The way that tips, gratuities and service charges are to be distributed to employees is set to become fairer and more transparent, thanks to new legislation.
Here, experienced employment lawyer and head of our leisure and hospitality sector team Lee Jefcott and associate Trishna Modessa-Parekh outline what the changes mean for both employers and workers — and why this presents both challenges and opportunities to attract and retain staff and customers alike.
Allocation of tips — ‘a mystery’
The allocation of tips and service charges in the leisure and hospitality sector has always been something of a mystery. Many employers do ensure that 100% of tips, gratuities and services charges are paid to staff, yet the process has been far from transparent — and some high-profile operators have suffered adverse publicity due to deductions being made for bank charges and other costs.
At present, there is nothing in law to prevent employers from making such deductions. While any monies paid directly to workers are workers’ legal property, many employers have a policy or contractual provision that requires tips to be pooled or returned to the employer. However, in an increasingly cashless society, most monies are paid directly to the employer and are therefore the employer’s legal property.
Many hospitality and leisure workers — particularly those in pubs, cafes and restaurants — rely heavily on customers leaving tips to top up their wages and compensate them for long and unsociable working hours. Yet, inevitably, not all businesses act fairly in allocating them.
Fair and transparent allocation
The Government aims to address this issue with the forthcoming implementation of the Employment (Allocation of Tips) Act 2023. The new legislation will legally ensure that 100% of tips, gratuities and service charges are allocated to workers and distributed fairly and transparently — with no deductions for breakages or any other costs.
It’s estimated that the Act will positively impact at least two million workers, with £200 million being returned to the pockets of working staff each year.
However, at a time where hospitality employers are facing unprecedented cost pressures, some industry commentators fear that this legislation will introduce significant challenges.
New obligations for employers
On 2 May 2023, the Employment (Allocation of Tips) Bill received royal assent. It’s anticipated that the provisions will come into force in or around May 2024 (the exact date is to be confirmed by the Government later this year).
The Act is set to introduce the following obligations for employers:
- Employers must pay 100% of the tips and service charges they receive to workers by the end of the next month, following payment by the customer.
- Tips cannot be subject to deductions, other than for tax and National Insurance liabilities.
- Employers must implement policies that explain their tipping practices and must allocate the payments in a fair and transparent manner.
- Records are to be retained to demonstrate compliance for three years from the date that tips are received.
- Workers will have the right to request information relating to employers’ tipping records.
- Failures to comply with the Act will enable workers to bring Employment Tribunal claims against their employers.
- Employers must adhere to the statutory code of practice, which is set to be consulted on later this year.
Employers need to act
While some larger leisure and hospitality businesses have already implemented practices to deal with the allocation of tips, those that haven’t must now invest time and resources to implement systems to ensure their accurate and transparent distribution. This may involve adopting technology solutions or modifying existing payroll systems. However, many employers are choosing to wait for the draft statutory code of practice to be published before addressing the issue.
It may be helpful for employers to consult with workers at this stage to incorporate their views — especially as those businesses that don’t comply with the new rules will leave themselves open to workers taking a claim to an Employment Tribunal.
Claims can be made if there is evidence that an operator has not allocated all tips, gratuities and service charges to workers. The Tribunal has the power to order an employer to ‘revise an allocation’ or make compensation payments to workers of up to £5,000 apiece.
Employees will also have the right to bring a claim if their employer does not provide a copy of its tips policy or a written records of tips when asked.
Reputational impact
In the era of conscious consumerism, the danger of non-compliance for employers isn’t just the cost associated with an Employment Tribunal. The reputational impact could be far more dangerous, driving away both potential customers and employees.
By the same token, this presents a key opportunity. Savvy employers may be able to embrace the legislation as a way of promoting fairness, maximising pay and benefits and creating a positive working environment — helping them to attract and retain staff and customers alike.
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Employers must adapt their business models and compensation structures to comply with the new regulations. They also need to consider nuances such as the use of third parties (for example, when using troncs to effectively ‘outsource’ the tipping process) or how the new legislation deals with persons that aren’t directly employed (like agency workers).
Leisure and hospitality employers that are unsure about how to apply the new rules should consult with a specialist adviser — and our award-winning employment law team supports all types of businesses to implement changes in their workplace and ensure compliance.
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