Tip-top: new legislation on tipping

United Kingdom

The new Employment (Allocation of Tips) Act (the Act) will make it unlawful for employers to withhold tips and service charges from staff.

There is no immediate date scheduled for implementation, although we expect that it will come into force in 2024. In this Law-Now we explain what steps employers should be taking to ensure their approach complies with the incoming legislation.

What does the Employment (Allocation of Tips) Act mean for employers?

The Act covers “qualifying tips” which are tips, gratuities and service charges that the business exercises control or significant influence over. These must be “allocated fairly between workers of the employer at that place of business” and be paid to the workers by the end of the following month, without any deductions, except for tax and national insurance.  Credit card processing fees or other processing fees should not be deducted from qualifying tips, and employers will have to bear this cost.

Informal cash tipping going directly to the worker will generally fall outside the scope of the legislation.

The legislation will also apply to an independent tronc (the special pay arrangement where the troncmaster distributes the tips and there is no obligation to deduct national insurance contributions). Under the Act, the employer is responsible for ensuring fairness in the allocation of the aggregate amount to a tronc. However, the employer is not responsible for the subsequent allocation to individual workers – this is for the troncmaster to decide.

The Act says that employers must have a written policy on how to deal with tips, which needs to be made available to workers.   This requirement will apply to employers where tips are paid on more than an occasional and exceptional basis.

In a move designed to improve transparency, there is a new record keeping requirement: employers must keep a written record of tips and service charges received over a three-year period. Again, this provision applies to those employers where tips are paid on more than an occasional or exceptional basis.

There will be a new right to request that is linked to the record keeping provision. Workers will have a right to request certain tipping records kept by their employer. The response should be provided within 4 weeks.

A breach of the rules may result in a tribunal claim from workers and agency workers.  A tribunal will have the power to revise the allocation of tips, issue a recommendation and require an employer to make a payment to the claimant. Compensation may be awarded to the claimant up to a limit of £5,000.  Unusually there is a 12-month period (rather than the standard 3 month period) in which an employee can bring a claim if they consider that the employer is in breach of the Act. A tribunal will also have the power to make an employer pay tips to other affected workers in the same situation as the claimant, even where they have not brought a claim.

What is a fair allocation of tips?

Further information on what amounts to a fair allocation is expected to be provided in the statutory Code of Practice (the Code). The Code is currently being developed and will be subject to a formal consultation later in the year. Not complying with the Code may be admissible as evidence in tribunal claims. It is important to note however that the Act is not dictating that total tips must be paid equally between all workers at a business, so we have yet to see what fairness looks like in practice.

There are different ways of allocating tips; some employers may want to include everyone who was working during each shift, or another approach is to apply an average figure across all workers each month. We expect the Code will stipulate what factors an employer should take into account when allocating tips fairly and provide some examples.

Next steps for employers

Employers should wait until the Code is published before they implement changes to avoid duplication of effort. However, it is clear that this Act will involve several new processes to be put in place for businesses where tipping is a regular occurrence and, depending on current arrangements, may involve employers bearing increased costs due to having to bear card processing or administrative costs. In the meantime, employers can helpfully:

  • Consider whether they have a tips policy in place. If so, this may need amended. If not, be aware that such a document will ultimately need prepared and communicated to the workforce.
  • Look at their current record keeping process to determine how that might be adapted to recording tips and service charges over a three year period.

Comment

The Act stems from concerns raised as far back as 2015 that some employers were retaining tips and not sharing them fairly with workers. Since the pandemic, approximately 80% of tipping in the UK now happens by card. However, one of the concerns is whether this new legislation could push employers to refuse card tipping if they wish to avoid incurring the associated card payment charges. In businesses where card tipping is banned, cash tipping is the only alternative. Due to customers having less cash on them these days the net effect of this could be an overall reduction of tips. Even for staff lucky enough to be dealing with customers with cash, those staff can then keep their own cash tips and not share, thus undermining the purpose of the legislation.

On a more positive note, at a time when the hospitality sector is facing staff shortages and difficulties in attracting staff, ensuring that tips are paid directly to workers and shared fairly could prove to be an attractive financial incentive and enhance their ESG credentials as an employer who pays fairly. A 2019 survey by Caterer.com found that hospitality workers receive roughly £29 in tips per day, whilst those in London receive around £75. The 2019 survey said that tipping could add £6,500 to a worker’s salary and over £17,000 to those in London.

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Haleemah Shaffait assisted in the preparation of this Law-Now.