So, you run a restaurant. You pass on all tips and service charges received from satisfied customers to your hard-working staff. Just down the road there is another restaurant, which pockets all gratuities paid by diners and as a result they make higher profits. Does this sound fair? Of course it isn't!

All employers will have to follow the same rules when the Employment (Allocation of Tips) Act 2023 (the Act) comes into force this summer. The Act will be supported by a statutory code of practice on the fair and transparent allocation and distribution of tips (the Code). In mid-December 2023, the Government launched a consultation on a draft Code, which will apply to England, Scotland and Wales.

Purpose of the Act and Code

The purpose of the Act is to ensure that employers pass tips paid by customers to workers without deductions and allocate them fairly, while the Code provides guidance to employers and workers. The Government is looking for feedback from employers, workers, representatives and consumers from all tipping industries. The consultation is therefore highly relevant to the hospitality sector.

The Act in a nutshell

Employers must:

  • Pass on all tips, gratuities and service charges to workers without deductions (except statutory deductions such as tax and national insurance) at the latest by the end of the month following the month in which customers pay them

  • Allocate tips to workers fairly

  • Have a written tipping policy for each place of business

  • Make the policy available to all workers at the place of business

  • Keep records of all tips received and the amount allocated to each worker

  • If requested, supply records to workers within four weeks.

What is in the consultation documents?

The consultation is made up of two documents. The first is a set of 34 questions concerning matters such as your business and how you allocate and distribute tips. The second is the draft Code, which contains five sections:

  1. What is meant by qualifying tips and qualifying workers

This states that qualifying tips are tips received by the employer or received by the worker but subject to the employer's control, meaning that the employer exercises control or significant influence over allocation of the tips. Qualifying workers include individuals directly employed by the business and agency workers but not self-employed people.

  1. Factors and methods relevant to fairness

According to the draft Code, employers do not have to allocate the same proportion of tips to all workers, but they need to have a clear and objective set of factors. The draft Code states that they should consult workers in relation to the system of allocation and should seek broad agreement.

  1. Transparency

Employers need to have a written policy on how they deal with tips unless they are only received occasionally and exceptionally. They must make the policy available to all staff either electronically or as a physical document, and it must be in plain language. There is no requirement to share it with customers.

Employers must keep records of all tips received and the amount allocated to each worker for three years.

  1. Addressing problems

Employers need to have a fair process in place for resolving issues relating to tips and responding to queries from workers.

Workers will be able to enforce their rights in employment tribunals, potentially bringing a claim based on a failure by the employer to allocate and distribute tips fairly or to comply with the requirements regarding a tipping policy and tipping records. The draft Code notes that further information about the employment tribunal process will be set out in non-statutory guidance.

  1. Glossary of terms

This includes terms that are relevant to the Code and the Act.

Workers' rights

A worker can make one request for information relating to their employer's tipping record in each three-month period and they could ask for records going back up to three years if they worked for the employer for the whole of that period. The information provided must include the total amount of qualifying tips received by the employer at the relevant place of business and the amount paid to that worker but not other workers.

A worker will be able to bring a claim in an employment tribunal if their employer fails to allocate tips fairly to them or fails to do so on time and will have 12 months to do so. An employment tribunal can order the employer to pay compensation to the worker in respect of any financial loss - the maximum amount payable is £5,000.

A worker will also be able to bring a claim if their employer fails to have a tipping policy, keep written records or comply with a request for information. The time limit is three months for such a claim. If the claim is successful, the employment tribunal can make an order requiring the employer to comply. It can also award compensation of up to £5,000 to the worker to compensate them for financial losses.

An employment tribunal will be able to require an employer to revise an allocation they have already made and to order an employer to pay tips and service charges to any worker, not just the worker who brought the claim.

The effect of the Code

Employers must have regard to the Code when designing and implementing their tipping policies and practices. It is admissible in evidence in employment tribunal proceedings. Where relevant, judges must take the Code into account in deciding disputes relating to tipping practices. A failure to observe the Code will not automatically mean that the employer is liable to a worker; however, if the employer fails unreasonably to follow the Code, the employment tribunal can increase the award to the worker by up to 25%.

Next steps

The Government will analyse the submissions to the consultation then publish its response and a final version of the Code in the spring so there may be some changes made to the Code. It intends that the Act and Code will come into force on 1 July. Non-statutory guidance will be published to sit alongside the Code.

What do you need to do?

You need to ensure that you comply with the Act by putting in place a system to deal with the fair allocation and distribution of tips (if you do not already do this). You also need to introduce a tipping policy, after consulting with staff on the allocation of tips, and keep the necessary records. According to the draft Code, you can still use a tronc system if you act fairly.

How to respond to the consultation

The consultation closes at 4.30pm on 22 February. If you wish to submit your views to the Government, you can access the documents here.

How can we help you?

Please get in touch with your usual Womble Bond Dickinson contact if you have any queries on the consultation or the new requirements in relation to tips.

Ranking in the UK's top 25 law firms, Womble Bond Dickinson's full-service Retail & Hospitality team comprises over 150 lawyers and represents many of the world's best-known brands including Parkdean Resorts, London Theatre Company Holdings Limited, Bourne Holidays Limited, Bike and Boots Limited, Costa Coffee, Hilton Grand Vacations, The Original Bowling Company and Virgin Hotels.

This article is for general information only and reflects the position at the date of publication. It does not constitute legal advice.