The Employment (Allocation of Tips) Act 2023 – Understanding the impact on pay in the hospitality sector

13/03/2024

In a significant development for the hospitality industry, the Employment (Allocation of Tips) Act 2023 (the Act), which received Royal Assent on May 2, 2023, is set to revolutionize tipping payment practices across the UK.

Due to come into force on 1 July 2024, and affecting approximately two million workers in the sector, this new Act presents substantial implications for employers’ cash flow and payroll processes.

Understanding the Act

The Act helps to delineate tips or gratuities as voluntary payments made by customers, distinguishing them from service charges, which are typically added to the bill by default.

Under the new legislation, employers are mandated to distribute all qualifying tips to workers fairly and without undue deductions, save for necessary tax withholdings.

Ahead of the change in legislation, the Government has published a draft Code of Practice to complement the Act (the Code).

Whilst still under consultation, this Code aims to clarify the criteria for achieving a distribution of tips that is both fair and transparent, as mandated by the Act, ensuring that workers fully understand their entitlements:

• Scope: This section clarifies the Act’s coverage, including the definition of “tips” and the acceptable methods of payment.
• Fairness: At the heart of the Act lies the principle of fairness. This part of the Code offers guidance on factors employers might consider when allocating tips, such as the performance of individual employees and the intentions of customers.
• Transparency: It mandates that employers must maintain and make accessible to their employees a documented policy on the distribution of tips. This policy should detail the allocation and distribution process for tips, alongside the measures the employer will adopt to adhere to the Act.
• Addressing Problems: This ensures that employers establish equitable procedures for resolving disputes related to tip distribution. These procedures should apply not just to direct employees but to agency workers as well.
• Glossary of Terms: To aid understanding, this section provides clear definitions for essential terms used throughout the Code, including “agency worker” and “basic pay.”

Historically, the legal regime around tips and service charges has varied, with different rules applying to cash tips, tips paid into a communal staff box, and those paid by card.

The introduction of the Act necessitates a more uniform approach, ensuring tips are distributed fairly among workers, managed transparently through a tronc system under an independent troncmaster, and reported accurately to HM Revenue & Customs (HMRC).

The implications for the hospitality industry

This legislative shift aims to rectify longstanding controversies around the retention of tips by employers, spotlighted by media scrutiny and public outcry.

The Act is intended to deliver fairness in the distribution of tips, especially in light of the financial strains imposed by the pandemic and the evolving cashless economy, where the majority of tips now transact via card payments.

The Act introduces several key requirements:

• All tips must be passed on to employees, barring a few specific exceptions.
• Companies must disclose their tipping policies to their employees.
• Employers are obligated to maintain accurate records of how tips are distributed among staff.

Under the Act, employees will gain the right to request a copy of their tip distribution records. This provision is designed to empower workers to assert their rights through employment tribunals, if necessary.

For hospitality sector employers, adapting to these changes requires a strategic rethink of how tips and service charges are handled, including the potential creation of a compliant tronc scheme.

Businesses also need to consider the immediate cash flow consequences of these changes.

The Act’s introduction at a time of economic uncertainty poses additional challenges, necessitating adjustments in operational practices to ensure compliance while maintaining financial viability.

Employers must now develop written policies outlining the fair and transparent distribution of tips, keep detailed records for three years, and adapt to the inclusion of agency workers under the Act’s provisions.

Non-compliance carries the risk of claims in Employment Tribunals, with potential financial penalties.

As businesses navigate these changes, the support and expertise of knowledgeable professional advisors become essential. If you require guidance, please speak to us.