Government backs new law on tips

The Employment (Allocation of Tips) Act received Royal Assent on 2 May 2023.

The Act will overhaul tipping practices so that all tips, gratuities and service charges (“tips”) are distributed fairly amongst staff and paid without deductions. Its main provisions are expected to come into force in 2024.

Background to the Act

The new legislation is estimated to affect around 2 million hospitality workers in the UK working in pubs, cafes and restaurants, often paid minimum wage and for whom tips can make up a large proportion of their income.

Cash tips paid directly to a worker generally become the legal property of that individual (although it remains possible for employers to exercise influence over cash tips under their terms of employment). Payments made by card, however, are paid directly to the employer and become the legal property of the employer.

The Act's intention is to prohibit the practice, currently adopted by some businesses, of retaining all or part of tips paid by card instead of passing them on in full to staff.

The government originally announced plans to legislate along these lines several years ago following a Call for Evidence in 2015. At that point in time, evidence revealed that around two thirds of employers in the hospitality sector were making deductions from staff tips, sometimes up to 10%. The government consulted on proposals to legislate in 2016, but no further steps were taken.  

Many employers have changed their tipping practices since the 2015 Call for Evidence, but, according to the government’s statistics, deductions of 3-5% remain commonplace within the hospitality sector.

More recently, as we have moved towards a cashless society, particularly during the pandemic, there has been mounting pressure on the government to address this issue. It has become increasingly important with the rising cost of living. Around 80% of tips are now paid by card, making it easier for businesses to retain a proportion before passing the rest to staff.

Since 2009, it has been unlawful for employers to use tips to count towards minimum wage pay. A Code of Practice was published at the same time aimed at improving transparency around tipping practices for both customers and staff. However, the Code of Practice was voluntary and some unions have since lobbied the government for stronger protection.

What does the Act say?

The Employment (Allocation of Tips) Act includes:

• A requirement for employers to pass on 100% of tips to staff with no deductions, other than those required by tax law.
• A statutory Code of Practice on Tipping setting out the principles of fairness and transparency that employers must have regard to. Where a tronc system is in place, this will be viewed as compliant with the Bill provided it is being run as the Bill intends.
• Requirements for employers to have a written policy on tips, to distribute tips in a way that is fair, transparent and consistent and to keep a record of how tips have been dealt with for three years from the date received.
• A right for workers to request information relating to their employer’s tipping record over a specified period during which they had worked for the employer, within the last three years. Employers will have flexibility on how to design and communicate a tipping record, but will need to respond to a request for information within four weeks.
• A requirement for tips that are distributed via a tronc to be paid no later than the end of the month following the month in which they were paid by the customer.
• A right for agency workers to benefit from the Act in the same way as workers.

A breach of the rules will enable workers to bring a claim in the Employment Tribunal, which could result in the employer being required to revise the allocation to the worker and/or pay compensation.

Significantly, the obligations apply to the “total amount” of tips paid by customers, therefore including any amount subsequently deducted by way of bank, payroll or administrative charges (for example, credit card processing fees). At a time of rising costs generally, this could be a significant additional burden for hospitality businesses to bear. Some businesses may look for alternative solutions, such as not allowing tips by card, which could result in workers seeing a reduction in tips as fewer customers carry cash, defeating the objective of the legislation.

What next?

Now that the Act has received Royal Assent, confirmation of the date of commencement is expected to be announced later this year, with the Act coming into force in 2024. The associated Code of Practice will also be drawn up this year, following a formal consultation.

The trade body UKHospitality described the Bill (as it then was) as a “good starting point" but said that there are additional issues it would like to see addressed, including the length of time necessary for businesses to adapt, the levels of red tape, the potential need to disclose sensitive business information and the need for tips to count towards earned income, thus helping those workers seeking mortgages. However, the Bill was not significantly amended before passing into law.

In the meantime while the Act awaits commencement, employers should review their policies and practices on tipping to ensure they are compliant with the changes coming into force.