Ask the Expert - Allocation of Tips

Each month we will be asking a question on a hot topic to one of our employment specialists. This month, Suzanne Brookes, Senior Associate considers the new rules that will be introduced later this year in relation to the Allocation of Tips, predominately affecting the hospitality sector.

“I run a restaurant, what are the new rules about tips for staff and when do they come into force?”

The Employment (Allocation of Tips) Act 2023 is due to come into force on 1 October 2024. Its purpose is the overhaul of tipping practices to ensure that tips, gratuities, and service charges paid by customers (“Tips”) are distributed fairly amongst staff.

The essence of the legislation is the creation of a legal obligation on employers to pass on 100% of Tips to staff with no deductions and to do so fairly and transparently.

The Act does not apply to businesses whose workers receive tips only very occasionally and exceptionally. It also does not apply to Tips received directly by a worker without any control or involvement of the employer. However, if your business is one where Tips are typically paid and you take control of, or exert significant influence over, their distribution you will be required, in outline, to:

• Pass on the total amount of Tips received to your workers, without deductions (other than those required by law).
• Pay those Tips to your workers at the latest, by the end of the month following the month in which they were paid by the customer.
• Ensure the Tips are allocated in a fair and transparent manner having regard to the new statutory Code of Practice.
• Maintain a written policy on how Tips are dealt with at your place of business, and ensure this policy is available to your workers.
• Keep a record of all Tips received at your business, and their allocation and distribution between each worker, for three years.
• Provide access to that record to workers on receipt of a written request.

Significantly, the obligations apply to the “total amount” of Tips including any amount subsequently deducted. For example, card processing fees, bank charges. It may therefore be prudent to consider how you might allow Tips to be paid once the new rules come into effect.

The new rules apply in relation to “workers”, not just employees. Workers will include agency workers; in which case you can choose whether to pay the worker directly or pay the agency who will then be responsible for distributing the Tips to the worker.  

In terms of enforcement, a breach of the new rules will enable workers to bring a claim in the Employment Tribunal. This could include a claim for unlawful deductions from wages as qualifying tips are now expressly included in the definition of wages for the purposes of such a claim. 

In addition, a worker could claim against you if they believe that you have failed to fairly allocate and/or pay tips at all or within the timeframe required under the new rules. Notably, a worker has 12 months from the alleged failure to comply with the rules. A worker may also bring a claim for your failure to comply with the obligations regarding a written policy and records.

In either case, if successful, a Tribunal must make a declaration and may order you to revise a Tips allocation previously made and/or pay compensation of up to £5000 not just to the Claimant but to your other workers.