The Employment (Allocations of Tips) Act 2023 (“the Tips Act”) will come into force on 1 October 2024. But what does this mean in practice? In this insight, we unpack the legislation and set out what employers need to do to prepare for the new rules.
What is the Tips Act?
The Tips Act will require employers to pass on all qualifying tips, gratuities and service charges to workers from 1 October 2024. It protects workers, as well as employees, and also some agency workers, referred to as "eligible agency workers". In summary, the Tip Act states as follows:
- the total amount of the qualifying tips, gratuities and service charges paid at, or attributable to, a place of business of the employer must be allocated fairly between the employer's workers at that place of business.
- where, as a result of that fair allocation, a worker is allocated an amount of employer-received tips, and that amount is paid to the worker by the employer.
- the fair allocation and payment of tips must be made by no later than the end of the month following the month in which the tip, gratuity or service charge was paid by the customer.
- a qualifying tip, gratuity or service charge must be allocated between workers at the place of business where it was paid, or at least where it was attributable.
- employers of businesses where tips are left more than occasionally are required to have a written policy on how it deals with tips.
- workers have a right to request a copy of their tipping record in order to enable them to bring a claim to an employment tribunal where they believe they are not receiving the tips they should be; and
- employers are required to maintain a record of how every tip has been dealt with for three years from the date the tip was paid.
What are “qualifying tips, gratuities and service charges”?
The Tips Act applies to "qualifying tips, gratuities and service charges", which means all employer-received tips and certain worker-received tips. The statutory Code of Practice (see below) provides the following definitions:
- Tip or Gratuity. A spontaneous payment offered by a customer. This can be in cash, as part of a cheque payment, as a specific gratuity on a credit or debit card payment or paid using a digital payment service or application.
- Service Charge. An amount is added to the customer's bill before it is presented to the customer. If it is made clear to the customer that the charge is a purely discretionary amount and there is no obligation to pay, the payment is a voluntary service charge.
It does not make a difference whether a service charge is mandatory or discretionary for the customer to pay.
Employer-received tips and worker-received tips – what’s the difference?
An employer-received tip is an amount paid by a customer as a tip, gratuity or service charge, which is either received by the employer (or an associated person) or by another person under a payment arrangement. Employer-received tips typically include tips or service charges paid to an employer using a credit or debit card and, by virtue of the provision regarding "payment arrangements", include sums paid to an organisation such as a bank instead of being received by the employer.
A worker-received tip is an amount paid by a customer as a tip, gratuity or service charge, which is received on payment by a worker and not subsequently received by the employer or an “associated person”. Worker-received tips typically include tips paid in cash directly to a worker, which the worker is not required to pay on to the employer. Unlike employer-received tips, worker-received tips only fall within the definition of "qualifying tips, gratuities and service charges" if either of the following apply:
- They are subject to employer control. That is if the employer or an associated person exercises control or significant influence over the allocation of the tip. This might arise, for example, where the employer directs that tips are shared among other workers.
- They are connected with any other worker-received tips that are subject to employer control. A worker-received tip will be "connected with" another worker-received tip if both tips are paid at, or are attributable to, the same place of business, and the second tip is paid later in the week, or in the week following the week, in which the first tip is paid.
What is the accompanying statutory code?
A new accompanying statutory code provides businesses with advice on how tips should be fairly distributed. The aim of the Statutory Code of Practice is to improve fairness and transparency for customers and workers. Workers will also have the right to request information about an employer’s tipping record and this will need to be provided by the employer within four weeks. Employers are required to keep a written record of how tips have been dealt with over a three-year period.
Non-compliance with the Code of Practice will not give rise to a cause of action in itself. However, it will be admissible in evidence in employment tribunal proceedings, and any provision of the Code that appears to the tribunal to be relevant to any question arising in the proceedings will be taken into account in determining that question.
Can I make deductions from tips, gratuities or service charges?
Deductions can only be made from qualifying tips, gratuities and service charges if they are required or authorised by statute. A worker cannot contract out of their right to receive tips that they have been allocated by the employer or consent to such amounts being reduced.
What should employers do?
Employers should review their current policies and practices on tipping to ensure they are compliant (including with the upcoming Statutory Code of Practice) when the new legislation comes into force.
Employers will be required to have a written policy on how allocation of tips will be distributed. A breach of the rules will allow workers to bring an employment tribunal claim which could result in the employer having to pay compensation and/or adjust the allocation to the worker.
If you have any questions or need assistance with preparing a written policy, please get in touch with our employment team.
