The Employment (Allocation of Tips) Act 2023
The Act makes it unlawful for businesses to hold back tips and service charges from their employees, ensuring staff receive all of the gratuities they have earned. These measures came into effect October 1st, 2024.
If in breach, businesses could be liable for compensation of up to £5,000 per employee!
What is the Employment (Allocation of Tips) Act?
The purpose of the new legislation follows two main themes:
- to ensure 100% of gratuities (tips and service charges) left by customers reach workers
- that the allocation of those monies is dealt with fairly
The Act primarily covers “employer-received” tips (non-cash gratuities), left by card or as a discretionary service charge over which the employer has initial control. But, cash tips that an employer has control or direction over, are also covered. The legislation has an associated Code Of Practice.
100% of Gratuities left by the customer must be passed to workers
Operators cannot make any deductions to cover any administrative costs (card fees, payroll costs etc.).
All gratuities paid at/attributable to a single venue, must be allocated amongst the workers at that venue.
Non customer facing workers can receive a share, if their role can be linked directly to the service provided in that site. This is primarily intended to recognise cloud kitchens or centralised prep kitchens, but can extend to other roles that support the overall guest experience.
All gratuities must be fairly allocated and paid to workers no later than the end of the month following the month received from the customer.
Agency Workers
Through the new legislation, agency workers are entitled to a share of gratuities in the same way as employees.
That share may be invoiced to the agency (who will then arrange allocation amongst those workers) or paid directly by the host employer. It is worth noting that freelancers (e.g. self employed chef) fall outside the legislation’s scope, leaving tip allocation at the discretion of employers or troncmasters, providing flexibility in distribution.
Further non-statutory guidance of the practicalities of passing tips to an agency may come in the coming months.
What is fair?
The core objective of the law is to establish fairness in how tips are distributed among staff.
Fairness can vary based on factors such as job role, seniority, and length of service. Each business may interpret fairness differently based on its unique service dynamics.
There is no one-size-fits-all, but employers are required to maintain transparent policies outlining how voluntary service charges and tips are distributed to all relevant staff members.
It is worth noting that the finalised Code Of Practice prioritises hours worked as a primary factor in deeming what is ‘fair’ under the legislation.
Policies and Records
A written policy which fully explains how gratuities are collected and allocated to workers must be maintained. This policy must state how it meets the terms of the new legislation. Policies may be the responsibility of the business, the troncmaster, or both, depending on how gratuities are dealt with. All policies must be made available to workers.
Full records of qualifying gratuities received and paid out must be maintained for a 3 year period. Workers can request access to their record of gratuities, for one month or two consecutive months, but these months must have already passed. The worker must have worked during the requested months and can only make one request, per three-month period. A worker can ask to see records of total gratuities received by site, but is not entitled to see other personal information or other workers details (excluded under the Data Protection Act).
Operators should ensure their team can confidently communicate tipping policies to customers. Information on service charges, tips, gratuities, and cover charges should be upfront before the purchase, covering mandatory or discretionary charges, deductions, and distribution details.
Salaries and Wages
Operators are prohibited from negotiating with a worker to vary their contractual salary/wages, in return for a share of gratuities.
Employers should clearly outline the base pay in employment contracts, excluding tips, to avoid liability for the full wage stated.
Tips that are not properly accounted for may be deemed part of the basic wage, leading to unintended National Insurance Contributions on the full amount. This oversight could result in increased costs for both employers and employees, as well as potential penalties for non-compliance.
Reserve Refunds
Operators are prohibited from keeping a portion of funds back to distribute later.
It has been common place for an element of gratuities to be banked into a reserve to be allocated at a later time. Sometimes referred to as a “Rainy Day” fund, this has historically been used to smooth pay curves across a year, taking into account high and low trading periods.
Operators will need to consider such trends and how this may be managed under the new legislation.
Note, any existing fund in place before 1 October 2024, can be carried forward and there is no requirement to pay these monies out until needed. This may provide some runway for the immediate future but clearly will deplete at some point.
Complaints and Enforcements
Workers can take complaints regarding the running of a tronc (in relation to employer-allocated gratuities) to an Employment Tribunal.
These complaints must be made within 12 months, with possible extensions under certain circumstances.
Tribunals can order corrective action and/or compensation of up to £5,000 per worker.
Multiple complaints can lead to substantial financial consequences for businesses. Additionally, tribunals may recommend payments to affected groups similar to whom made the complaint.
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