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Our blogs | Employment Law

New allocation of tips rules: What the hospitality, leisure and services sectors need to know

26 September 2024
New allocation of tips rules: What the hospitality, leisure and services sectors need to know

What’s changing?

From 1 October 2024, the Employment (Allocation of Tips) Act 2023 and the statutory code of practice introduce rules that require employers to be fair and transparent in how they manage and distribute tips.

Who does this affect?

It affects various businesses such as restaurants, hotels, hairdressers and other similar services industries.

Which jurisdictions does the new tips legislation cover?

The Employment (Allocation of Tips) Act 2023 and its accompanying statutory code of practice cover England, Wales and Scotland.

The Act and code of practice do not apply in Northern Ireland.

Are there any risks employers need to be aware of?

Employers should be aware of potential indirect discrimination claims, if a criterion means that fewer tips are allocated to a group of workers that contains a disproportionate number of individuals with a particular protected characteristic i.e. distribution based mainly on length of service is potentially discriminatory against younger workers unless it can be justified.

Which tips are covered?

The new rules on the fair and transparent allocation of tips apply to “qualifying tips, gratuities and service charges”. This means either:

  • tips that the employer receives and shares with staff (referred to as “employer-received tips”); or
  • tips given directly to staff, but where the employer controls or influences how they are shared (referred to as “worker-received tips”).

When considering whether a tip is a qualifying tip under the legislation, it makes no difference what the employer calls the payment, whether that is a “tip”, “gratuity” or “service charge”; and how the payment is made, whether that is by cash, credit card, debit card or via a digital platform.

A payment in the form of an item that has a monetary value and can be exchanged for money, goods or services is a qualifying tip. For example, a shopping voucher in retail would be a qualifying tip.

Tips that are given directly to the worker and that they are entitled to keep are not caught by the legislation because the employer does not control or influence how they are shared.

The Employment (Allocation of Tips) Act 2023 makes it is a specific legal requirement for affected employers to have a written tips policy in place, which must be made available to all workers at that place of business. This includes agency workers.

What is meant by the fair allocation of tips?

The Employment (Allocation of Tips) Act 2023 nor the accompanying statutory code of practice is prescriptive about how tips are allocated. There is no obligation on employers to distribute tips evenly between all the workers at a particular location – although some employers may wish to opt for an even distribution as it may be simpler to implement.

The statutory code of practice states that some of the criteria that employers may take into account when allocating tips are:

  • type of role/work, eg distribution between front of house and backroom workers;
  • basic pay (and how workers are engaged);
  • hours worked during the period when tips are received;
  • individual and/or team performance;
  • seniority/level of responsibility;
  • length of time served with the employer; and
  • customer intention.

What if we allocate tips under a tronc scheme?

For an employer that uses an independent tronc operator to distribute tips, the employer is generally deemed to be allocating tips fairly.

However, an employer that engages an independent tronc operator is still expected to apply the principles of fairness to any instructions or framework that it sets for the tronc operator; and take action if it becomes aware that the tronc operator has acted unfairly in the allocation of tips.

Are there any other key principles to be aware of?

While it is left to employers to decide how to allocate tips, certain principles come employers should note the following:

  • Other than statutory deductions such as income tax, the “total amount” of qualifying tips paid by customers must be passed on to the workforce. For example, the employer cannot make deductions from tips to cover the cost of engaging a third-party provider to run a tronc scheme.
  • Tips earned by workers at a particular location should not be shared with workers at a different location. For example, a restaurant chain should ensure that tips earned at one of its locations go to the workers there and are not given to workers at another of its locations. (There is an exception in the Act for employers that want to allocate tips gathered at public-facing locations to workers at non-public facing-locations.)
  • The fair allocation of tips applies to all workers. This includes agency workers. The employer can pass tips that an agency worker has earned to the agency for it to make payment to the agency worker.
  • Employers are required to distribute a tip to staff no later than the end of the month following the month in which the tip is paid by the customer. Similarly, an agency must ensure that an agency worker receives a tip no later than the end of the month following the month in which the tip is paid by the customer. For example, a tip that a customer gives on 8 April must be distributed no later than 31 May.

What tipping records are employers required to keep?

Under the new laws, employers are required to keep records of tips for three years, beginning with the date on which the tip was paid to the worker.

Staff have a new right to request access to the employer’s tipping records, which means that affected employers need to put in place a right-to-request process.

The new right includes the right to see information dating back three years on the total amount of qualifying tips received by the employer at the place of business; and the total amount of qualifying tips paid to the individual who has made the request.

Staff can make only one such request in any three-month period. They can make requests only for periods during which they worked for the employer.

A worker is not entitled to access the information about the qualifying tips paid to any other member of staff and the employer has four weeks from the date of the request to provide the information.

What actions should employers take now?

  • Read the statutory code of practice
  • Discuss internally what the policy around tips would entail.
  • Draft a tips policy and ensure it is available to your staff by 01 October 2024
  • Although not a legal requirement, consider implementing an internal tips complaints procedure which can be useful for employers to maintain fairness and transparency. The procedure should have a clear route via which staff can raise concerns or complaints about any aspect of the employer’s tips allocation. Workers should be encouraged to raise issues informally at first and to take a formal route – such as complaining formally under a grievance procedure – only if the problem cannot be resolved informally.

For support and guidance on the new allocation of tips contact a member of the team on contact@davenportsolicitors.com or 02079036888.

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