New law on tipping

May 13th 2024

Tips, service charges or gratuities, whatever they are called, tipping is becoming more and more commonplace in the UK. With that, questions over where those tips actually go have been asked and there is no clear answer, but that won’t be the case for much longer.

A new law and statutory Code of Practice on the fair allocation of tips are expected to take effect from 1 October 2024. Kevin Ferguson looks at what this means for employers.

Over recent years there have been reports that major restaurant chains were deducting from tips before passing them on to workers, in what was widely condemned as unfair practice. This led to calls for reform to the law which would require employers to pass on tips and service charges to workers in full, ensuring they get to the people for whom they were intended. These calls were renewed during the pandemic, as the move to cashless transactions led to a fall in cash tips, making it much harder for workers to keep track of where their tips went.

The Government has made several stalled attempts to get legislation on tipping off the mark, before finally adding the Employment (Allocation of Tips) Act 2023 onto the statute books last year. Subject to approval of the draft regulations, the new law and the statutory Code of Practice will be in force from 1 October 2024.

The new law brings in a brand-new obligation on affected employers under which they must ensure that the total amount of qualifying tips that is paid at, or otherwise attributable to, a place of business of the employer, is allocated fairly between their workers at that place of business.

Of course, some employers may already pass all tips over to staff, in which case relatively little will change for them. However, there are specific requirements under the law which will require action by all affected employers. As such, it’s important that all affected employers are aware of what is coming in so that they can assess how their current practices compare.

These include both employer received tips and certain worker received tips.

An employer received tip is an amount paid by a customer by way of a tip, gratuity, or service charge which:

• is received upon its payment or subsequently by the employer or an associated person.
• is received upon its payment by a person under a payment arrangement made between the employer and that person.
A worker received tip is an amount paid by a customer by way of a tip, gratuity, or service change which:
• is received upon its payment by a worker of the employer, and
• is not subsequently received by the employer or an associated person.

A worker received tip must be subject to employer control. This means that the employer or an associated person exercises control or significant influence over the allocation of the tip. For example, where cash tips are collected up by the employer who then distributes them out to staff.

If, on the other hand, the worker receives and keeps a tip, with no employer control or involvement, the tip is outside of the scope of the legislation and not a qualifying tip. Digital tipping, where a customer uses an app to directly tip members of staff, bypassing the employer altogether, is also out of scope.

It’s not just cash and card payments that will fall within these new rules. An amount that is not paid in money can still be a qualifying tip, gratuity, or service charge if it is paid in the form of a voucher, stamp, token, or similar item which is:

• of a fixed value expressed in monetary terms, and
• capable of being exchanged for money, goods, or services.

The new law requires tips to be fairly allocated. To assist employers with determining what is fair in their workplace, a statutory Code of Practice has been created. The Code does not set out an exhaustive list of factors for employers to consider. Instead, it provides overarching principles on what fairness is for the purposes of the law, the areas in which employers need to make decisions to comply with their duties, and how they should apply these principles in their specific places of business. It will be for each individual employer to determine which specific principles best apply to their business.

The statutory Code of Practice states that allocating and distributing tips fairly does not necessarily require employers to allocate the same proportion of tips to all workers. There may be legitimate reasons why employers choose to allocate different workers different proportions of tips. Employers should use a clear and objective set of factors to determine the allocation and distribution that best suits their organisation.

Some factors to consider include:

• The type of role or work, e.g. distribution between front-of-house and back-room workers.
• Basic pay and how workers are engaged.
• Individual and/or team performance.
• Seniority or level of performance.
• Length of time served with the employer.
• The customer intention.

Employers should ensure that they give due consideration to all workers involved in providing service to customers, including agency workers.
Employers should review their approach to allocating tips fairly on a regular basis in line with staff turnover and any wider changes to the business, to ensure the allocation and distribution of tips remains relevant and fair.

Employers will need to consult with workers to seek broad agreement in the workplace about how tips will be allocated. It may be that there are legal or contractual requirements to engage in formal collective consultation if the tipping system affects the terms and conditions around pay, and these should be adhered to.

The new law requires employers to have a written policy in place where qualifying tips are paid at, or are otherwise attributable to, a place of business of an employer on more than an occasional and exceptional basis. This must include:

• Whether the employer requires or encourages customers to pay tips.
• How the employer ensures that all qualifying tips paid at, or otherwise attributable to, the place of business are dealt with, including how the employer allocates tips between workers.

The policy must be written in plain language, and employers must provide an accessible format for any worker with a disability, on request.

Alongside and in accordance with the policy, employers will also need a means of collecting and distributing tips. Some employers may choose to do this through the use of an independent tronc operator. (A tronc is a special pay arrangement that lets businesses in the hospitality and leisure sector, fairly share staff tips, gratuities and service charges given by customers)

The new law on tipping will mean a change for employers whose customers and clients regularly pay tips to their workers. Even where there is a process in place currently for the distribution of tips, employers will need to make sure that:

1. This is written into a policy, if this is not already the case.
2. The process they are currently following is in accordance with the law.

If an employer is starting from scratch when it comes to the distribution of tips, they must develop the processes necessary to be compliant with this new legislation.

If you are an employer and you need advice about how the implications of the new law on tipping will affect your business, as well as how to get ready for it, please do not hesitate to contact the team at JRW Hogg & Thorburn.

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