Your guide on key changes to distributing and allocating tips: A summary for the hospitality sector

Following the introduction of the Employment (Allocation of Tips) Act 2023 earlier this year, key changes are coming into force on 1 October 2024 that will change tipping practices. In particular, the hospitality sector will be significantly impacted by these changes and several employers will need to review and update their policies on tipping before the new change. 

Why has the legislation changed tipping practices?

These changes have been implemented following a wider government review of modern working practices. Over the past few years tipping practices have made headline news as several companies have been outed for unfair distribution and allocation of tips to workers. A primary focus of the new legislation is to encourage fairness and transparency with the allocation of tips, gratuities and service charges. 

The new changes are expected to support workers with cost-of-living concerns, boosting morale and performance. This should have a knock-on effect of increasing customer satisfaction and generating more business for employers. 

What are the key changes?

In addition to the legislation, a code of practice on fair and transparent distribution of tips has been published to provide additional guidance and support for employers with the new changes. Throughout this post we will outline some key takeaways from the code of practice. 

Employers are now required to:

1. Pass on all tips and service charges to workers without deductions (except in limited scenarios e.g. the deduction of income tax);
2. Ensure that tips are distributed in a fair and transparent manner when the employer takes control (or has significant influence) over the distribution of tips; 
3. Consider the code of practice on fairness and transparency of tip distribution when distributing or influencing the distribution of tips; 
4. Maintain a written policy on how tips are dealt with at work, and ensure the policy is available to all workers; and
5. Maintain a record of all tips paid at work and their allocation and distribution between each worker – workers can request access to this record. 

What is a qualifying tip?

The key factor to consider is whether (1) the employer receives (i.e. employer-received tips) or (2) exercises control or significant influence (i.e. worker-received tips) over the distribution of tips. Usually this is where the employer receives the money first (e.g. cash tips) and then it is distributed to workers (e.g. at shift end or via payroll). 

To provide a further example for each scenario above:

1. An employer receiving tips would include a tip paid by card or electronic method;
2. An employer exercising control or significant influence would include an employer telling staff how to distribute cash tips. 

It is important to note that the method of payment does not establish whether a tip is a “qualifying tip” under the new legislation. Therefore, it does not matter whether a tip is paid via card, cash, or another method e.g. an app. Under all of these scenarios, the employer receiving the tip means it is a qualifying tip and they are responsible for ensuring fair distribution. However, if the tip is not received by the employer (e.g. a cash tip kept by the employee with no employer control, involvement or influence) then it remains outside of the scope of the act. This also applies to any app used by the company which allows for tips directly to the employee. These various scenarios should be covered by the employer’s policy on how tips are dealt with at work to promote transparency. 

The key principle of fairness (and transparency)

The legislation applies to all workers – including permanent staff, agency workers and zero hour contract workers. It does not apply to self-employed people. All individuals should be aware of the employers’ tipping policy. It is a requirement under the legislation that employers ensure their tipping policy is accessible and available to staff (unless tips are occasional/exceptional). 

The principle of fairness does not force employers to allocate the same proportion of tips to all workers. Employers should ensure that a clear and objective set of factors are used to determine the allocation and distribution of tips. However, these factors should be carefully chosen by employers with fair consideration for the type of business in operation and listed in the tipping policy. Some suggested factors include:

• Type of role/work (e.g. front of house vs back of house)
• Basic pay (and how workers are engaged)
• Hours worked during period when tips are received
• Individual and/or team performance 
• Seniority or level of responsibility
• Length of service
• Customer intention

Employers must also ensure there is no discrimination when selecting or applying factors for the allocation and distribution of tips. For example, employers must ensure they do not indirectly discriminate against an individual or a group by allocating them fewer tips.

It is recommended that employers consult with workers to seek broad agreement for a system of tip allocation and distribution that is accepted as “fair, reasonable and clear”. This will work to increase worker satisfaction and reduce the risk of claims against the employer. The system should be regularly reviewed in line with staff turnover or wider changes to the business. It is important that employers consider transparency when they are updating the tipping policy, as all staff should be kept aware of changes to the policy from the day they take effect. 

How should tips be allocated and distributed?

Employers still have various options for the allocation and distribution of tips. A popular method is for employers to receive the tips directly and pay workers their share of tips in the next payroll cycle. 

Larger employers will prefer to use a “tronc” system to handle the allocation and distribution of tips. Usually an independent tronc operator (i.e. an external payroll/accountancy firm) is instructed to operate the tronc system, but an independent member of staff can be appointed for this role too. Where an independent tronc operator is selected, their system must be in line with the principles of fairness. An employer will be considered as complying with the code of practice if they have a reasonable belief that the tronc is operating “independently and fairly”. If an employer becomes aware of the opposite, that a tronc operator is acting unfairly or improperly, they are required to address this. Failure to do so can result in enforcement action against the employer in the employment tribunal. 

Employers must ensure tips are distributed to staff by the end of the month following the month that the tips are paid by customers. To provide an example, if a tip was left on 23 October, it must be distributed by 30 November at the latest. 

Employers need a tipping policy

Under the legislation, an employer is required to have a written tipping policy when qualifying tips are paid (or otherwise attributable) on more than occasional and exceptional basis. This means that all hospitality businesses will be expected to have a tipping policy in place. 

The tipping policy should outline (1) how tips are accepted, (2) how tips are allocated and distributed, and (3) steps employers are taking to ensure tips are handled fairly and transparently.

Workers must be aware of their entitlements under the tipping policy for employers to meet their obligations of fairness and transparency under the new act. They can provide the tipping policy to staff in writing or in electronic form, but all staff should have the same access to the policy. It must be in plain and clear language, and it must be available on request in an accessible format for any worker with a disability. There is no requirement for employers to share the tipping policy publicly or with customers. 

Employers should ensure that they have fair processes in place to resolve disputes and respond to worker queries (e.g. regarding tip allocation). This will involve consideration to the Acas code of practice on disciplinary and grievance procedures. 

Keep a clear record of tips – workers can request to see it and bring Tribunal action

In line with its key principles of fairness and transparency, the legislation requires employers to keep a clear record of tips received by the employer at the place of business and their allocation to each worker. The record must be maintained for a period of three years beginning with the date on which the tip was paid. It must be stored, processed, and disposed in line with data protection legislation. 

Workers have the right to make a written request to view the tipping record of their employer for a period dating back to three years. The worker needs to have worked for the employer for the full duration of the requested period and they are limited to one request in a three month period. When a request is made an employer is required to provide their tipping record, including the total amount of qualifying tips received during the relevant period at the relevant place of business and the amount allocated to the worker making the request. Employers are not required to disclose the amounts paid to other workers. 

If issues around tipping remain unresolved, workers can enforce their rights in the Employment Tribunal. If the Tribunal find in favour of the worker’s complaints regarding fairness or transparency, a public declaration can be made against the employer. Other sanctions include the Tribunal ordering the employer to revise a previous allocation of tips, making a non-binding recommendation on a previous allocation of tips, or even ordering the employer to pay compensation. This compensation can stretch to include other workers who did not make a complaint at Tribunal. 

Closing thoughts

Kallum Kalsi, Employment Solicitor at KLG “It is imperative that employers implement a fair and transparent tipping policy to limit the risk of time-consuming and costly public Employment Tribunal claims. The code of practice provides helpful guidance to employers on several areas of the legislation but there are still aspects that remain ambiguous and open – for example, what is the recommended method for employers to distribute tips? As the new legislation comes into force on 1 October 2024, I expect we will see the variety of approaches taken by employers. It is also worth noting that there still may be further changes in the future with the new Labour government yet to put their mark on tipping practices.”

Contact us

Are you an employer looking for guidance and support on the new tipping changes? Contact us on 0330 221 0684 or [email protected] to book your free 15 minute consultation with an employment law specialist from our team. 

Reference:

The code of practice on fair and transparent distribution of tips