Examining the law on staff tips

Since 2015, the Government has been investigating the idea of controlling how tips are distributed to staff in the hospitality sector. Finally, a new law has been introduced that does this: the Employment (Allocation of Tips) Act 2023. In this article we look in detail at this piece of legislation and what it now means for employers.

Stacie Cheadle, Consultant and Employment Law Researcher, Croner-i

Background

According to a YouGov poll, conducted before the Covid lockdowns, 35% of Britons always tip, whilst 28% often do. Only 5% said that they never tipped at all. However, how much of this tip money, provided by patrons to say thank you for good service, actually reaches the pockets of the staff that worked to earn it? The same poll reports that two in five respondents said that they were less confident that tips paid via credit or debit card would make it to the intended recipient than had they been paid in cash, so it certainly seems the perception is that it is not likely.

In 2015, there were media reports of unfair tipping practices by major restaurant chains and other hospitality outlets, such as deducting from tips before passing them on to workers. Out of this came calls for reform to the law in this area and the need for legislation that forces employers to hand over all tip money, service charges and gratuities.

The Government has consulted with the public a number of times on this issue, beginning with a 2015 Tips, Gratuities, Cover and Service Charges: Call for Evidence. Later on in 2016, there was a consultation on “Tips, gratuities, cover and service charges: proposals for further action”, which sought feedback on whether employers should be prevented from making any deductions from such payments.

Finally in 2018, the Government announced its intention to legislate to prevent employers from making deductions from tips, and it was included in the Employment Bill proposed in the December 2019 Queen’s Speech. However, that Employment Bill was not ultimately introduced and the subsequent Queen’s Speeches in 2021 and 2022 were silent on the matter of tips.

Covid, however, changed things dramatically, with the already declining use of cash sped up as many businesses stopped accepting anything other than electronic payments, to try and stop the spread of the pandemic. This is a habit that’s stuck and many people now no longer carry cash at all; in September 2021, the Government noted that 80% of all UK tipping now happens by card, rather than cash. This, along with lockdowns, social distancing and family “bubbles” presented a significant challenge to hospitality and led to renewed calls for reform.

New law

The Employment (Allocation of Tips) Act 2023, which gained Royal Assent on 2 May 2023, amends the Employment Rights Act 1996 by inserting new legal obligations on employers. Once implemented, employers will be forced to pass on all tips, gratuities and service charges they receive or exercise control over, to workers in full.

Tips distribution under the law

When passing on tips, gratuities and service charges, employers will not be permitted to make any deductions, and the payment must be made by the end of the following month.

Employers must also ensure the fairness of arrangements to distribute those tips among workers, whether when distributed by the employer or via an independent tronc. This includes not sharing payments with a different restaurant under the same employer.

Agency workers will benefit in the same way as salaried staff and all workers will be able to raise a tribunal claim if they were unfairly allocated tips or not paid them on time. The compensation for such claims will be up to £5000 if made within 12 months.

Employers will need to have a written tips policy which is available to workers. Records of tips received and allocated must also be kept for three years. Workers can request to see parts of these records and raise a separate tribunal claim if records aren’t kept, or their employer doesn’t allow them to see them.

It is important to note that the legislation will only apply where the employer controls or influences the allocation of tips; employers who have no influence into how tips are passed on to workers won’t be directly bound by the new law. However, they may wish to introduce some form of framework as to how staff will receive tips in line with the Act.

Code of Practice

The Act gives the Secretary of State the power to introduce a new Code of Practice, which will guide employers on being fair and transparent when distributing qualifying tips, gratuities and service charges. The details of this have not been released yet. But employers should be careful to comply with it when it is introduced or risk an uplift of up to 25% of any award given as a result of a breach of the law on tips, in accordance with the rules on breaches of statutory Codes of Practice.

Implementation

These provisions apply both to those working directly for hospitality businesses and to agency workers supplied to work in those businesses.

It is likely that the law will be implemented in 2024 so employers should use this time to consider whether they need to make any changes. Those employers who currently keep tips will have the biggest job to do because they will also need to manage the financial impact on them. It should be remembered that it is already unlawful for tips to make up any part of the National Minimum Wage pay that workers receive. Once a fair allocation system is devised, it’s important to communicate this clearly and transparently to workers in good time before the change, so that those workers can see their employer is aware of their new obligations and is acting in accordance with them.

Whilst it is expected that this will have a positive impact, since employees are receiving the full reward for their hard work, issues may arise over staff not believing that tips are being shared fairly. As such, it’s beneficial for employers to have a clear plan in place, which can be communicated to their teams, to minimise any resistance or grievances. The new statutory Code of Practice, when released, will provide information to help businesses better understand how to do this, to ensure fairness and transparency.