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October 2024

The Employment (Allocation of Tips) Act 2023 (“the Act”), supplemented by a statutory code of practice and associated non-statutory guidance, comes into force today, 1 October 2024.

The Act significantly impacts the hospitality industry by introducing new rules governing how employers must deal with tips paid by customers, and it is estimated it will lead to an additional £200m being taken home by millions of workers in the UK.

The new requirements

The new legislation affects all retail and hospitality businesses including restaurants, cafes, hotels, hairdressers and taxi firms.

Businesses must now ‘fairly allocate’ all tips received. In addition, tips must be paid straight to workers and cannot be retained by the employer for any reason, including for business expenses.

“Tips” includes gratuities and service charges. However, it does not include cash tips if those are received by a worker and not declared to the employer. It does not matter if the tip is made by card, cash, or via an app.

In addition, employers must not make any deductions from tips except for tax, and where appropriate, National Insurance.

Tips must be paid to the worker/employee no later than the end of the month following the month in which it was paid by the customer.

What does fairly allocating tips mean?

The statutory code states that allocating and distributing tips fairly does not necessarily require employers to allocate the same proportion of tips to all workers, providing there are legitimate reasons why different workers are allocated different proportions.

The code provides examples of the criteria that employers may consider when allocating tips, such as:

• the number of hours worked in the period the tips were collected;
• individual and team performance;
• level of responsibility and/or seniority;
• customer intention;
• length of service;
• type of role (e.g., front of house or back of house); and
• rate of basic pay.

The code prevents employers from pooling tips from multiple sites and all individuals who are involved in providing a direct service to customers should be considered as part of the distribution, including agency workers.

What do employers need to do?

Unless employers only receive tips on a very occasional or exceptional basis, they will need a written policy in place relating to the collection and distribution of tips.

They will also need to decide on their chosen method of tip distribution. How employers distribute is up to them, as long as it is fair. Some employers may choose to allow each individual worker to retain 100% of their tips received, whereas some employers may choose to implement a tronc system. However, using a tronc does not absolve employers of their responsibilities, so they will need to be careful to ensure the use of a tronc system is appropriate and that it is properly and fairly implemented. Employers should consider whether it is appropriate to seek the agreement of their staff as to which system of allocation will be used.

Employers must keep records of the qualifying tips received and how these are distributed. These records must be kept for three years from the date the tip was received and staff may request copies.

It is recommended that regular checks are made to ensure tips are being distributed in line with policies. It is also recommended that policies are regularly reviewed in line with business changes, such as restructurings or redundancies.

Connected obligations

Employers should be mindful of their data protection obligations when sharing records of tips. Employers should not provide details of the specific amounts paid to other workers, nor other people’s personal data, such as their bank details. Instead they should provide the total amount of qualifying tips received and the amount paid to the worker making the request.

Tips do not form any part of the National Minimum Wage. Employers must ensure that workers are paid in line with the National Minimum Wage and National Living Wage requirements regardless of any tips the worker may receive. 

How should an employer deal with complaints relating to tips?

The code of practice states that parties should attempt to resolve issues relating to tips between themselves. It is therefore imperative that any complaints are investigated and dealt with properly, either informally (if appropriate) or under a suitable grievance procedure.  

If the matter cannot be resolved internally, a member of staff may make a claim in the employment tribunal and they may be awarded up to £5,000 to compensate them for any financial losses relating to their employer’s failure(s).

If you have any questions on the fair distribution of tips or need assistance regarding your compliance with the new legislation, please contact a member of our Employment team.