New Law Protects Workers' Right to Tips: What Employers Need to Know

Whilst most employers already practice a policy of passing all tips and service charges on to their workers, it is clear that this is not always the case. Often service charges, particularly when paid by card, will have an element retained by the employer, leaving workers, often earning minimum wage, to lose out on hard earned tips.

The government as far back as 2018, announced plans to introduce legislation to assist workers in such scenarios and we are pleased to confirm that the Employment (Allocation of Tips) Act 2023 has  now received Royal Assent and is expected come into force in 2024.

The Act, once in force, will require that all tips, gratuities and services charges received by a business are fairly distributed between the workers. This article will explain the key provisions and what employers need to know in order to prepare for the new Act.

Key Provisions

• The main provisions apply to employees, workers and agency workers equally
• Tips covered by the legislation include employer-received tips and worker-received tips, where an employer exercises control over the tips
• 100% of tips must be passed on to workers with no deductions except those required by law (e.g. tax/NI)
• The total tips must be allocated “fairly” between workers of the place of business
• Tips must be allocated to workers no later than the end of the month following the month in which the tip was received
• Employers must have a written policy setting out how tips will be allocated
• If an employer uses a tronc system that is compliant with the Act, they will be deemed to have allocated the tips fairly
• Employers must keep a record of all tips received and how they are allocated
• Records must be kept for 3 years from the date the tip was received
• Workers will have the right to view the employer’s tips record

Code of Practise 

There is no definition of ‘fairness’ contained in the Act, but employers will be required to have regard to a Code of Practice, which is to be issued by the Secretary of State following a formal consultation later in the year.

Whilst this should help to provide clarity on how tips are to be allocated amongst workers, in realty the businesses within the leisure and hospitality often have many unique ways of operating. The Code of Practice will need to be very thorough in order to accommodate all of the business types in the service industries.

Until the Code of Practice is agreed and published, it is difficult to know how the allocation of tips will work in practice. There are currently a large number of questions which will need to be answered. Will the allocation apply to all workers, from cleaning staff to managers? Many service workers work hard to entice customers to give tips, so will performance be taken into account? Will tips be given based upon the total tips received over the course of a month, or only those received during the shift times actually worked? The latter question will particularly affect women, who often cannot work during evening and weekends when the most tips are received, due to their childcare responsibilities.

Failure to Comply 

If an employer fails to comply with the Act’s provisions on when and how tips should be dealt with, workers will be able to bring a claim to the employment tribunal. The time limit for bringing a claim is 12 months from the date of the breach (rather than the 3 months that is often the case for employment tribunal claims).

The Tribunal will have the ability to order that the employer revises an allocation, and order the employer to make a payment to any workers of the employer, not just the Claimant. This could result in significant awards against employers who are found to be in breach. The Tribunal may also order the employer to pay up to £5,000 compensation per Claimant to reflect any financial losses caused by non-payment.

A worker will also be able to bring a claim if an employer has failed to comply with its obligations to have a written policy or records for tips. The time limit for bringing such a claim will be 3 months. Compensation may be ordered for financial losses of the Claimant up to a maximum of £5,000.

BPE Comment

Whilst the objective of the Act is to put more money into the pockets of employees, the provisions of the Act may put significant burdens on employers, which could ultimately be passed on to employees and customers. The Act requires that 100% of tips are passed on to employees with no deductions (except tax). This would mean that costs associated with taking tips, such as card charges and bank fees, would have to be borne by the employer. Typical credit card processing fees range between 1.5% and 3.5%, but can be as high as 6%. Other costs that may ordinarily be deducted from tips would in include tronc fees from an independent external troncmaster, or any other costs associated with administering tips. This could result in a significant cost over the course of a year, creating further costs burdens for the hospitality industry which has continued to struggle since the coronavirus pandemic.

The Act may help to reduce the financial impact of the cost of living crisis on workers, but it is important to consider the practical implications. Many employers may need to find ways to recoup the additional costs resulting from the ‘no deductions’ requirement, which may include reducing wages for workers.

Most restaurants include a mandatory service charge for large groups, however the Act creates a negative incentive for employers to implement such service charges, as they will now only serve to increase costs.

These issues, which are just a few, could very well undermine the intended aims of the Act.

What should employers do now?

Employers in industries which receive tips should review their practices when it comes to tips to ensure that they are compliant with the Act once it comes into force. Employers will need to ensure they have an appropriate system in place for recording the receipt of tips and payment to staff, and suitable storage of those records for the 3 year retention period.

For many employers, it will be worthwhile understanding what the cost of giving 100% of tips to workers will be, and how this cost can be managed effectively.

The Act requires that employers have a written policy for the allocation of tips. Once the Code of Practice is published, a compliant policy should be prepared in advance of the Act coming into force. The employment team at BPE can assist with producing a policy which is both compliant with the new legislation, and suitably tailored to fit the dynamics of your business. 

Ensuring compliance with the Act will be extremely important given the potential for significant awards that could be made by a Tribunal for breach.

Recommended Reading:

https://www.legislation.gov.uk/ukpga/2023/13/enacted

These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.