New rules on tipping – are you prepared?

From 1 October 2024, the Employment (Allocation of Tips) Act 2023 will require employers to ensure that workers receive the full tip from a customer. The overhaul of tipping practices is set to benefit more than 2 million UK workers across the hospitality sector.

The legislation places a legal obligation on businesses to distribute all discretionary tips, sets out a timeframe in which to distribute them and a requirement to implement a business policy ensuring fair and transparent distribution of tips. 

Key points of the new rules on tips

In brief the legislation covers the following: 

What is a tip?

The legislation applies to ‘Employer-received’ and ‘Worker-received’ tips. As well as payments, tips also include vouchers, stamps, tokens, casino chips or similar with a monetary value or capable of being exchanged for money, goods or services.

How should tips be paid?

All tips, service charges and gratuities must be paid to workers and cannot be subject to deductions including administrative fees. Tips must be paid to workers by the end of the month following the month they were paid by the customer. Tip distribution must be fair and transparent with due regard to a Code of Practice (COP), this can include a tronc arrangement.

Paperwork

There must a written tips policy to include whether the employer requires or encourages customers to pay tips and how the employer ensures that all qualifying tips, gratuities and service charges are paid and distributed fairly. The employer must retain a tipping record of the total tips received and details of their allocation to workers for up to three years. 

What are workers’ rights?

Agency workers will be entitled to receive tips in the same way as employees. All workers will have the right to request details of the total amount of tips received and the amount paid to them. Employees and agency workers can raise a tip dispute through an employment tribunal and have 12 months to make a claim.

Supporting Code of Practice

Following public consultation, the Department of Business & Trade released the final draft Code of Practice on 22 April 2024 to support the new legislation to promote fairness and transparency. 

Changes to the COP since the consultation draft, although small in number, provide some further clarity in a few areas. This includes confirming that tips that a customer pays direct to workers digitally via an app are not ‘employer-received’ and are therefore outside the scope of the legislation. In addition, an agency employer will be required to distribute the tips to their workers once allocated by the Employer. 

You can read the code in full here. 

How should tipping work until 1 October 2024?

Before October 2024, employers may apply a discretionary service charge to bills. Legally, the service charge belongs to the employer until it is transferred to an employee in full or with a deduction made by the employer. The tips can be paid to the employee by the employer via the payroll subject to PAYE/NIC or by a troncmaster where a tronc scheme is in place. Typically, deductions are made from the tips to cover certain costs such as credit card charges or the cost of administering and paying the tips to employees.

Tronc arrangements

The majority of businesses currently use a tronc arrangement overseen by a troncmaster to manage the allocation and distribution of tips. They are typically a general manager, who independently oversees the allocation of tips and administers the arrangement. Neither the employer nor its senior management can be the troncmaster, but the employer can have oversight of the appointing or removal of a troncmaster. The advantage of a robust tronc scheme is that the tips are exempt from Class 1 employers and employees NIC.