This article was originally posted in International Employment Lawyer.

The Employment (Allocation of Tips) Act 2023 comes into force on October 1, 2024. Most likely to impact the hospitality sector, the new law regulates how employers allocate tips, gratuities and service charges among workers and eligible agency workers, and provides that such employer-received payments are given to workers and eligible agency workers in full and allocated in a fair and transparent way.

The government has published a Statutory Code of Practice which sets out the relevant considerations to fairness and transparency. Failure to comply with the code will be admissible as evidence in Employment Tribunal proceedings and tribunals will be required to take the code into account.

Workers cannot contract out of their rights and any attempt to do so will be void.

Fair allocation

The legislation itself doesn’t set out what is “fair” in the allocation of tips, and each employer should instead look to the code to decide which specific principles best apply to its business. Employers are required to pass on all tips and service charges to staff without deductions, except in very limited scenarios, such as deduction of income tax.

In terms of what is “fair,” the code notes that employers aren’t necessarily required to allocate the same proportion of tips to all workers. There may be legitimate reasons why employers choose to allocate different proportions of tips to different workers.

Under the code, employers should give appropriate consideration to all workers involved in providing service to customers, including agency workers.

The allocation of tips should be by reference to a clear and objective set of factors (see requirement to have a policy, below), which should be fair and reasonable given the circumstances and the nature of the employer’s business.

The following non-exhaustive list of factors may be helpful for employers to consider:

• type of role or work (for example, distribution between front-of-house and back-room workers);
• basic pay (and how workers are engaged);
• hours worked during period when tips are received;
• individual or team performance;
• seniority or level of responsibility;
• length of service with the employer;
• customer intention; and
• whether the employer requires or encourages customers to pay tips, gratuities and service charges at the place of business.

Employers should avoid indirect or unintentional discrimination, for example, where fewer tips are allocated to a group of workers that share a particular protected characteristic.

The code recommends that employers consult with workers to seek broad agreement that the system of allocation of tips is fair, reasonable, and clear, although there is no obligation to obtain consent/agreement on every point.

Employers should also keep their approach to allocating tips under review.

Timely allocation

Employers are required to make the payment of the fairly allocated tips in full no later than the end of the month following the month in which the customer paid the tip. For example, if a customer leaves a tip on June 23, it must be distributed by July 31 at the latest.

Written policy requirement

Employers that pay qualifying tips, gratuities, and service charges on more than an occasional and exceptional basis, must have a written policy in place, setting out how those tips are allocated fairly in accordance with the act, and must make the policy available to all workers.

In practice, most employers are likely to require a policy where tips are paid. The policy should be made available to all workers at the business, for example, electronically or on a notice board in a staff area. The policy must include information regarding:

• how the employer ensures that all qualifying tips, gratuities and service charges paid at, or attributable to, the place of business are dealt with in compliance with the law; and
• how the employer allocates qualifying tips, gratuities and service charges among workers.

Records-keeping obligations

Where employers are subject to the act, they will also need to keep records of all tip allocations for three years from the date they were paid and make those records available to workers on request (the frequency of a request is limited to one request per worker in a three-month period).

The employer’s record must include the following information:

• the amount of qualifying tips, gratuities, and service charges paid at (or attributable to) the place of business; and
• the amount of those qualifying tips, gratuities, and service charges that the employer: (a) allocated to their workers at the place of business; and (b) arranged to be allocated to their workers at the place of business by an independent tronc operator.

Employers will need to comply with GDPR and should provide the information regarding the total amount of tips received by the employer and paid to the worker, but not the specific amounts paid to other workers.

Rights to complain

Workers have the right to complain to an Employment Tribunal where there has been a failure to comply with the obligations under the act up until 12 months from the date of the failure to comply. This is much longer than for other tribunal complaints (which is generally three months).

In addition to the usual remedies available, the tribunals have the power to revise the tips allocation, make a payment to any impacted workers (not just the claimant), and can order the employer to pay up to £5,000 of compensation for any financial loss suffered by the claimant as a result of the breach.

How to ensure compliance

Review practices – Employers should review their current practices for the allocation of tips and, assuming they fall within the remit of the act, ensure that they are compliant ahead of October 1, 2024.

No deductions from tips – Employers should ensure they don’t make any deductions from tips (e.g., for credit card fees) and that any tips are distributed to workers and agency workers in full.

Written policies made available – Employers should ensure they have written policies in place setting out how tips are allocated fairly, and that the policy is made available to workers and agency workers (if relevant). As a recommended practice, communicate with staff ahead of the change to try to obtain broad agreement on the distribution of tips in order to avoid any disputes, particularly if this is likely to be a change in practice.

Records keeping – Employers should be prepared to keep detailed records of the distribution of tips and to respond to any requests made for the records.