Paying staff tips: government publishes further guidance for employers

From 1 October 2024, new laws will require employers to pass on all qualifying tips, gratuities and service charges to its workers. 

To support employers in preparing for these changes and in response to its consultation, the government has published a final draft statutory code of practice on fair and transparent distribution of tips (“the Code”), with only minor amends made to its earlier draft.

In this blog, we consider the Code’s contents and explain what employers need to do next.

The Tipping Act – a quick recap

The Employment (Allocation of Tips) Act 2023, known as the “Tipping Act” is expected to come into force fully on 1 October 2024.

In summary the Tipping Act requires employers to:

• pass on all “qualifying tips, gratuities and service charges” (more on this below) to workers without deductions, except in very limited scenarios, such as deduction of income tax
• ensure that tips are distributed in a fair and transparent manner when the employer takes control, or exerts significant influence, over their distribution
• have regard to the Code when they are distributing or influencing the distribution of tips
• maintain a written policy on tips
• maintain a record of all tips and their allocation and distribution between each worker, to which workers have the right to request access

Why is the Code important?

Employers are under a legal duty to have regard to the Code when designing and implementing tipping policies and practices. 

Although a breach of the Code doesn’t, in itself, give rise to a standalone claim, tribunal judges have a duty to take the Code into account when determining claims under the Tipping Act.

Scope: qualifying tips

The Code clarifies that “qualifying tips, gratuities and services charges” include:

• All “employer-received tips” (i.e. those paid directly to the employer). This will include tips paid by card or via an alternative electronic method, for example through a mobile app or having scanned a QR code. 
• Certain “worker-received tips” i.e. any that are subject to the employer’s control or connected to worker-received tips that are subject to the employer’s control.  An employer is likely to have exercised control or significant influence over cash tips if they tell staff how to distribute cash tips or if they collect cash tips and distribute them at the end of a shift or as part of the regular payroll.

If a worker receives and keeps a cash tip, with no employer control or involvement, the tip is out of scope.

Interestingly, the Code confirms that “Digital tipping whereby a customer uses an app to directly tip members of staff, bypassing the employer altogether is also out of scope”. However, employers will need to take care here – if the employer has, for example, provided instructions to the digital tipping app as to how tips should be allocated then this will likely fall within scope of the Tipping Act. Employers are encouraged to take advice here to avoid being caught out.

Scope: qualifying workers

The Code clarifies that the Tipping Act applies to all workers (including eligible agency workers). It does not apply to self-employed persons. 

Fairness: factors to consider

Employers are not required to allocate the same proportion of tips to all workers. Employers should set an objective, fair and reasonable factors to allocate and distribute tips (and these will depend on individual businesses).

The Code provides a non-exhaustive list of example factors:

• Type of role/ work (e.g. distribution between front of house and back room workers)
• Basic pay 
• Hours worked during the period when tips are received
• Seniority/ level of responsibility
• Length of service
• Customer intention

Any factors must be set out in a tipping policy and reviewed regularly. Employers must be careful to avoid any form of unlawful discrimination when allocating tips, particularly indirect discrimination.

Employers should consult with workers to seek broad agreement on the fairness of the policy. Where a tipping system affects pay terms and conditions, employers should also consider any potential collective consultation obligations.

Fairness: method of distribution and allocation

Employers must ensure that all tips are distributed to workers, at the latest, by the end of the month following the month in which the tips are paid by the customers e.g. if a customer leaves a tip on 23 June, this must be distributed by 31 July at the latest.

Employers can directly receive tips and pay workers during the next payroll cycle. Employers can also use a “tronc system” to distribute tips.

An independent tronc operator can be an appointed member or staff, or an external payroll or accountancy firm. An employer should set instructions/ a framework for the tronc operator in line with the Code’s principles of fairness. If a tronc operator acts unfairly, an employer must address this.

Transparency: policy

Employers must have a tipping policy when qualifying tips are paid on “a more than occasional and exceptional basis”. 

Employers can distribute the policy electronically or in print, and must make it accessible to all, including those with disabilities. Agency workers should receive the policy directly or via their agency. It should be written plainly.  Updates to the policy should be clearly communicated.

Transparency: records

Employers are required to keep detailed records of all qualifying tips received by the employer and the amount allocated to each worker for three years from the date the tip was paid.

Workers may request to see their employer's tipping records – limited to one request per worker every three months (provided they worked for the employer for the period in question and a request can cover a period of up to three years). 

Employers must comply by showing the total tips received at the place of business and the portion given to the requesting employee (but not specific amounts paid to other workers). Employers must comply with data protection laws.

Addressing problems

The Code stresses that employers should have a fair process for resolving worker issues and queries and give equal weight to agency worker queries as their directly employed staff.

What should employers do next?

Employers now have only a few months left to get their ducks in a row. The detail of the Tipping Act is complex, and employers are encouraged to take advice on individual circumstances. The government will also publish further non-statutory guidance to accompany the Code.

Generally, employers will now need to take the following steps:

1. Carry out an audit of current tipping practices (including tronc systems and digital tipping apps) and clarify which individuals and what tips are within scope of the Tipping Act 
2. Draft a policy which meets the requirements of the Tipping Act/the Code
3. Consult with staff regarding the draft policy (including collective consultation, where legally required)
4. Make arrangements for keeping records
5. Ensure internal processes are in place for responding to complaints and requests for records

How we can help 

If you’d like further advice or support on the Tipping Act and your practices, we’d be happy to support you and your business. Please get in touch.

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