New Law, New Tips: How the Rules on Tip Allocation Are Changing

The key points to note from the new Act and Code of Practice are as follows:

·         The Act protects all workers, including all eligible agency workers. (An agency worker is “eligible” if they are supplied by an agent to do work for another person (the hirer) under a contract or other arrangement made between the agent and the hirer; they are not a worker of the hirer because of the absence of a worker’s contract between them and the hirer; they are not a party to a contract under which they undertake to do the work for another party to the contract whose status is that of a client or customer of any profession or business undertaking carried on by them.)

·         It covers all “tips, gratuities and service charges” over which an employer exercises control or significant influence.

·         It came into force on the 1st October 2024 and applies to tips paid by customer on or after that date.

·         Employers have a duty to ensure that all qualifying tips, gratuities and service charges are allocated fairly to workers (including eligible agency workers) and to make payment in full no later than the end of the month following the month in which the tip, gratuity or service charge was paid. The Code of Practice gives the example of a customer leaving a tip on the 23 June which must be distributed by 31 July at the latest.

·         If it is fair to do so, the employer may arrange for all or part of the qualifying tips, gratuities and service charges to be allocated between workers by an independent tronc operator.

·         The definition of wages in the Employment Rights Act 1996 has been amended to expressly include “qualifying tips, gratuities and service charges”. This amendment has been made to ensure that the right not to suffer unauthorised deductions will apply to such tips. A worker cannot contract out of, or consent to qualify, their right to receive tips that they have been allocated by the employer.

·         Employers that pay tips, gratuities and service charges on more than an occasional and exceptional basis will need to have a written policy setting out how those tips are dealt with, and must make the policy available to all workers. Employers will also need to keep records of tip allocation for three years and make those records available to workers on request.

·         Workers can complain to the employment tribunal where there has been a failure to comply with the obligations regarding allocation or payment of qualifying tips. The claim must be brought 12 months from the date of the failure to comply. An employment tribunal will have the power to order an employer to revise the allocation of tips and make a payment to a worker or workers (not just the Claimant). A tribunal may also order the employer to pay compensation of up to £5000 for any financial loss suffered by the Claimant because of the breach.

What should be included in the written policy?

The Code of Practice defines a tipping policy as “a set of written guidelines, which must be produced by an employer and shared with workers, and which sets out the factors considered by that employer to determine the allocation and distribution of tips.”

The policy must be available to all of the workers at that place of business. How an employer does this is not prescribed in the legislation, but the explanatory notes state that: “the employer may therefore select some suitable means based on the circumstances of its workers and their working practices. As the written policy must be made available, it would not be sufficient for the employer simply to tell its workers about the policy orally.”

It is important that employers ensure that agency staff are given a copy of the policy themselves at the start of the engagement, either via themselves or the agency.

The explanatory note goes on to state that if an employer makes a written policy available to workers at their place of business and the employer then amends this, the employer must make the amended version of the written policy available to all of their workers at that place of business.

The policy must include information regarding:

Whether the employer requires or encourages customer to pay tips, gratuities and service charges at the place of business.

How the employer ensures that all qualifying tips, gratuities and service charges paid at, or attributable to, the place of business are dealt with in accordance with the requirements of the new Act. This should include information on how the employer allocates qualifying tips, gratuities and service charges between workers.

Even if the tips some worker received are not qualifying tips, gratuities and service charges, and an employer is not required to have a written policy, they will still need to need to make sure that certain information is made available to the worker. This being:

·         The fact the employer is not statutorily required to have a written policy;

·         The reason why this is the case.

This type of information may be needed in a restaurant where all tips are paid to workers in cash, with no interference or influence from the employer.

What are the factors that should be considered when looking at “fairness”?

The Code of Practice sets out key principles of fairness and suggests how employers can apply them to different aspects of developing and implementing a policy on the treatment of tips. The Code states that it will be for an employer to decide which specific principles best apply to its business and that, in the event of a dispute, it will be for an employment tribunal to decide whether the employer has complied with the law.

The Code provides that:

·         The fair allocation and distribution of tips does not require employers to allocate the same proportion of tips to all workers. There may be legitimate reasons why employers choose to allocate different proportions of tips to different workers.

·         Employers should give due consideration to all of the workers involved in providing service to customers, including agency staff.

·         The allocation and distribution of tips should be determined by reference to a clear and objective set of factors which should be fair and reasonable, given the circumstances and the nature of the employer’s business.

The Code suggests that employers should consult with workers to seek broad agreement that the system of allocation is fair, reasonable and clear. “Employers must take account of any legal or contractual requirements to engage in formal collective consultation where a tipping system affects terms and conditions around pay that are covered by a collective agreement with a recognised trade union or an agreement made under the Information and Consultation of Employees Regulations 2004.”

The Code provides an illustrative list of factors that employers may consider:

·         Type of role or work (for example, distribution between front of house and back-room workers).

·         Basic pay (and how workers are engaged).

·         Hours worked during period when tips are received.

·         Individual or team performance.

·         Seniority or level of responsibility.

·         Length of service with the employer.

·         Customer intention.

What are the new Government saying about tips?

In their “Make Work Pay” document, Labour pledge to strengthen the law to ensure hospitality workers receive their tips in full and “workers decide how tips are allocated”. However, the Act and Code of Practice that have come into force on the 1s October both reflect the fact that it is the employer who must ensure that there is a fair allocation of tips and this hasn’t changed. It seems therefore, that this isn’t a pledge which will be implemented immediately, although of course best practice would suggest that employees should be consulted with regarding the distribution of tips in any event.