Employment (Allocation of Tips) Act 2023 – What you need to know

There has been much debate in recent years about the issue of “tips” – what to do with them, who owns them, and how should they be split between staff? The Act intends to prohibit the practice of businesses retaining tips paid by credit card instead of passing them on. Many hospitality businesses have already adopted the practice of distributing all tips and service charges to staff so this legislation is for those who retain some element of service charges in the business.

Customers generally feel they have little choice but to pay service charges added to their bills, so knowing that this payment is going to all the staff is a good thing, but perhaps difficult for some businesses to administer. This new Act seeks to ensure there is fairness in the allocation of service charges and electronic tips – as well as making sure that income tax and National Insurance is collected at the same time.

Which “tips” are covered?

Tips which are added to a customer’s bill are now covered, essentially money which the business controls.  Cash tips paid directly to workers generally become the legal property of that worker.

Who does the Act apply to?

Employees, workers and agency staff.

When is the legislation likely to come into force?

The new rules are not the law just yet. Measures are expected to come into force in 2024 (date will be confirmed later this year), following a consultation and secondary legislation. A statutory Code of Practice (which is being developed and will undergo a formal consultation later in the year) will accompany this legislation – this will set out how employers can ensure that the distribution of tips is fair and transparent and fits into their business model.

What are the obligations?

The basics:

•  100% of the tips received electronically must be allocated fairly and in a transparent way.
•  Employers cannot make deductions from tips received (save for tax/NI).
•  Employers must keep a written record of how the tips and service charges are allocated.
•  Records must be kept for 3 years from the date the tip is received by the worker.
•  The allocation of tips must occur on premises where the tips were earned.
•  Tips must be paid to workers by the end of the following month in which the tip was received.
•  Employers must have a policy setting out and explaining how tips will be allocated.
•  Workers will receive a right to request more information relating to an employer’s tipping record.
•  Employers have discretion over how they record the allocation and have 4 weeks to respond to a worker’s request for information.
•  A failure to comply with the new law will give workers a right of action against their employer.

What about Troncs?

Under the new legislation and proposed Code of Practice, a tronc system would comply with the Act, provided it is run the way the Act intends the allocation to work.  This will need to be checked.

Penalties

Claims can be brought up to 12 months, presumably from the date when the employer failed to pay the tip.  This is a long time to have to wait! Tribunals will be able to compel employers to revise their tip allocation policies, order the employer to pay tips and services charges not just to the Claimant but to any workers employed by the employer and award up to £5,000 per Claimant to reflect additional financial losses caused by non-payment.

It should also be noted that since 2009, employers cannot use tips as part of calculating NLW/NMW entitlements.

Immediate issues

Whilst we understand the theory, the leisure and hospitality sector works in a very unique way.  Often workers do not work set days or hours so how does this work – are the tips allocated to everyone “on the books” that month or do they have to be allocated per shift? Also, is it everyone who works from the porters to the manager? Does this create inconsistencies between different types of workers – if more women work a day shift, yet the best tips happen at night, how does this work? Does this count as “pay” for gender pay gap purposes? Moreover, many workers in the sector may not want tips to be added to their pay packets (and also be taxed as income) as this could impact their ability to claim benefits.  This could be an administrative and payroll nightmare for some businesses.

A return to cash?

Is there an incentive to return to cash or tip jars? The administrative burden may encourage businesses – particularly small businesses - to move away from service charges.  We will have to wait and see.

What to do now?

It is unlikely the Act will come into force until 2024 once there has been consultation over the Code of Practice. There is time to get prepared. Review your practices when it comes to electronic tips or troncs, are they complaint? Do you have a mechanism for recording payments to staff as well as ensuring that payroll deductions are made. A policy is also going to be required setting out how tips are to be allocated and to whom – more guidance will come on this.  Get advice – speak to us. We are helping clients with their policies and procedures so speak to us if we can help you get ready.

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