Employment (Allocation of Tips) Act 2023 – now in effect

The Employment (Allocation of Tips) Act, colloquially known as the ‘Tips Act’ (the Act), was first presented as a Private Members’ Bill in Parliament in June 2022 and aims to make it unlawful for employers to make deductions from the tips given to their staff.  

The Act received Royal Assent on 2 May 2023 and whilst the Act was originally due to come into force on 1 July 2024, it came into force on 1 October 2024.

In this article, we set out the background to the Act, shed light on the updated tipping Code of Practice, outline the recently published non-statutory guidance and comment on key trends and potential impact.

Background

The Act has arisen as a response to concerns raised that those working in industries where part of their pay is derived from tips, gratuities and service charges (collectively known as ‘tips’), are not receiving 100% of the tip amount given to them by customers.

These concerns arose from a variety of media reports in 2015 regarding the alleged unfair tipping practices of certain hospitality businesses, which led to calls for reform to prevent employers deducting any sums from tips before passing them on to workers. Momentum gathered on the point around the time of the Covid-19 pandemic which triggered a societal change in payment habits and significantly reduced the amount of cash tips being given to workers.

The Act therefore seeks to amend the Employment Rights Act 1996 to impose new legal obligations on employers to ensure that 100% of tips are paid to workers, in full, without deductions and that the allocation of tips is what the legislation describes as “fair”. 

Recent updates

The UK Government issued a consultation on 15 December 2023 on the draft statutory Code of Practice (the Code) on Fair and Transparent Distribution of Tips. The purpose of the Code is to support employers in promoting fairness and transparency in the distribution of tips, gratuities and service charges (collectively ‘tips’) that fall within the scope of the Act.

On 22 April 2024, the Government published its response to the consultation alongside an updated final draft Code which was approved by the House of Commons on 15 May 2024 and by the House of Lords on 24 May 2024 just before the prorogation of Parliament in advance of the general election.

Commencement regulations were made bringing the Code, and the remaining provisions of the Tips Act, into force on 1 October 2024. Further non-statutory guidance was published on 27 September 2024 to accompany the Code.  The non-statutory guidance provides additional information and examples, as well as basic templates for tipping policies and requests for tipping records.

The guidance reiterates the Code and states that agency workers must be taken into account when considering the distribution of tips. Employers must also consider the scope of workers involved in “directly” providing service to customers when deciding their tips policy. The guidance also explains that tips must be distributed between workers at the place of business where the tips are received, rather than pooled across multiple sites. 

The non-statutory guidance covers how to address problems arising from the Act. Where disputes occur, once internal processes have been exhausted, Acas should be used to try and reach resolution. If resolution is not then possible, complaints must be brought to the tribunal within either 3 or 12 months depending on what failure the complaint refers to. 

For failure to comply with distribution requirements, the tribunal could order the employer to revise a previous allocation, make a non-binding recommendation on a previous allocation, order the employer to pay a worker or workers (even those who are not part of the tribunal claim) as well as award compensation of up to £5,000 per worker for financial loss. If an employer fails to comply with the requirements to provide information, the tribunal can make a declaration to that effect and can also order the employer to comply with the relevant requirements to show the tipping record and could also award compensation of up to £5,000 to the worker to compensate for any financial loss albeit it is difficult to envisage what loss might be suffered from a lack of information. 

Code of Practice

The Code covers six main areas including the scope of qualifying tips and workers, fairness in allocation, methods of distribution, transparency, problem resolution and a glossary of terms.

Not all tips will fall within the scope of the Act. For example, where a worker receives a tip and can keep the tip without any involvement or control from their employer, the tip will fall outside the scope of the Act and the accompanying Code.

The implications of the Code are significant. It promises to ensure that 100% of tips go to workers without any deductions, a move that will be particularly welcome for those who rely on gratuities as a substantial part of their income. The Code also requires employers to adopt a clear written tipping policy accessible to all workers, which is a step towards addressing previous concerns about the opacity of tipping practices.

The Code acknowledges that an employer may have legitimate reasons for allocating different proportions of tips to different workers but emphasises that allocation should be determined in accordance with fair, clear and objective criteria, taking into account the nature of the employer’s business.  For example, it acknowledges that employers may have to consider factors such as the type of role or work (front-of-house and/or back-room workers), basic pay, how the workers are engaged, individual and/or team performance, seniority and/or level of responsibility, length of service and, of course, customer intention, when distributing tips fairly.

While the Code is comprehensive, there are areas that may still raise questions.

For example, the Code does not make changes to existing tax and social security rules, which could leave some employers uncertain about how to reconcile the Act's requirements with current obligations in relation to National Insurance in tronc arrangements. A tronc system is a common method used to distribute tips within the hospitality industry. The tips given by customers are pooled into a collective fund, known as the tronc, and a troncmaster is then appointed to determine how the tronc monies will be distributed amongst staff.

The troncmaster can be either an internal member of staff who agrees to take on the role or can be an externally appointed professional company or individual. A well set up tronc system independent from the employer can allow employers to qualify for exemptions from National Insurance Contributions.  

The Code permits the use of tronc arrangements in the distribution and allocation of tips. However, it states that should an employer choose to use an independent troncmaster, any framework or directions it sets for its operation must adhere with the Code’s principles of fairness, and the employer must reasonably believe that the tronc is adhering to those principles to comply with the Code.

In particular, the Code emphasises that should an employer become aware that an independent troncmaster is not allocating tips fairly, the employer must act, or it could be regarded as having failed to comply with the Code. Employers may be concerned about balancing the requirement of fairness, with the requirement that any tronc arrangements in place must be independent from the employer to benefit from the NI exemptions available on tips allocated through tronc arrangements.

However, HMRC’s guidance on tronc arrangements and the NI exemption appears to suggest that as long as the employer does not determine, directly or indirectly, the allocation of those tips i.e., deciding who should receive how much, then the employer can be said to be maintaining independence from the tronc arrangements.

Consequently, ensuring the tronc arrangements comply with the principle of fairness (without getting involved with the allocation of the tips) should not compromise independence. However, extra care should be taken to ensure this.

Additionally, the timing of tip payments, which mandates distribution by the end of the month following receipt, could pose logistical challenges for businesses.

Transparency remains a cornerstone of the Code. Employers are advised to maintain a tipping record and ensure that their written tipping policy is readily available to workers. In the event of disputes, the Code provides for fair procedures to resolve issues, giving equal weight to queries from agency workers as to their own workers.

Should internal resolution fail, workers can take their grievances to the Employment Tribunal, where the Code can be introduced as evidence. The Tribunal has the power to make declarations, recommend or order revisions to tip allocations, or award compensation.

Key trends

In advance of the Act coming into force, the well-known London restaurant chain ‘Ping Pong’ decided to temporarily trial a new tipping policy. Ping Pong decided to remove the optional service charge of 12.5% from customer bills and will also prevent customers from tipping by card.

As an alternative, Ping Pong has proposed to charge an optional 15% ‘brand fee’ to contribute to brand-related expenditure and franchise fees. Additionally, Ping Pong will also increase staff wages by 19% in an attempt to ‘replace’ the earnings staff would have received from tips.

Whilst the Act’s overall purpose seeks to deal with an important issue in the hospitality and retail sector, the practical realities facing companies operating in those sectors could result in the Act not being fit for purpose. It will be interesting to see whether the trial proposed by Ping Pong is the start of increased changes by retail and hospitality outlets to try to offset the effects of the Act.

For example, other restaurants might seek to utilise a similar method to the one proposed by Ping Pong or alternatively may implement other methods such as increasing menu prices. It will take time to determine the ultimate effects this has on the sector.

Next steps

The Act came into force on Tuesday 1 October 2024, with non-statutory guidance published on 27 September 2024 to provide further clarity regarding the expectations on employers in complying with the Act. The guidance provides limited additional clarity, but immediate steps by businesses and legal practitioners should be taken now to ensure compliance going forward. 

The Code of Practice and the Act were a welcome development for workers in the hospitality sector, addressing prior concerns about excessive admin charges and aiming to ensure a fair and transparent distribution of tips. While it is heartening to see the government's commitment to fairness, the lack of any proper examples as to what “fairness” means as well as no guidance on the more difficult areas of how to approach areas such as absence means that we now go forward with the reality that it may only be the tribunal that gives us the clarity that is needed unless further and more detailed guidance is forthcoming.

As the hospitality industry adapts to these changes, the full impact of the Act remains to be seen.

First published in Law 360.