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On Tuesday 1 October, The Employment (Allocation of Tips) Act 2023 came into force, requiring employers to allocate and distribute all qualifying tips to their workers in a fair and transparent way. Whilst it will particularly affect businesses in the hospitality industry (hotels, restaurants, coffee shops, and bars) it will also impact hairdressers, taxi companies, and other such businesses that regularly receive tips.

Our Employment Team has put together a useful guide to explain what you need to do.

What are qualifying tips?

All employer-received and certain worker-received tips, gratuities, gifts, and service charges (these will be collectively referred to as tips). It does not matter if a service charge is required or voluntary, either way, it falls within this definition. Worker-received tips will be covered by the new law if you exercise control or significant influence over these cash tips. This will be the case if you tell staff how to distribute cash tips (for example, in your tipping policy) or if you collect them and distribute them yourself.

What about agency workers?

You must take agency workers into account when dealing with the allocation and distribution of tips – how much agency workers receive will vary from case to case, and it does not necessarily always have to be an equal share.

What do I need to do?

You must ensure that all tips paid at, or attributable to, a specific place of business are allocated fairly between your workers at that place of business. This means that, for example, tips paid at a specific restaurant cannot be distributed to members of staff at a different restaurant owned by the same employer.

Generally, you must make a fair allocation and payment by the end of the month after the month in which the tip was paid by the customer. For example, if a tip is paid by a customer on 8 August, it must be distributed by 30 September at the latest.

You must also keep a record of how every tip has been dealt with. This must be kept for three years beginning on the date the tip was paid. Your records must include the following information:

• The amount of tips paid at the place of business.
• The amount of those tips that you:
  • Allocated to your workers at that place of business; and
  • Arranged to be allocated to your workers at the place of business by an independent tronc operator.

If your place of business receives tips on more than an occasional and exceptional basis, you must have a written policy on how you deal with tips. You must make this policy available to all of your workers at that place of business.

What does the written policy have to contain?

You must have regard to the statutory Code of Practice when preparing your written policy. The policy should set out the factors you have considered to determine the allocation and distribution of tips. Specifically, it must include information about:

• Whether you require or encourage customers to pay tips.
• How you deal with tips, including information on how you allocate those tips between workers.

What does a fair allocation and distribution of tips look like?

You do not necessarily have to allocate tips in the same proportions for all of your workers. You should use a clear and objective set of factors to determine the allocation and distribution of tips to all workers. The choice of these factors should be fair and reasonable, depending on the circumstances and nature of your business.

Factors you may want to consider include:

• The type of role or work (e.g. front of house and back-room workers)
• Basic pay
• Individual and/or team performance
• Seniority or level of responsibility
• Length of service
• What the customer paying the tip intended

However, you must avoid any form of discrimination when selecting and applying the factors. You should be particularly careful to avoid indirect or unintentional discrimination. You should consult with your workers to reach a broad agreement that the system is fair, reasonable and clear. You should review your approach on a regular basis.

Can I still use a tronc?

You can still use an independent tronc. You will, however, have to ensure that the tronc is operated in a fair, transparent, and independent manner by the troncmaster. Failure to do so could see you face Employment Tribunal claims from your workers.

Can I contract out of the requirements?

No. A worker cannot contract out their right to receive tips or consent to the amount being reduced. Any provision attempting to have a worker opt out of or dilute their right to receive a fair allocation of tips would be void under the new law.

Are there ways of getting around the new rules?

We are aware that some businesses are exploring creative solutions in an effort to retain some tips, or a proportion of such tips paid by customers for various reasons including but not limited to covering bank, tronc costs, and other administrative costs associated with the allocation of tips. Whilst there is very limited guidance on this point currently, the new legislation is clearly intended to cover all tips, gratuities, and service charges however they are described. Therefore, we would strongly recommend that you seek legal advice before implementing any such solutions.

What are the potential consequences of breaching the new rules?

Workers can bring a claim against you if you fail to comply with your obligations to allocate and distribute tips fairly or if you fail to pay those tips to workers in the required time frame (detailed above). The time limit for bringing these claims is 12 months from the date of the failure to comply (or if it is part of a series of failures, then the date of the last failure). However, the Tribunal can extend this if it is satisfied that it was not reasonably practicable for a complaint to be presented before the period expired.

In addition, workers can bring a claim against you if you fail to comply with the requirements under the new law to have a written tipping policy and tipping records in place. The time limit for bringing this claim is 3 months from the date of the failure to comply or from the most recent failure to comply (if there has been multiple failures).

The Tribunal can order compensation of up to £5,000 (this may be in addition to any compensation for unlawful deductions from wages that fall beyond the scope of this briefing note).

If one of your staff succeeds with one of these claims, then the Tribunal can (amongst other things) make an order that you compensate all of your staff that have been affected by your failure to comply, regardless of whether they are complainants in the case.

If you require any further advice on the changes or assistance in preparing a tipping policy, please get in touch with the Leathes Prior Employment Team via edisney@leathesprior.co.uk.