On 1 October 2024, new legal requirements are coming into force to prevent employers keeping tips left by customers in recognition of good service. The new legislation, the Employment (Allocation of Tips) Act 2023 and accompanying statutory Code of Practice aims to ensure the fair and transparent distribution of tips. In April of this year, following a consultation with stakeholders, the government published the updated Code of Practice. The Code of Practice has legal effect and will be considered by the Employment Tribunal when determining disputes relating to tipping practices. This article provides a guide for employers on their requirements under the new Act and Code of Practice.
The new legal requirements apply to employers in Scotland, England, and Wales. The requirements apply to all workers, but not to self-employed individuals.
How to distribute tips
The new legislation requires that:
- the total amount of tips received at a place of business must be distributed fairly between workers without deductions, except in very limited scenarios such as the deduction of income tax; and
- tips must be paid to workers no later than the end of the month following the month in which the tip was received.
The fair distribution of tips doesn’t necessarily mean that employers must distribute tips equally to all workers, however, a clear and objective set of factors should be used which are fair and reasonable in the individual circumstances. The Code of Practice suggests that factors which may be considered are: type of role, pay, individual and/or team performance, seniority, length of service, and customer intention. When applying the factors to the allocation of tips, employers must be cautious not to unintentionally discriminate based on protected characteristics.
The Code of Practice also provides that employers should make genuine efforts to consult with workers to seek agreement that the method used to distribute tips is fair, reasonable, and clear. Employers should continue to engage with staff to allow for changes in circumstance and staff turnover.
Tips covered by the new legal requirements are those which are received by the employer (i.e. often where tips are paid by card or via a mobile app, or other similar electronic methods), or where the employer exercises significant influence over tips received by the worker. This also includes where a service charge is automatically added to a customer’s bill. However, if a worker receives and keeps a tip personally, and the employer has no control or involvement with the tip, this will not be covered by the new legislation.
If an employer fails to comply with the new legislation, a worker can present a complaint to the Employment Tribunal. Eligible agency workers can also bring a claim under the legislation. The Tribunal can make a public declaration if it finds a complaint about fairness or transparency in tipping is well founded. It can also order the employer to revise a previous allocation of tips and award compensation of up to £5,000. The compensatory award can also be made for workers at the relevant place of business who have not made a complaint to the Tribunal.
It remains illegal in the UK for tips to be used to make up a worker’s entitlement to the National Minimum Wage.
Written policy
Employers are also required to have a written policy if they receive tips on more than an occasional basis. The policy must be made available to all workers, either in electronic form or as a hard copy document. The policy must include whether the employer requires or encourages customers to pay tips, and include details of how tips are accepted, the method of allocation and distribution, and how the employer ensures that tips are allocated fairly and transparently. The policy can be displayed to customers, but this is not a legal requirement.
Record keeping
Employers also have additional obligations around record keeping. A tipping record must be kept for three years beginning with the date on which the tip was paid. The record will detail the amount of tips received and how tips have been dealt with in accordance with the legislation. The tipping records must be stored, processed and disposed of in line with data protection legislation.
Compensation of up to £5,000 can also be awarded by the Employment Tribunal for a failure to comply with the new regulations around the written policy and record keeping.
For further information on the new tipping requirements, please contact Joanna Rae or another member of the Shepherd and Wedderburn Employment team.