New rules on allocation of tips

The Employment (Allocation of Tips) Act 2023 (‘The Tips Act’) comes into force in full on 1 October 2024, making changes to existing legislation (the Employment Rights Act 1996) to introduce new tipping rules.

The related Code of Practice Fair and Transparent Distribution of Tips (the Code), created under the Tips Act, will take effect on the same date. The aim of the Code is to promote fairness and transparency in tipping practices, and to establish a framework to which employers must have regard when designing policies and procedures.

A worker may bring a claim to an employment tribunal if their employer fails to act fairly or transparently in relation respect of the allocation or distribution of tips, service charges or gratuities.

Scope of the Code

The Code applies to all workers, including eligible agency workers.

All tips, service charges or gratuities, however paid, are within the scope of the Code, provided that the employer has at least some involvement in handling them. These are referred to in the Code as ‘qualifying tips’. Tips received by the employer will qualify. Tips received by the worker will qualify if the employer ‘exercises control or significant influence’ over the way the tips are distributed.

Notable exclusions include a cash tip given to an employee (with which the employer has no involvement) or ‘digital tips’ whereby a customer uses an app to directly tip members of staff (bypassing the employer altogether).

Written Policy and records

The Tips Act requires all employers who accept tips to have a written Tipping Policy, unless tips are received only occasionally or exceptionally. For example, the Code clarifies that a clothing shop where staff are tipped only a few times a year, would not be required to have a policy.

The written policy should include information on how tips are accepted; how tips are allocated and distributed; and what steps the employer takes to make sure tips are handled fairly and transparently.

All workers (including agency workers) must be aware of and have access to the policy, which must be written in ‘plain language’ and available in an accessible format on request. The method of communication is up to the employer and might include, for example, uploading an electronic copy to a staff portal or displaying a physical copy in a staff break room. If the policy is provided as part of a staff induction, employers must take care that agency workers drafted in at short notice are also made aware. It is not compulsory for employers to make the policy available to customers or the general public, but they may do so if they wish.

The Tips Act also sets out requirements on employers for clear record keeping. As a minimum, employers must keep a ‘tipping record’ including details of all qualifying tips received at the placed business and the amount allocated to each employee. Records must be retained for a period of three years after the tip was received.

Requests for Information

Importantly, a worker now has the right to make a written request to view an employer’s tipping record, going back three years (if they have been employed for that long) or for the duration of their employment. This right is limited to one request per worker in any three-month period.

However, employers must bear in mind data protection principles when providing information. The records provided to an employee must detail only the total amount of qualifying tips, and the amount paid to the worker making the request. The amounts paid to other workers must not be disclosed.

Fair methods of allocation/distribution

The Code reiterates the long-standing position that tips must not be counted towards the National Minimum Wage, or subject to any unauthorised deductions.

It goes on to emphasise that ‘fairness’ does not necessarily mean allocating the same proportion of tips to every member of staff. Rather, employers should have in place ‘a clear and objective set of factors’ determining how tips are distributed. The Code recognises that employers vary widely in their business practices, and so is not prescriptive in this respect. A non-exhaustive list is provided of factors which may be considered (including, for example, type of role, seniority, hours worked and individual/team performance).

Two potential methods of tip distribution are outlined in the Code. Firstly, an employer may choose to receive tips directly and pay workers their share as part of the next payroll cycle. Alternatively, a ‘tronc’ system may be used.

Where a ‘tronc’ system is used, an employer must appoint an independent tronc operator, whether internal (for example a member of staff) or external (such as an accountancy firm). In any event, the employer must set out the framework for the system’s operation. An employer’s ‘reasonable belief’ that the tronc is being operated fairly will be sufficient to comply with the Code. However, an employer has an ongoing obligation to intervene if it becomes aware that a tronc is being operated unfairly or improperly.

In terms of timing, the new legislation requires that tips must be distributed to staff, at the latest, by the end of the month following the month the tip is paid by the customer. So, to use the example given in the Code, a tip received on 23 June must be distributed to staff by 31 July.

Enforcement and remedies

The Code suggests that, in the first instance, any issues should be resolved through internal grievance procedures, or with the support of ACAS. However, beyond this, employees may enforce their rights by making a claim to an employment tribunal.

A claim may be about an employer’s failure to maintain an appropriate tipping policy or records, failure to comply with requirements around fair allocation/distribution of tips, or both. However, it’s important to note that an employer’s failure to ‘fully observe’ the Code does not on itself amount to proof that an employer has acted unfairly; this is for an employment tribunal Judge to decide, taking the Code into account.

As remedy, a tribunal may order an employer to the worker bringing the claim and also, crucially, to other workers who have not made a complaint. It may also recommend or order an employer to revise a previous allocation of tips. A ‘public declaration’ may also be made of any errors made or unfair practices adopted.

What does this mean for me?

These new rules will of course have most impact on the hospitality sector, where a large proportion of daily transactions involve tipping, and this extra income provides a significant top-up to employee basic pay.

The prospect of an employment tribunal making a ‘public declaration’ is daunting and has the potential to cause significant reputational damage, alongside the financial impact of any compensation award.

If your organisation is looking to introduce or revise a Tipping Policy it is important to consider first whether there are any collective agreements in place impacting tips specifically, or Terms and Conditions affecting pay more generally. While the Code recommends consulting employees and securing broad agreement to any new processes, there may be already be agreed consultation arrangements in place for your business.

The Code also recommends that policies are reviewed on a regular basis (in line with staff turnover or any other organisational changes). Now is the prefect time to ensure your existing arrangements stand up to scrutiny before the new rules are implemented.

Further non-statutory guidance to support the statutory code, is anticipated in coming months, which may provide further suggestions and examples of how employers can ensure compliance.