Workers set to take home £200 million more through new tips legislation.
Many workers within the hospitality, leisure and services industries rely on tips as a substantial part of their income. However, there have been many cases of employers retaining a significant portion of tips or deducting ‘administrative fees’ before distributing tips to workers. This practice often deprives lower paid workers of the additional income they are entitled to. To protect workers from these practices and improve transparency on handling tips, the Conservative government launched a consultation on tips in 2016. Following this, a Private Members’ Bill (the Employment (Allocation of Tips) Bill 2022-23) was backed in July 2022, which received Royal Assent on 2 May 2023.
The Employment (Allocation of Tips) Act 2023 (Tips Act) and its accompanying statutory Code of Practice (Code) came into force on 1 October 2024 and applies in England, Scotland and Wales.
This Act regulates how employers allocate tips among workers by introducing an obligation to ensure that all tips, gratuities and service charges are given to workers in full and allocated in a fair and transparent manner.
Who is protected?
The Tips Act protects workers, as defined in section 230(3) of the Employment Rights Act 1996 (ERA 1996). The Tips Act also applies to some agency workers, who may not be workers of the principal to which they are supplied. Eligible agency workers are then protected as if they are employed by the principal, although the principal may pay the tips via the agency.
Scope of the Tips Act
It covers all “qualifying tips, gratuities and service charges”, which means all employer-received tips and certain worker-received tips. The requirements of the Tips Act apply to the amount paid by the customer, disregarding any deductions, such as credit card fees or charges from the amount paid.
Any amount that is not paid in money can only be a qualifying tip, gratuity or service charge if it is paid in the form of a voucher or similar item which has a fixed value expressed in monetary terms, and is capable of being exchanged for money, goods or services.
The Tips Act does not apply retrospectively and only applies to tips paid on or after 1 October 2024.
This Act has also amended the definition of wages under section 27 of the ERA 1996 to expressly include “qualifying tips, gratuities and services charges allocated to the worker”. Therefore, a deduction from tips that have been allocated to a worker in accordance with the Tips Act will generally be regarded as unlawful.
Employer duties
As of 1 October 2024, employers have a duty to ensure that all qualifying tips, gratuities and service charges are allocated fairly to workers (including eligible agency workers). Employers must make payment in full by no later than the end of the month after the month the customer paid the tip.
An employer may arrange to allocate the qualifying tips, gratuities and service charges via an independent tronc operator. This operator must function in line with principles of fairness.
The accompanying Code of Practice has five sections which consider qualifying tips and qualifying workers, the factors and methods relevant to fairness, transparency, addressing problems, and a glossary of terms. Although non-compliance with the Code is not a cause of action in itself, evidence of non-compliance will be admissible in employment tribunal proceedings and tribunals will be required to take it into account.
Where qualifying tips, gratuities and service charges are paid on more than an occasional and exceptional basis, the employer is required to have a written policy which sets out how tips are dealt with. This policy must be made available to all workers. Records of such allocations will need to be retained for three years and made available to workers on request.
Employee rights
Workers are unable to contract out or dilute their right to receive a fair allocation of tips. As such, contractual provisions which require a worker to reimburse their employer will be considered void.
If an employer has failed to comply with their obligations regarding allocation or payment of qualifying tips, an employee is able to present a complaint to the employment tribunal. The worker has 12 months from the date of the failure to comply to bring this claim. A tribunal has the power to order an employer to revise the allocation of tips and make a payment to workers (not just the claimant). A tribunal also is able to order an employer to pay up to £5,000 in compensation for any financial loss suffered by the claimant because of the employer’s breach.
A worker also has the right to make a written request for the amount of qualifying tips, gratuities and service charges paid to the employer, and the amount of those qualifying tips, gratuities and service charges that the employer allocated to that worker, and arranged to be allocated to its workers.
Whilst the “tronc master” will remain alive and kicking the Employment (Allocation of Tips) Act 2023 marks a significant step forward in ensuring fairness and transparency in the distribution of tips across the hospitality, leisure and services sectors. This new Code will protect the tips of more than 2 million workers, with these workers set to take home an estimated £200 million more. This overhaul of tipping practices will help to ease cost of living pressures and set a new standard for the industry.
