A tip for your trouble – new rules for employers on treatment of gratuities and service charges (UK)David Whincupon June 7, 2023 at 2:26 pm Employment Law Worldview


Employers in the hospitality, leisure and service sectors should be aware that the Employment (Allocation of Tips) Act 2023 has now completed the parliamentary process and will be coming into force at some point in 2024, most likely May.   

This particular piece of legislation has been a long time coming – the suggestion was first floated back in 2015 following concerns regarding the treatment of tips for workers and the transparency of such practices to both consumers and workers. There is good reason to think it a sledgehammer to crack the proverbial, but as it will have considerable political appeal in the run-up to the next election, the chances of its being much later than that are slim.

The Act will insert more than 20 new sections into the Employment Rights Act (ss27C-Y) to create a statutory obligation on employers to allocate tips, gratuities and service charges to workers without deductions, so no service or admin charges may be knocked off the pot first. It will cover “qualifying tips, gratuities and service charges”, namely tips received directly by employers, associated persons, etc. (e.g. tips or service charges paid to an employer using a credit or debit card) and worker-received tips which are subject to employer control (e.g. where the employer directs that tips are shared amongst other workers).  It will not interfere with existing 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. There are specific provisions where tips are distributed via a tronc.  Qualifying tips must be paid no later than the end of the month following the month in which they were paid by the customer.

Employers will be required to ensure that the total amount of the qualifying tips is allocated “fairly” between workers at the particular place of business and there will be a new statutory Code of Practice introduced to provide guidance to employers on what amounts to a fair allocation. The Code will be developed in conjunction with Acas and will be the subject of a formal consultation.

The Act will introduce a number of new rights for workers, including the ability to request information about how tips are paid and the right to bring a claim if their employer has failed to comply with the new obligations.  Note that claims relating to the allocation of tips can be brought up to 12 months after the alleged failure to comply took place. The reason for such an extension over the three months applicable to your average unlawful deductions claim is unclear. Employment Tribunals will have a number of powers, including the ability to order employers to revise the allocation of tips or to make a payment to one or more workers. Two other things to flag. Where tips are paid on more than an occasional and exceptional basis, employers will be required to have a written policy in place covering matters such as how the employer allocates tips, etc. Affected employers will also be required to keep records of their tipping practices for at least three years beginning with the date on which the tips were paid.

As failure to comply with the Code may generate an ET claim, the Code will in effect become part of the enforceable employment contract.  The question which it will need to address to be useful is the extent of any discretion remaining to the employer, and how far “Code-fairness” becomes unfair in practice because it cannot anticipate or second-guess facts on the ground. 

On the assumption that market forces and employee relations/retention issues already ensure a distribution of tips which broadly works, there must be some question over the wisdom of generating a whole new strand of rights to fix an issue which (once you end the employer’s right to retain any proportion of the tips) is perhaps more one of form than substance.  We say “a whole new strand” because to help make the new rules stick, the new entitlement to complain about unfair distribution of gratuities will count as a statutory right protected from retaliation or termination under s104 ERA, so side-stepping the two years’ minimum service requirement for an unfair dismissal claim and maybe, if the unfair distribution is not limited to the individual complainant, also bringing it within the whistleblowing rules. The temptation for workers in traditionally insecure employments to seek to gain such protections by making prompt and more or less speculative complaints around very small sums may be significant.  If that concern is realised, then together with the record-keeping obligations, this Act will represent a burden on employers potentially quite disproportionate to the sums at stake. We must hope that the Code is sufficiently clear that compliance or otherwise can be swiftly and definitively determined.

As this legislation has been talked about for a number of years, many affected businesses have already changed their tipping practices by passing 100% of tips to workers, but now is the time to review your current arrangements to ensure they comply with all the new obligations before they come into force next year. It may be worth exploring options with a professional provider of external troncmaster services to see if any of the potential liabilities here can be laid off on someone else. Section 3 of the new Act deems fair use of an independent tronc operator by an employer to be compliance with its obligations of fair distribution, so that would appear to be an easy answer, though obviously not without cost.

If you have strong views on how these things do or ought to work, we recommend your inputting to the intended consultation on what “fairness” will mean –   like “ reasonableness”, defining that word is the very embodiment of trying to nail jelly to a wall, so any voice of reason you can add to that debate can only be a good thing.

Employment Law Worldview

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