Tips to be paid to staff in full under latest plans for legislation

The plans are 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.

The intention is to prevent the practice currently adopted by some businesses of retaining all or part of discretionary service charges paid by card instead of passing them on in full to staff.

The government originally announced these plans several years ago following a Call for Evidence in 2015. It consulted on proposals in 2016 but no further steps were taken. More recently, as we have moved towards a cashless society, particularly during the pandemic, there has been mounting pressure on the government to implement the plans. 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.

The new legislation will include:

• 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;

• 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;

• a right for workers to request information relating to their employer’s tipping record. 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 it was paid by the customer.

A breach of the rules will enable employees to bring a claim in the Employment Tribunal, which could result in compensation and fines.

An important issue is whether the legislation will allow employers to deduct charges applied directly by banks on tips paid by credit card. The proposals state that employers will not be able to deduct administrative charges. However, the reference to administrative charges in the 2016 consultation was primarily focussed on the sometimes vaguely quantified cost to the employer of ‘handling’ or processing the service charges. Bank charges are usually between 2-5%, but the government’s Call for Evidence revealed that some employers were charging between 5-15% administrative charges with little explanation for what those covered. It seems reasonable to prohibit employers from charging their own handling fee, but it could cause issues if they have to cover bank charges.

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.

The government will implement the new legislation in the long-awaited Employment Bill, the timing of which remains unknown.

In the meantime, employers should review their policies and practices on tipping in case changes may be required.