairly and transparently — with no deductions for breakages or any other costs.
It’s estimated that the Act will positively impact at least two million workers, with £200 million being returned to the pockets of working staff each year.
However, at a time where hospitality employers are facing unprecedented cost pressures, some industry commentators fear that this legislation will introduce significant challenges. For example, employers will now have to bear the cost of bank charges for card payments and the costs of using a digital tipping app or third party tronc, since those costs can’t be taken from the tips.
New obligations for employers
The Act is set to introduce the following obligations for employers:
- Employers must pay 100% of the tips and service charges they receive to workers by the end of the next month, following payment by the customer.
- Tips cannot be subject to deductions, other than for tax and National Insurance liabilities.
- Employers must implement written policies that explain their tipping practices and must allocate the payments in a fair and transparent manner.
- Records are to be retained to demonstrate compliance for three years from the date that tips are received.
- Workers will have the right to request information relating to employers’ tipping records.
- Failures to comply with the Act will enable workers to bring Employment Tribunal claims against their employers.
Code of Practice
A consultation has taken place with hospitality businesses and industry bodies about how employers should implement these new requirements. A Code of Practice was issued on 22 April 2024.
The Code states that allocating tips fairly doesn’t necessarily mean allocating the same proportion to each worker. Employers can take into account pay, type of role, individual and team performance, seniority and level of responsibility, length of service and customer intention. It’s therefore up to the employer to adopt a fair tipping process — and an employment tribunal will not have the power to substitute its view of what would have been fair. It can, however, order an employer to “revise an allocation of tips” where there has been a breach of the legal requirements.
There is to be no ‘pooling’ of tips across sites. The legislation is clear that the allocation must relate to a particular place of business where the tips were paid.
While the Code of Practice is welcome, it only provides a high level overview and there is no detailed guidance on what is likely to satisfy the requirements of fairness.
Agency workers
Agency workers should be included in the allocation. However — given that agency workers will not be set up on an employer’s payroll (since the agency is responsible for paying them) — the legislation suggests that employers need to pass over the allocation to the agency, which must then pass on 100% of it to the relevant workers within the correct time limit.
Use of troncs
Some employers use a third party ‘tronc’ provider to distribute tips. Tips distributed this way benefit from not being subject to national insurance contributions.
The Act states that the allocation of tips by the tronc to workers will be deemed to be fair “provided [that] it is fair for the employer to make those tronc arrangements”.
This suggests that there is still a residuary duty on the employer to somehow supervise the arrangement or intervene if it becomes aware of any unfair practices — and calls into question how far the employer is entitled to interfere with these independent third-party arrangements.
Digital tipping apps
Digital tipping is becoming increasingly common. Many of these platforms provide for workers to receive an allocation of tips directly — without the money going to the employer for allocation. In such cases, the Code of Practice states that legislation will not apply, as this only applies to tips received by the employer (or over which the employer exercises control or significant influence).
Employers need to act
While some larger leisure and hospitality businesses have already implemented practices to deal with the allocation of tips, those that haven’t must now invest time and resources to implement systems to ensure their accurate and transparent distribution. This may involve adopting technology solutions or modifying existing payroll systems.
Any businesses that don’t comply with the new rules will leave themselves open to workers taking a claim to an Employment Tribunal.
Claims can be made if there is evidence that an operator has not allocated all tips, gratuities and service charges to workers. The Tribunal has the power to order an employer to ‘revise an allocation’, make a specific payment to a worker or make compensation payments to workers of up to £5,000 apiece.
Employees will also have the right to bring a claim if their employer does not provide a copy of its tips policy or a written records of tips when asked.
Reputational impact
In the era of conscious consumerism, the danger of non-compliance for employers isn’t just the cost associated with an Employment Tribunal. The reputational impact could be far more dangerous, driving away both potential customers and employees.
By the same token, this presents a key opportunity. Savvy employers may be able to embrace the legislation as a way of promoting fairness, maximising pay and benefits and creating a positive working environment — helping them to attract and retain staff and customers alike.
Talk to us
Employers must adapt their business models and compensation structures to comply with the new regulations. They also need to consider nuances such as the use of third parties (for example, when using troncs to effectively ‘outsource’ the tipping process) or how the new legislation deals with people who aren’t directly employed (like agency workers).
Leisure and hospitality employers that are unsure about how to apply the new rules should consult with a specialist adviser — and our award-winning employment law team supports all types of businesses to implement changes in their workplace and ensure compliance. We have an extensive track record in acting for multi-site operators in the hospitality and leisure sector.
We can assist with carrying out an audit of your current tipping arrangements and identify whether you’ll be compliant with the new requirements.
Talk to us by completing our contact form below.
