• 02 Sep 2024
• •
• 4 min read

Changes to employer obligations on the fair allocation of tips

On 1 October 2024, the Employment (Allocation of Tips) Act 2023 comes into force.

The Tips Act makes important changes to the allocation and distribution of tips between workers. The purpose is to prevent exploitative practices such as the deduction of administrative fees.

Failure to comply with the new obligations could lead to claims in the Employment Tribunal and so it’s important for employers to be aware of their obligations and have adequate procedures in place prior to the 1 October 2024.

What are the key changes?

• Employers have a duty to ensure that all qualifying tips, gratuities and service charges are allocated and distributed fairly between workers.
• Where qualifying tips are paid or attributable to a place of business on more than an occasional and exceptional basis, the employer must have a written tips policy in place and must make this available to its workers.
• Employers must keep written records of tips received at a place of business and paid to workers. Workers have the right to make a written request to view the tipping record for the previous three years, provided they worked for the employer for the full duration of the period requested.
• A statutory Code of Practice has also been issued which provides guidance on the fair and transparent distribution of tips.

Who is protected?

The Tips Act protects all workers. This includes anyone working under a contract of employment or who performs work personally for another party who is not a client or customer. This will include permanent staff, zero-hour workers and eligible agency workers.

What does it apply to?

The Tips Act regulates all qualifying tips, gratuities and service charges.

This relates to tips:

• received by an employer (e.g. a service charge added to a bill); and
• those received by workers directly (e.g. cash given directly to the worker) but only where the employer controls or influences how those tips are allocated. For example, where an employer requires all tips to be shared between workers regardless of who the tip was given to.

It does not apply to non-monetary gifts which cannot be divided or exchanged for cash, e.g. a bottle of wine. It will however apply to vouchers, stamps or similar tokens.

How should tips be allocated?

Provided they are meeting the fairness and transparency requirements under the Tips Act, how tips are allocated is a matter for the employer. Employers may choose to distribute different proportions of tips to different workers but this must be determined by reference to clear, objective and non-discriminatory criteria, taking into account the circumstances and nature of the employer’s business.

Tips must be allocated between workers at the place of business in which payment was made or to which the payment is attributable. Special rules apply to non-public places of business, which provides employers with some flexibility to depart from this general rule.

Employers must ensure that tips are paid by the end of the month following the month in which the customer paid.

Where tips are distributed to eligible agency workers, you can choose to pay the amount to the agent instead of paying it to the worker. You should ensure that the payment is paid to the agent no later than the end of the month following the month in which the customer paid.

Do I have to allocate tips myself or can I arrange for someone else to do it?

Where fair to do so, employers are permitted to arrange for what is known as an Independent Tronc Operator (ITO) to independently distribute the tips. Employers are still responsible for the fairness of the total amount allocated to the ITO but will have no involvement or control over how the tips are distributed between workers.

Do I have to put in place a policy?

Where tips are paid on more than an occasional and exceptional basis, employers must have a written tips policy in place. The policy must set out certain information, including how it determines the allocation and distribution of tips, gratuities and service charges.

If employers are not required to have a policy in place, they must inform workers of this fact and the reasons why.

Can I make deductions? E.g. for administrative fees or where I have accidentally paid too much?

In short, no. Only those deductions which are authorised by statute are permitted, e.g. for tax.

Employers are not permitted to make any deductions from tips. To do so, could lead to claims for unlawful deduction from wages.

Workers cannot contract out of this right. Therefore, any agreement purporting to permit deductions will be void.

This also applies to clawing back tips in the event of overpayment or incorrect allocation. Employers must therefore ensure they have adequate processes in place to avoid this.

What happens if I don’t comply with the new rules?

Workers will have the ability to bring a claim in the Employment Tribunal where there has been a failure to comply with the obligations regarding the allocation and payment of qualifying tips. The time limit for bringing this claim is 12 months from the date of the failure. This is notably higher than the usual 3-month limitation period for most employment claims.

The Employment Tribunal has the power to order an employer to revise the allocation of tips and make a payment to the worker themselves, but also any other worker who is owed sums. Further, the Employment Tribunal may award up to £5,000 for any financial loss suffered by the worker because of the breach.

Where an employer has to revise the amount paid, it is not possible for an employer to seek reimbursement for any past over-allocation to the worker.

Workers may also bring claims where an employer has failed to comply with their obligations regarding written records and policies. This claim must be brought within 3 months from the date of the failure. An Employment Tribunal has the power to award up to £5,000 to compensate the worker for any related financial loss they have suffered in connection with the breach.

Employment Tribunals will have regard to the Code of Practice when considering whether an employer has complied with its obligations.

Have further questions?

This article sets out a summary of the changes coming into place on 1 October 2024. There are a whole host of legal and tax considerations relating to the Tips Act, e.g. who are eligible agency workers? Will tips count towards national minimum wage? What criteria can I apply for distributing tips? How can I allocate tips to non-public roles? What does the Code of Practice say?

We are hosting a joint webinar with Azets on 16 September 2024 which will go into detail on the new obligations. This will provide an in-depth review of the legal and tax position. You will also have the chance to ask questions. Please join us by registered here.

If you would like to talk to our expert Employment team, please please call us on 0800 2800 421 or contact us using the form below.