New law brings fairness to the table: staff must receive the tips they've earned

Over the years there have been numerous reports of employers taking a proportion of employees’ tips to meet their own costs or increase profits. These issues came to a head in 2015 following evidence that around two thirds of employers in hospitality were making deductions from staff tips, in some cases of around 10 per cent. Trade unions and other campaigners called for legislation to ban “unfair” tipping practices and, in response, the government introduced a Voluntary Code of Practice. Although there has been some improvement, the government estimates that deductions of between 3-5% are still commonplace. 

The Employment (Allocation of Tips) Act 2023 (once enacted) will amend the Employment Rights Act 1996 to impose new legal obligations on employers to pay staff 100% of the tips they receive from customers.    

Background

Currently, tips, gratuities and service charges which are paid directly to the employer (for example by debit or credit card) are the legal property of the employer. Tips and gratuities which are paid in cash directly to a worker are the legal property of the worker, but employers can dictate whether the worker can keep them both through their terms of employment or via direct instruction.  

What is changing?

The Act will create a legal obligation on employers across sectors to allocate all tips, gratuities and service charges to workers without any deductions. It also requires employers to ensure that the distribution of qualifying tips between workers is fair, although that term isn't defined and will presumably be addressed via regulations and/or the new Code of Practice.

This means that businesses will have to:

• fairly distribute 100% of all tips, gratuities or services charges between workers at that place of business without deductions other than those required for tax and NI. This means that employers will have to 'gross up' tips paid by credit cards, for example, which are usually subject to processing fees of between 1-3%
• pay these amounts to workers no later than the end of the month following the month in which they were paid by the customer
• have a written policy (which staff can access) which complies with the code of practice and sets out how they deal with tips. It must include details about whether it requires or encourages clients to pay tips and how tips are allocated to staff
• keep a written record of tips received and distributed over a three-year rolling period

Do the new rules also apply to agency staff hired by a hospitality business?  

Yes. Agency workers will have the same rights to receive a fair share of tips as workers employed directly by the hospitality business. Agency workers cannot be excluded or disadvantaged simply because they are provided through an agency. Employers will have to pass on the agency worker’s share of tips to the recruitment agency who supplied them, who are then required to pay those amounts to their workers within a month of receipt. 

What claims will workers be able to bring claims if they don't receive their fair share of tips?

Workers will be able to bring proceedings in the employment tribunal if they don't receive tips (or these aren't allocated fairly), and if payments are not made within the allocated time.

Workers (including agency workers) will be able to bring a claim in the employment tribunal where their employer has failed to deal with tips in accordance with the legislation. They will have 12 months to bring these claims, and if they are claiming for a series of breaches, 12 months from the last of these. 

Tribunals will be able to require an employer to change the allocation of tips (so that it is fair) and/or to require it to pay a worker any tips they are entitled to. They will also be able to provide a remedy where, for example, a particular group of workers have been treated unfairly but only one of that group has brought a complaint.

Tribunals will also be able to award workers up to £5,000 to compensate them for any financial losses suffered because of their employers' failure to pay them correctly (or at all). 

When will these changes come into force? 

The government will have to introduce separate regulations to bring into force these changes and has indicated that this is likely to happen by May 2024 (it will confirm the actual date of commencement later this year).

The measures in the Act will be supported by a statutory Code of Practice. This Code is being developed and will be subject to formal consultation later this year.

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