Distribution of Tips.

The Employment (Allocation of Tips) Act 2023 is expected to come into force on 1 October 2024. Employers will have a duty to ensure that all qualifying tips, gratuities and service charges (“Tips”) are allocated fairly to workers.

The requirements of the Act apply to the actual amount paid by the customer - any deductions from the amount paid, whether made by the employer or any other person, are to be disregarded. For example, any charges or fees for using a credit or debit card will not reduce the amount that must be allocated to workers.

It does not make a difference whether a service charge is mandatory or discretionary for the customer to pay.

The Act will protect workers and also eligible agency workers. It does not apply to the self-employed.

To be a qualifying tip, gratuity or service charge, the employer must receive or exercise control or significant influence over its distribution. This is most common when the employer first receives the money and then allocates it to workers.

A sum that is not paid in money can also be a Tip if it is paid in form of a voucher, stamp, token or similar item, which has a fixed value expressed in monetary terms and is capable of being exchanged for money, goods or services.

The draft statutory Code of Practice (“the Code”) provides the following definitions:

• Tip or Gratuity - A spontaneous payment offered by a customer. This can be in cash, as part of a cheque payment, as a specific gratuity on a credit or debit card payment or paid using a digital payment service or application.
• Gift - A one-off reward that a customer may wish to make that is non-monetary. It will have a monetary value but cannot be divided or exchanged for cash (for example, a bottle of wine).
• Service Charge - An amount added to the customer's bill before it is presented to the customer. If it is made clear to the customer that the charge is a purely discretionary amount and there is no obligation to pay, the payment is a voluntary service charge.

A worker-received tip is an amount paid by a customer to a worker that is not required to be passed on to the employer. Worker-received tips only fall within the meaning of qualifying tips, gratuities and service charges under the Act if either of the following apply:

• They are subject to employer control. That is, if the employer exercises control or significant influence over the allocation of the payment, for example, where the employer directs that tips are shared among other workers.
• They are connected with any other worker-received tips that are subject to employer control. A worker-received tip will be "connected with" another worker-received tip if both tips are paid at, or are attributable to, the same place of business, and the second tip is paid later in the week, or in the week following the week, in which the first tip is paid. A "week" for these purposes means any period of seven days beginning with a Monday and ending with a Sunday.

Where the only tips paid at a place of business are worker-received tips that do not fall within the definition of qualifying tips, gratuities and service charges, most provisions of the Act will not apply to that place of business. However, the employer may still have some limited obligations relating to policies and record-keeping (see below).

Fair allocation and arrangements for payment

An employer must ensure that the total amount of the Tips paid at, or attributable to, a place of business of the employer is allocated fairly between the employer's workers at that place of business and then paid.

The fair allocation and payment of Tips must be made by no later than the end of the month following the month in which the Tip was paid by the customer.

These obligations are varied to some extent in the following circumstances:

• Where the Tips are managed by an independent tronc operator. The Code states that if an employer chooses to appoint an independent tronc operator:
  • The instructions, or framework, the employer sets for its operation must be in line with principles of fairness. An employer that does this, and who has a reasonable belief that the tronc is operating independently and fairly, will be regarded as having complied with the Code.
  • To maintain a fair allocation of tips, an employer must act if it becomes aware of an independent tronc operator acting in an unfair or improper manner. This could involve instructing the tronc operator to change its operation, replacing the tronc operator with an alternative operator, or terminating the tronc arrangement altogether. If an employer fails to act, they may be regarded as having failed to comply with the Code and may face enforcement action (for example, by workers bringing tribunal claims on the ground that the employer's arrangements for allocation through a tronc are no longer fair).
• Where the Tips are payable to eligible agency workers. In this event, the principal can choose to pay the amount to the agent instead of paying it to the agency worker. (The principal is treated as the employer of the eligible agency worker for these purposes.) This reflects the reality that an agency worker will often not be on the principal's payroll. The principal must make payment to the agent by no later than the end of the month following the month in which the customer paid the Tip. If the principal chooses to pay the tip to the agent in this way, the agent must then pay the full amount to the eligible agency worker before the end of the month after the month in which the agent is paid the amount.
• Where tips are paid at, or attributable to, a non-public place of business. A public place of business is where interaction between customers and workers occurs wholly or mainly face-to-face. For example, each restaurant in a group of restaurants would be a public place of business, but the company headquarters of the restaurant group is likely to be a non-public place of business. An employer can comply with the requirement to fairly allocate non-public Tips between workers at the non-public place of business by instead ensuring that the total amount of the non-public Tips is allocated fairly between both those workers at the non-public place of business and workers at one or more public places of business of the employer. This provides some flexibility to depart from the general rule that a Tip must be allocated to workers at the place of business where it was paid, although employers can only do so if it is fair.

The Code sets out the key principles of fairness and suggests how employers can apply them to different aspects of developing and implementing a policy on the treatment of Tips.

The Code states that it will be for an employer to decide which specific principles best apply to its business and that, in the event of a dispute, it will ultimately be for an employment tribunal to decide whether the employer has complied with the law.

The Code provides that:

• The fair allocation and distribution of Tips does not necessarily require employers 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.
• Employers should give due consideration to all of the workers involved in providing service to customers, including agency workers.
• The allocation and distribution of Tips should be determined by reference to a clear and objective set of factors which should be fair and reasonable given the circumstances and the nature of the employer's business.

The Code suggests an illustrative, rather than exhaustive, list of factors which employers may 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.

The Code goes on to state that:

• Employers must avoid indirect or unintentional discrimination, which may be a risk when fewer tips are allocated to a group of workers which includes a disproportionate number of workers with a particular protected characteristic. Further detail, including some worked examples, will be provided in the non-statutory guidance that will be published in due course.
• Employers should consult with workers to seek broad agreement that the system of allocation of tips is fair, reasonable and clear. The factors considered by employers must be stated in the tipping policy shared with workers.
• Employers must take account of any legal or contractual requirements to engage in formal collective consultation where a tipping system affects terms and conditions around pay that are covered by a collective agreement with a recognised trade union, or an agreement made under the Information and Consultation of Employees Regulations 2004.
• Employers should review their approach to allocating tips on a regular basis in line with staff turnover and any wider changes to their organisations and be alert to the risk that a previously lawful method of tip allocation becomes unlawful and discriminatory if certain groups of workers become split on the basis of a protected characteristic.

Provided it is not discriminatory, the fact that a particular method of distributing Tips is genuinely considered by affected workers to be fair may help a tribunal to conclude that it is fair and reasonable.

Tips must be allocated between workers at the place of business where it was paid, or at least where it was attributable to. For example, Tips paid by customers at a particular restaurant will not be shared with workers at a different restaurant of the same employer. There is however an exception to this rule for Tips paid at, or attributable to, a non-public place of business (see above).

Where a worker has a contractual right to receive an amount representing Tips under a contract of employment, any entitlement to be allocated Tips under the Act does not affect that contractual right. However, an entitlement under the Act to Tips can be discharged through the payment of contractual tips, and vice versa. An employer is not required to pay a worker a fair allocation of Tips in addition to the contractual tips that the worker is entitled to, to the extent that the worker’s contractual right already comprises a fair allocation.

Remedy for non-payment

Workers and eligible agency workers will be able to complain to an employment tribunal where an employer has failed to allocate or pay Tips. The time limit for bringing a claim is 12 months from the date of the failure to comply (subject to the requirements and effects of ACAS early conciliation), which is significantly longer than the usual time limit of three months for other tribunal claims. An employment tribunal will have the power to make a recommendation to the employer and order an employer to revise the allocation of Tips and make a payment to a worker or a number of workers, not just the worker making the claim. A tribunal may also order the employer to pay compensation of up to £5,000 for any financial loss suffered by the claimant due to the employer’s breach.

Workers and eligible agency workers will, alternatively, be able to make an employment tribunal claims for unlawful deduction of wages where a deduction from a Tip is unlawful, and was not required or authorised by statute. The time limit for bringing such a claim is three months from the date of the deduction (subject to the requirements and effects of ACAS early conciliation).

Written policy

Employers will need to have a written policy in place setting out how Tips are dealt with, unless Tips are only received occasionally and exceptionally.

The Act does not set out how to assess the threshold of "more than an occasional and exceptional basis". It appears to be a low threshold, however, particularly as the references to "occasional" and "exceptional" are cumulative. For example, if payment of Tips at a particular place of business is occasional but not exceptional, the threshold would still appear to be met. The Code gives as an example that a clothing shop which only receives Tips from customers a few times a year would not need to have a written policy. In practice, the requirement to have a written policy is likely to apply to most workplaces where Tips are paid.

An employer who is required to have a written policy for a place of business must make that policy available to all its workers at that place of business.

The policy must include information regarding:

• Whether the employer requires or encourages customers to pay tips, gratuities and service charges at the place of business.
• How the employer ensures that all tips, gratuities and service charges paid at, or attributable to, the place of business are dealt with in accordance with the requirements the legislation. This should include information on how the employer allocates qualifying tips, gratuities and service charges between workers.

If an employer is not required to have a written policy for a place of business only because worker-received tips paid at, or attributable to, the place of business do not fall within the meaning of qualifying tips, gratuities and service charges, the employer must still make certain information available to workers. That information includes the fact that the employer is not statutorily required to have a written policy for the place of business, and the reasons why that is the case. An employer will therefore need to provide that information at a place of business where non-qualifying tips are paid on more than an occasional and exceptional basis. This is likely to be the case, for example, at a restaurant where all tips are paid to workers in cash, without any interference or influence from the employer.

We can provide a policy for you.

Record keeping

Employers will need to keep the following records for three years, beginning with the date on which the Tips were made:

• The amount of Tips paid at or attributable to the place of business.
• The amount of those Tips that the employer:
  • allocated to that worker; and
  • arranged to be allocated to their workers at the place of business by an independent tronc operator.

A worker may request those records if they have worked for the employer at some time during each month that forms part of the request.

If an employer receives such a request, the employer must provide the worker with the requested records for the period specified in the request, or a substantially similar period.

The period specified in the request must:

• Be a period of one month, or two or more consecutive months.
• Begin no more than three years before the date of the request.
• End before the date of the request.

That employers have the alternative option of providing records for a period that is "substantially similar" to the period specified in the request (rather than providing records for that specified period) allows for greater convenience where, for example, the employer keeps its records on a weekly or four-weekly basis, rather than monthly.

The records must be provided to the worker within the period of four weeks beginning with the date that the request is received by the employer.

A worker may not make more than one request for records in any three-month period.

Such a disclosure of records does not breach any restriction on the disclosure of information, however imposed, including confidentiality obligations. This is subject to the fact that employers are not required to disclose information that would contravene data protection legislation - although in determining whether a disclosure would do so, the duty imposed by the Act is to be taken into account.

In practice, an employer is likely to be able to share the requested records without including the personal data of other individuals (for example, by redacting that data), thereby avoiding potential breaches of data protection legislation.

Remedies relating to policies and record keeping

Workers will be able to make an employment tribunal claim where an employer fails to comply with the duty to have a policy in place and keep records. The time limit for bringing this claim is three months from the date of the failure (subject to the requirements and effects of ACAS early conciliation). A tribunal may order the employer to comply with their policy and make records, and may also order compensation of up to £5,000 for any financial loss suffered by the claimant because of the breach.

If an employer receives a request for records, but is not required to maintain those records only because worker-received tips paid at, or attributable to, the place of business do not fall within the meaning of qualifying tips, gratuities and service charges, it must notify the worker that it is not required to maintain the requested records under the legislation, and explain why. The employer must provide this information within the period of four weeks beginning with the date that they receive the request.

For more information and/or advice, please contact the Employment Department.