The Employment (Allocation of Tips) Act 2023 (‘Tipping Act’)

The Employment (Allocation of Tips) Act 2023 (‘Tipping Act’), which was originally due to come into force on 1 July 2024, will now take effect on 1 October 2024.    

The legislation inserts a new provision into the Employment Rights Act 1996 (‘ERA 1996’) to ensure that all tips, gratuities and service charges (collectively referred to here as ‘tips’) paid by customers are allocated to workers.   

The Tipping Act is supported by an accompanying Statutory Code of Practice (The Code), which will also come into force on 1 October 2024. The Code provides guidance on how to promote fairness and transparency in the allocation of qualifying tips.  Employers will be expected to have regard to the Code when designing and implementing their tipping policies, and judges will be able to take any failure to comply with the Code into account when determining disputes.

Whilst the retail and hospitality sectors will be particularly affected by the new provisions, this article will be essential reading for any industry or employers who regularly receive gratuities or apply service charges to their bills.  No transitional period applies to the new provisions, so businesses will need to have taken all appropriate steps ahead of 1 October 2024 to ensure they are compliant from Day 1.

What ‘tips’ are ‘qualifying tips’?

Only those tips which the employer either:

  1. receives directly from a customer (e.g. a service charge on a restaurant bill); or
  2. over which the employer exercises significant control or influence (e.g. a cash tip paid to a worker who is then required by his/her employer to place it in a kitty for employer-determined distribution)

are ‘qualifying tips’ and subject to the provisions of the Tipping Act.  This means that tips paid by a customer to the employer/the employer’s place of business by way of debit/credit card, via an app or a QR Code, for example, will be in scope.

On the other hand, ‘worker-received’ tips - i.e. cash tips paid by a customer directly to a worker, which are not subject to any employer control or involvement, and which the worker may keep for themselves), are not included.

Importantly, tips can still be ‘qualifying tips’ even if they are paid in the form of a voucher, stamp or token.  The key is whether the tip has a fixed value (which can be expressed in monetary terms), or is capable of being exchanged for money, goods or services (e.g. a casino chip).

Who does the Tipping Act benefit?

All workers (from employees through to zero hours and casual staff) as well as agency workers are protected.

Main principles - what does the Tipping Act require of employers?

1.  Pass on tips without deductions

In short, the Tipping Act requires employers to pass on the actual amount paid by a customer by way of a tip to its workers. This means that the tip must be passed on without any deductions (save in limited circumstances, such as for income tax). 

2.  Distribute tips fairly

Employers must ensure that tips are not only passed on to workers but that they are distributed fairly and transparently, in regard to the Code.

What is “fair” will depend on the circumstances.  Helpfully, the Code makes it clear that this does not necessarily mean that employers must allocate the same proportion of tips to all workers. They can, instead, take into account factors such as the type of role being done; the hours that were worked when the tip was received; the worker’s seniority; whether they are in a customer-facing role etc.

Whatever criteria are applied, however, employers must ensure that it is fair and objective, and avoids indirect discrimination (save where this can be objectively justified).

The Code encourages employers to consult with workers to seek their broad agreement that the system of allocation proposed is fair.

Employers may choose to operate their tipping policy themselves or appoint an independent tronc to operate it on their behalf. The ‘independent tronc’ could be an elected member of staff or a third party, such as a payroll firm.  However, the employer will still be liable and must ensure that any independent tronc complies with the principles of fairness and transparency required by law and the Code.

3.  Implement a written policy

If tips are to be paid on more than one occasion, employers must have a written policy which sets out how tips will be dealt with. The policy should include details such as:

  • whether the employer requires or encourages customers to pay tips; and;
  • how it will ensure that all qualifying tips will be dealt with and allocated between workers.

The policy must be disseminated to all workers (including agency workers) and must be reviewed and updated regularly.

If an employer does not believe it is required to have a written policy, it must say so and explain why.

4.  Record keeping

Employers must keep records of the amount of tips paid at or attributable to the place of work as well as the amount(s) allocated to workers (including those allocated by any tronc).

The records must be maintained for three years.  Workers will have the right to submit a written request for their record and, if such a request is received, the employer must provide it within four weeks.

When do tips need to be paid?

Tips must be paid to the worker by the end of the month following the month in which it was paid by the customer.

In the case of agency workers, the employer must pay the agency by the end of the month following the month in which it was paid by the customer.  The agency must then pay the tip to the agency worker by the end of the following month (e.g. the customer pays the employer on 3 March 2024; the employer must pay the worker/agency by 30 April 2024; the agency must pay the agency worker by 31 May 2024).

What happens if the employer does not comply with the provisions?

Workers have the right to lodge a complaint with the Employment Tribunal. 

Where the complaint relates to the employer’s failure to comply with the requirements to implement a written policy or to keep appropriate records, the worker will have three months (starting from the date of the failure) to present the claim.

If a complaint under the provisions is well-founded, the ET must make a declaration to that effect and may make an order requiring the employer to comply with the requirement.  If a declaration is made, the ET can also order the employer to pay compensation to the worker of up to £5,000.

Where a complaint relates to how and when tips must be dealt with, the limitation period is longer. In these cases, claims must be presented within 12 months from the date of the relevant failure.

If a complaint under these provisions is well-founded, the ET must make a declaration to that effect and may order payment of compensation of up to £5,000.  It may also require the employer to revise the tips allocation made to the worker (or make a non-binding recommendation) or require the employer to make a payment to one or more workers (even those who are not complainants).  The Tribunal may also make recommendations as to how tips should be distributed in the future.

Can I ask my workers to pay back tips?

No. Any contractual reimbursement provision will be void and unenforceable.  However, claims under these provisions are capable of being waived via a statutory settlement agreement.

Are there any other consequential legislative amendments?

Employers should note that S.27 ERA 1996 has been updated to clarify that tips and gratuities are included in the definition of “wages” for the purposes of unlawful deduction from wages legislation.

Whilst many employers would have already been operating on the basis that tips are ‘wages’ for the purposes of this, and other relevant, legislation, what is new is the fact that tips are specifically carved out from the provisions allowing contractual authorisation of the deduction.  This means that where a worker’s contract purports to allow their employer to deduct tips and gratuities, this will be void and unenforceable.

Comment and next steps

The extent to which the Tipping Act necessitates a significant, if any, shift in mindset for relevant industries remains to be seen.  Many employers may already operate (or believe they operate) a fair system of tip allocation and may feel that these provisions are an unwelcome interference in their respective businesses.

What cannot be avoided, however, is the additional bureaucratic and administrative burden that the provisions will entail, as well as the additional financial risk to which employers may be exposed if they are found to be non-compliant.

The Code is clear that a written policy will need to be generated, consulted about and kept under review.  Any changes will need to be regularly communicated, and it will be necessary, therefore, for businesses to ensure that they have (or put in place) good lines of communication with all associated stakeholders (troncs and agencies, as well as workers).

Employers will also need to ensure they have a system for managing and maintaining tips records, and that those records can be accessed and updated easily and quickly. 

Some larger employers may be well set up to assimilate these new requirements into their existing systems. Others may need to start from scratch.  Still, others may decide to change their business models completely to fall outside the scope of the provisions.

Wherever your business falls along this spectrum, we recommend taking the following steps without delay:

  • Review your current working practices. Identify those workers who, and the qualifying tips which, fall (or would fall) within scope.
  • Give thought to what your distribution criteria could be
  • Consult with staff about the distribution criteria. Where pay and/or terms and conditions are governed by collective agreement, consult with trade union representatives.
  • Draft an appropriate ‘Tipping Policy’.  Ensure this dovetails with your other policies, including any Data protection policy or Privacy Information Notice.  Ensure it is disseminated amongst or can be accessed by, all staff (workers, employees and casual staff).
  • Decide who will allocate tips (the employer or an independent tronc).
  • Update associated terms and conditions, for example, with any independent tronc (where appointed) or work agency to reflect the new provisions and include appropriate indemnities and warranties to reflect or deflect liability as necessary.
  • Appoint a record keeper and set up appropriate systems which can be accessed quickly and easily.
  • Keep your policy, records and tip allocation criteria under regular review

Prettys Employment Team can provide advice and assistance on any of the matters raised above.  Please contact the team on 01473 232121 for further information.

Sheilah Cummins
Senior Associate