New legislation on tips: what businesses need to know

From 1 October 2024, new legislation applies in England, Scotland, and Wales to ensure that businesses whose employees regularly receive qualifying tips, gratuities, and service charges from customers distribute these fairly among workers. This legislation aims to end unfair tipping practices by employers and ensure that workers receive 100% of qualifying tips. It does not apply to Northern Ireland where employment legislation is devolved.

Businesses that regularly accept tips and service charges from customers, such as restaurants, need to comply with a statutory Code of Practice on fair and transparent distribution of tips from October 2024, which sets out principles of fairness and transparency. Employers should consult with workers to ensure that the system of allocating tips is fair and transparent.

Non-compliance with the Code of Practice will not give grounds to bring a claim in itself but will be taken into account when deciding relevant worker claims regarding tips.

What are the key points?

The Employment (Allocation of Tips) Act 2023 applies to employers who receive qualifying tips, gratuities, and service charges from customers on more than an occasional basis. This includes restaurants, hairdressers, and other businesses where tipping by customers is common.

As well as employees, the Act applies to workers, including agency workers supplied to the business.

Employer-received tips

Where the employer receives or controls the distribution of tips, they must distribute tips received from customers to workers without any deductions. This means that employers will need to bear the costs for administrating any tronc scheme, including credit card charges where tips are paid by customers using credit cards and payroll fees. These tips must be allocated to workers by the end of the month following the month in which they were paid by the customer.

Worker-received tips

The Act does not apply to tipping practices where tips are paid directly to workers in cash and kept or informally pooled by the workers themselves, i.e. where the employer does not exercise control or significant influence over the tips. However, employers may still have obligations related to policies and record-keeping.

Fair distribution

Employers must ensure that tips they receive or control are allocated fairly among workers. The Act and Code of Practice is not prescriptive about how tips should be allocated but requires employers to set out fair criteria for distributing tips. Example criteria to consider include: the type of role the employee works, the hours worked, performance, and customer intention. Employers must avoid any form of unlawful discrimination when allocating tips between workers.

Written policy and tipping record

Where the Act applies to them, employers must have a written policy on how tips are handled and ensure that workers are aware of their entitlements.

A tipping record must also be kept by the employer, unless it receives tips only occasionally and exceptionally. The tipping record must include details of all qualifying tips received by the employer at the place of business, and the amount allocated to each worker, or the amount allocated to the tronc. This record must be kept for a period of three years, beginning with the date on which the tip was paid. A worker has the right to make a written request (one per three-month period) to view the tipping record in relation to employer-received or controlled tips that the worker has received.

Deductions from wages

As an exception to the usual rule that deductions from wages can be made with the worker’s prior written consent, or under an appropriately worded clause in the employment contract, the Act provides that deductions can only be made from qualifying tips, gratuities and service charges if they are required or authorised by statute (such as tax deductions).

Troncs

For employers that use troncs to distribute tips among staff, these must be operated by independent tronc operators so that the tips are not subject to employers’ and employees’ National Insurance contributions.

Employers may either run their tronc internally (using an employee with the right skills and ability to act impartially) or use an independent, third-party tronc service. The tronc operator must run a payroll and report to HMRC. Employers will need to ensure written tronc scheme rules are made available to all employees (including agency workers).

Under the Act, the employer is responsible for the fairness of the allocation of an amount to a tronc but is not responsible for the subsequent allocation of that aggregate amount between individual workers. The tronc operator is responsible for ensuring that the subsequent distribution of tips among workers is transparent and fair.

Legal remedies

Workers can complain to an employment tribunal if there is a failure to comply with the obligations regarding the allocation or payment of tips. Tribunals can order employers to revise the allocation of tips and make payments to workers in respect of any underpayment of tips.

Fact sheet guidance on tips and service charges and a template restaurant tips and gratuities policy can be found on the Markel Business Hub.