Tips – the new law and code of practice

The ability to levy a service charge which can be distributed to staff gives the hospitality industry a huge advantage in the marketplace for human talent compared to other low wage sectors. There also both and NI and VAT tax breaks. Going forward the Government will require employers to pay 100% of all tips received to staff. The business must bear the administration costs of this - an estimated cost to the sector of up to £150m.

Background

A perceived abuse of the tipping system over many years led to a voluntary industry code of practice being introduced. However, there has been a clear desire to move away from self-regulation to statutory regulation. What started as a private member’s bill became The Employment (Allocation of Tips) Act 2023 (the “Tipping Act”) in May last year. The legislation was not to come into force until the Code of Practice had been adopted. The final code has now been published and the new regime will come into force on 1 October 2024.

Code of Practice on fair and transparent distribution of tips

The Code of Practice is statutory and has legal effect, meaning it can be used in evidence at an Employment Tribunal. The Code is broad enough to give reasonable employers scope to design a policy that works for them.

The code can be found here.

Who does the legislation apply to?

The Tipping Act will apply to pubs, restaurants, cafes, bars, clubs and other leisure businesses where tips are non-incidental. For example, a clothes shop that receives customer tips once or twice a year would not be covered.

What sort of “tips” are covered by the legislation?

The Tipping Act applies to qualifying tips, gratuities and service charges (“Tips”) which can be employer-received or worker-received. 

Employer-received tips are covered by the Tipping Act, whether they are cash or card payments. 

Worker-received tips are only covered by the Tipping Act if there is significant control of the tip by the employer. Cash tips given directly to staff will not be covered unless the employer exercises control over the money when it will be subject to the legislation. For example, if the employer requires all cash tips to be put into a pot and distributed at the end of the shift these tips will be subject to the legislation. 

It is unclear whether digital tipping platforms are covered by the legislation. There will be questions about whether payments are pooled by the third party or paid directly to an individual employee – UKHospitality have asked for clarification on this point.

NB The definition of tips covers both discretionary and non-discretionary tips and dressing a service charge up as a “brand charge” to avoid the legislation will not be effective!

Who is eligible to receive tips?

All workers are covered including permanent employees, agency workers and zero hours workers. The self-employed are not covered and it is unlikely that those employed through their own service companies would be either.

The main obligations

• 100% of tips must be passed on to workers (less deductions for tax and NI). You will not be able to deduct admin costs of the tronc from tips - costs will have to be covered from sales revenues.
• Tips must be distributed promptly, at the latest by the end of the month following the month in which tips are paid. “Smoothing over” tips over the course of a year is NOT permitted.
• Tips must be paid to workers at the place of work where the tips were received (see below)
• The distribution of tips must be fair and transparent (see below)

Place where tips were received

If a worker is working at different sites on different days then they will be entitled to a share of the money generated at each site when they are actually there. Accrual records will need to be kept to evidence the genuine nature of payments.
There is an exemption from the requirement to distribute tips to workers at the place of work for non-place of business workers. Non-place of business workers can be included in the tip distribution where they contribute to revenue generation and service e.g. a central reservations function, dark kitchen or production site.

Fair and transparent distribution

The code sets out overarching principles on fairness rather than an exhaustive list. It sets out factors for employers to consider how these should be applied at their place of business. 

• Fairness does not mean that employers have to allocate the same proportion of tips to all workers
• Employers should use a clear and objective set of factors to determine their tip distribution policy. The Code sets out an illustrative, but non-exhaustive list of factors employers may wish to consider:
  • Type of role (eg front or back of house)
  • Basic pay
  • Hours worked during period when tips are received
  • Individual and/or team performance
  • Seniority/level of responsibility
  • Length of service
  • Customer intention
• Policies should not be discriminatory
• Employers should consult with workers to seek broad agreement to their system for allocation of tips
• The employer’s policy should be reviewed regularly

Employers are required to have a written tipping policy in place where there are qualifying tips paid on more than “an occasional and exceptional” basis. The Codes states that

• The policy should cover:
  • How tips are accepted
  • How tips are allocated and distributed
  • What steps the employer takes to ensure tips are handled fairly and transparently
• The policy can be in electronic or hard copy form (and in accessible format for workers with a disability, on request)
• There is no requirement for the tipping policy to be displayed publicly for customers to view, but employers may choose to do so

Record keeping

• A tipping record must be maintained of all tips received and the amount allocated to each worker
• The record must be retained for 3 years
• A worker has a right to make a written request (limited to one in a three-month period) to view the tipping record of the employer for up to the past 3 years (provided they were working for the requested period)
• Tipping records must be stored, processed and disposed of in line with data protection law

NB Employers must not release information on other individuals and their allocations. This would be a breach of data protection regulations.

Disputes

Your policy should include a procedure for resolving disputes. The first step would likely be to resolve a dispute internally using your grievance procedure. If this fails the dispute could be referred to  ACAS. Ultimately a worker can bring a claim to the Employment Tribunal who can order additional payment of tips.

Agency Workers

Agency workers are covered by the legislation and entitled to be considered for a tip allocation when you are drafting your policy. It may be that you pay agency staff a higher basic rate than your staff and this takes into account the fact that they don’t get tips. It is the hourly rate that the worker receives that is important not the rate you pay the agency. 

If agency workers are entitled to a payment under your policy you need to consider how this will be paid in practice. If you pay the tips to the agency to forward to the worker then you remain liable for any failure to pay. You should review your contact with your staffing agencies and consider including indemnities to cover this. 

Practical tips 

Employers should prepare now for the new tipping regime which will start on 1 October.

• Have a tipping policy – this will require careful consideration for your specific business. Compare your current policy with the fairness factors in the new code of practice. The policy will also need to include a process for requesting details of a personal tip allocation and resolving disputes;
• Consult with staff and obtain their broad agreement to the policy;
• Have the policy readily available to all staff – in the staff handbook/ intranet and also available for agency workers even if they only work one or two shifts for you;
• Prepare your administration function to keep records of total tips for each site and individual allocations for 3 years and to respond to information requests;
• Keep your policy under regular review.

If you would like assistance drafting or reviewing your tipping policy or with any other aspect of this legislation please contact Amanda Trewhella.