Legal Update: New tipping rules from 1 October

The Employment (Allocation of Tips) Act 2023 (‘the Act’) is coming into force on 1 October. The Act is supported by a statutory Code of Practice on Fair and Transparent Distribution of Tips (‘the Code’), which also comes into force on 1 October and both introduce important new obligations on employers regarding the allocation, distribution and record keeping of tips. The previous government stated that the Code would be supported with non-statutory guidance which would help employers understand how to implement compliant processes within their business, but this has not yet been published.

In this update we’ll look at the new obligations and what they mean for your business.

 

What are the new obligations?

Under the new rules, employers are required to:

1. Pass on all qualifying tips and service charges to workers without deductions, except where legally required e.g. tax.
2. Ensure that tips are distributed in a fair and transparent manner when the employer has control, or exerts significant influence, over their distribution.
3. Have regard to the Code of Practice on fairness and transparency of tip distribution when they are distributing or influencing the distribution of tips.
4. Maintain a written policy on how tips are dealt with at their place of business, and ensure this policy is made available to all workers, including casual and agency workers, unless the organisation only receives tips occasionally and exceptionally.
5. Maintain a record of all tips paid at their place of business and their allocation and distribution between each worker, to which workers have the right to request access.

 

Obligation to pass on all qualifying tips and service charges to workers without deductions

What is a qualifying tip?

A qualifying tip is one where the employer receives the tip or where the worker received the tip but the employer exercises control or significant influence over how tips are distributed.

Where tips are left in cash, and the employer allows the worker who received them to retain them, they won’t be viewed as qualifying tips as the employer isn’t exercising any control over them. This could also be the case for tips paid by app directly to the worker over which the employer has no control or influence. However, it could be argued that simply by providing the app through which tips are paid, the employer is exercising control or influence over the tips. Hopefully, the forthcoming guidance will provide further clarification on this point.

The method of payment of the tip is irrelevant and therefore it doesn’t matter whether it is made by card, cash or via an alternative method (such as a payment via an app).

Non-monetary tips also fall within the new rules, if they have a fixed value which can be expressed in monetary terms or exchanged for money, goods or services e.g. vouchers.

 

Which workers are covered?

The obligation is to ensure that the total amount of qualifying tips paid at a place of business is allocated fairly between workers at that place of business.

The definition of ‘workers’ is very broad and includes permanent and temporary employees, casual workers and agency workers. The only people excluded from the obligation are the genuinely self-employed.

Where the individual is an agency worker, the hirer can pay tips to the agency who must then allocate them to the agency workers without deduction (except those legally required such as tax).

 

Fair and transparent manner distribution of tips

The Code sets out the key principles of fairness which employers should consider but emphasises that it will be for each individual employer to decide which specific principles best apply to their business.

It makes it clear that ‘fairly’ does not necessarily mean tips need to be divided equally between all workers, as there may be legitimate reasons why the employer decides to allocate different workers different proportion of tips. However, the employer will have to show that they have taken clear and objective factors into account when deciding how to allocate tips.

If the business has several sites, the tips cannot be shared beyond each site.

Neither the Act nor the Code gives any guidance on how non-monetary tips, such as vouchers or a gift card, should be treated but we hope that this is one of the grey areas which will be covered by the upcoming guidance.

 

What factors should the employer consider?

Although it’ll be down to each business to decide on the appropriate factors for their specific business, the Code says that they should be “fair and reasonable given the circumstances and the nature of the individual business”. It lists some examples of factors which employers may want to consider but stresses that this isn’t an exhaustive list:

• Type of role/work e.g. whether they are front of house or backroom workers
• Basic pay (and how workers are engaged)
• Hours worked during the period when tips are received
• Individual and/or team performance
• Seniority/level of responsibility
• Length of service
• Customer intention

 

Potential discrimination issues

The Code states that when putting together their policy, employers need to consider whether the effect of the policy may discriminate against certain groups of employees. For example, does the effect of the policy give a smaller share of tips to a group which contains a higher proportion of workers with a particular protected characteristic?  Even if satisfied that the impact of the policy is not discriminatory, employers should keep the policy under review as this may change over time.

Examples of where policies could be viewed as discriminatory have been promised in statutory guidance and we’ll send out a further update once this is available.

 

Consultation with workers

The Code states that employers should consult with workers to seek “broad agreement that the system of allocation of tips is fair, reasonable and clear”.  The Labour government have indicated that they plan to strengthen this requirement in the future to allow workers to decide how tips are allocated but they haven’t given any details on how or when this change is likely to be made.

The Code warns that if the impact of the policy would amount to a change of existing terms and conditions and 20 or more employees are affected, the employer will have to follow a collective consultation process. If you think this situation may apply in your business, please contact our employment advice team for guidance on this process.

 

Can employers still use a tronc system?

A tronc is a special pay arrangement used to distribute tips, gratuities and service charges through an independent tronc operator (the ’tronc operator’). Sometimes allocation may be directed by the tronc operator but paid via the employer’s payroll (this is permitted under s27F(6)(b) Employment Rights Act 1996).

These arrangements are still allowed under the new rules. Where the employer chooses to use a tronc, the instructions or framework they set out for its operation must be in line with principles of fairness set out in the Code. If that is the case and the employer has “a reasonable belief that the tronc is operating independently and fairly”, they will be complying with the Code. However, if they subsequently become aware that the tronc is being operated in an unfair or improper manner, they are obliged to act.

As employers are not able to able to make any deductions from tips (other than those legally required), they are not able to set off the costs of operating the tronc.

Under HMRC rules, where tips are distributed through a truly independent tronc operator, the employer doesn’t have to account for national insurance (although tax is still payable). However, if there’s any suggestion that the employer is, even indirectly, influencing how the tronc is distributed, national insurance is payable. If you’re in any doubt that the arrangements you’ve got in place would leave your business open to NI liability, seek expert tax advice.

 

Requirement to have a written tipping policy which is made available to all workers.

Employers are required to have a written tipping policy which sets out:

• how tips are accepted
• how tips are allocated and distributed
• what steps the employer takes to ensure tips are handled fairly and transparently, including the factors considered when deciding the method of allocation

The only exception to this is where tips are received only on an ‘occasional and exceptional’ basis. Although this is not defined in the rules, it is expected that this will be interpreted narrowly, as it must be both occasional and exceptional. The Code gives the example that a clothing shop which receives tips from customers only a few times a year would not be required to have a written tipping policy.

If the tips are not qualifying tips (for example, because workers are allowed to keep their own tips without any direct or indirect influence) the employer does not need to have a written tipping policy, but they are required to inform workers that this is the case and explain why. If tips are given only occasionally and exceptionally, you don’t need to provide this information.

In addition to having the policy, the employer needs to make it available to all workers, and be able to show that they have done this – but how that’s done is up to each individual employer. The Code specifies that the policy must be written in plain language and be made available on an accessible format if requested by a worker with a disability.

Where the employer uses agency staff, they can either provide a copy of the policy direct to the agency worker or provide a copy to the agency to be shared with the worker. However, the Code stresses that the policy must be equally available to all workers, so it’s important to make sure that agency workers are given the same access to the policy as other employees and that the system for addressing concerns is equally available to agency workers.

There is no requirement to share the tipping policy with customers of the business, but employers may choose to do this.

We have put together an example policy which you can find on Atlas by clicking here.

 

When do tips need to be allocated?

Tips need to be allocated by the end of the month following on from the month in which the tip was given. For example, if the tip was given on 28 August, then it needs to be paid out by 30 September.

If the tip is payable to an agency worker via the agency, the employer must make payment to the agency by the end of the month following on from the month in which the tip was given. The agency must then pay it to the worker before the end of the month after the agent received payment.

For example, if the tip was paid on 28 August, the hirer would have to pay the agency by 30 September and the agency would have to pay the worker no later than 31 October.

 

Obligation to maintain records

Where qualifying tips are received at a place of business, employers are required to keep records of:

• the amount of qualifying tips paid at the place of business AND
• the amount of those tips which the employer either allocated each worker at that place of business or arranged to be allocated to workers via a tronc.

Records need to be kept for a minimum period of three years, starting with the date on which the tip was paid.

This requirement does not apply where tips are paid only on an occasional and exceptional basis.

 

Right to request information

Workers have the right to make a written request to view the tipping record of the employer for the entire period they worked for them or a period of 3 years, whichever is  shorter. So, if an employee has only worked for the business for 6 months, they can only request to see the tipping records for that 6-month period. However, they must have worked for the employer at some point during each month which forms part of the request.

The workers’ right to request information is limited to one request in a 3-month period.

On receiving a request, an employer is required to provide the following:

• the amount of qualifying tips, gratuities and service charges paid at the place of business AND
• the amount of those qualifying tips, gratuities and service charge that the employer allocated to the worker or arranged to be allocated to workers by an independent tronc operator.

 

This information must be provided within 4 weeks starting from the date the request was made.

If the employer is not required to keep records because the tips received are not qualifying tips (for example, because the employer does not control or influence their allocation), they must inform the worker that they are not required to keep tipping records and explain why this is the case.

 

Does the obligation to maintain records and provide information apply even where there is a tronc arrangement in place?

Yes, even where a tronc arrangement is in place, the employer is required to keep a tipping record and this should detail the amount given to the tronc system for allocation.

 

Can the worker agree to waive their rights under the Tips Act in their contract?

No, this is expressly forbidden.

 

Worker complaints

The employer’s tips policy should set out how workers can raise issues internally.  However, if the worker is still unhappy, they can bring an employment tribunal claim. The tribunal has several actions it can take if it feels the employer is in breach of its obligations under the Act which differ slightly depending on the nature of the breach.

 

Failure to allocate tips fairly

Where the complaint relates to unfair distribution, the tribunal can:

1. Make a declaration that the employer is in breach.
2. Order compensation of up to £5000 per worker (the amount awarded will be based on what the tribunal believes would be ‘just and equitable’ to compensate the worker for any financial losses they have suffered as a result of the employer’s breach).
3. Order the employer to revise the previous allocation where it finds that this has not been done fairly (if this revision would mean that some workers have received too much in the tips allocation, the employer is not able to claw this back from them).
4. Make a recommendation on how the employer should allocate tips to achieve fairness. Although the employer does not have to follow this recommendation, it would be taken into account in any future proceedings.

The tribunal also has the power to make an order in favour of affected workers who are not party to the proceedings.

Workers will have 12 months from the date of the breach to issue tribunal proceedings.

If the worker is an agency worker, they can make a claim against the hirer and the agency.

 

Failure to keep records or have a written policy

If the employer fails to have a written policy on the allocation of tips or fails to comply with the requirements of record keeping and/or providing information when requested, the worker can bring an employment tribunal claim but, in these circumstances, they only have 3 months to issue proceedings.

If the worker is successful, the tribunal must make a declaration that the employer is in breach of their obligations and may order compensation of up to £5000 (again based on the financial loss suffered by the worker as a result of the breach). It may also order that the employer complies with the obligations they have breached.

 

Future developments

The previous government stated that non-statutory guidance would be issued to give employers a clearer understanding of how to implement the new rules, but (at the time of writing) this has not yet been issued. We’ll be sending out a further update as soon as this is released.

We’ll also keep you updated if there are any developments regarding Labour’s plans to allow workers to decide on how tips are allocated.

In the meantime, if you have any questions on the new requirements, please contact one of our HR and employment law experts on your 24/7 HR advice line on 0345 844 4848* and get your questions answered.

 

 

*Applicable for all clients who’ve purchased Citation’s HR & Employment Law core service: HR Workplace Expert. Please note that HR Virtual Assistant clients have access to our advice line Monday to Friday 9am-5pm.