Tip allocation
Historically, service charge payments were made at the discretion of the business, and there was no legal obligation to pass these on to staff. Cash tips, however, were considered the sole property of individual employees. Concerns about unfair tip distribution have prompted the introduction of the Employment (Allocation of Tips) Act 2023.
What does the new legislation mean?
The new legislation ensures that 100% of the service charges are distributed fairly, transparently and consistently among staff. This includes all agency workers too, which adds another layer of complexity for employers.
It also means that tips and service charges can’t be shared beyond an individual establishment (for example, in multiple chain outlets the charges could not be shared). So each location will be required to distribute 100% of the tips fairly among its staff.
Here’s a summary of what’s required:
- Clear guidelines must be provided to employees on how distribution works through a written policy.
- Tips must be paid by the end of the following calendar month following their receipt (including payments by both cash and card).
- A record of all tips must be held, including their allocation and distribution between each worker. Workers have the right to request access to this information.
- Employees can dispute withheld tips with an employment tribunal.
- Employers cannot deduct from the tips to cover costs such as credit card fees or administrative expenses.
What qualifies as tips?
According to the Act, the tips are referred to as those received by the employer, subject to the employer’s control or connected to worker-received tips that are subject to employer control. This means that if an employer receives a tip via a card or other electronic payment method, it is employer-received and they are responsible for distributing it fairly.
If a worker receives a cash tip directly, with no employer control or involvement, the tip is out of scope for this Act. This also applies if a customer tips digitally using an app directly to the employee bypassing the employer.
Vouchers, stamps, tokens or similar items with fixed values that can also be expressed in monetary terms qualify as tips.
Who does it apply to?
The Act applies to all workers in the place of business, this includes eligible agency workers (paid via the hiring agency). However, it doesn’t apply to self-employed workers.
Deadlines and requirements for businesses
The new legislation comes into force in October 2024.
- Employers need to develop a fair policy on how tips are treated. This needs to include how tips are accepted, how they are allocated and what steps are being taken to comply with the Tipping Act. It should consider:
- The roles or types of work
- Hours worked during the period when the tips are received
- Seniority
- Length of service
- Customer intention
- It’s advisable to consult with workers to develop a policy that’s fair and clear to all. This needs to be reviewed regularly in line with staff turnover and changes in the organisation.
- To comply with this new legislation, businesses are required to publish their tips and service charge policies prominently for both staff and customers.
- Employers must keep detailed records of tip allocation for at least three years. Employees will have the right to request and review their personal tipping records.
- A worker can make a written request (one per three month period) to view the record for their employer for a period dating back up to three years. However, they must have worked for the employer for the full duration of that period.
HMRC requirements
Traditionally compliance has been challenging, as currently an independent tronc (separate from the employer) only needs to account for tax and not National Insurance. If the employer influences the tronc’s distribution, then NI does become deductible.
How to prepare
- Create a written policy to set out how tips are dealt with.
- This can be shared electronically or physically – all employees must be able to access it in plain
- Ensure your payroll is ready.
- Record of allocation of the tips (this must be kept for three years starting from the point the tip was received).
Other considerations
- Fair allocation: what’s determined as ‘fair’ distribution could be seen as subjective.
- The portion of tips allocated to agency workers must be passed to the recruitment agency, which then distributes them to the workers within a month.
- Disputes: employees will have the right to dispute distributions through employment tribunals if issues are not resolved. This is where the three year tipping record is essential.
- Additional costs for employers: all administrative costs must be absorbed by the employer (imposed by the bank or tronc operator).
- Tronc systems can still be used, but administrative costs must be covered by the employer (and not taken from the tips or charges).
- Use an external tronc masters support for fair and transparent management and delivery of tronc.