As of 1 October 2024, workers now benefit from new laws that ensure they keep 100% of the money they have earned through tips.
The legislation marks the last remaining provisions of the Employment (Allocation of Tips) Act 2023 (E(AT)A 2023). The (E(AT)A 2023) was introduced to promote fairness and transparency in the distribution of qualifying tips, gratuities, and service charges.
The changes will have a significant impact on many employers, specifically those within the hospitality and leisure industries. The intention of this legislation is to address concerns about a minority of employers who continue unacceptable tipping practices. The Department for Business and Trade estimates that the changes will mean around £200 million will be received by workers that would otherwise have been retained by these employers.
Important points for employers to be aware of
- An employer must ensure that the total amount of the qualifying tips, gratuities, and service charges paid at, or otherwise attributable to, a place of business of the employer is allocated fairly and transparently between workers;
- Where a worker is allocated an amount of employer-received tips, that full amount must be paid to the worker by the employer;
- Any payment that is required to be made to an employee can be paid in the month of receipt, or no later than the end of the following month. If payment is made in the following month, any employees who have left and received their P45 will have a payment after leaving applied and should not be excluded; and
- Employers must document a clear policy on how every qualifying tip, gratuity, or service charge has been dealt with.
Failure to comply with the requirements around how tips are allocated fairly or an absence of a written tipping policy and tipping records could result in employees raising the issue at an employment tribunal, with compensation awards of up to £5,000 per worker.
In determining what ‘allocated fairly’ means, employers should refer to the guidelines within a new Code of Practice that has been issued.
New Code of Practice – Distributing Tips Fairly
Employers must consult new statutory guidance when implementing their tipping policies and practices. The Code of Practice (the Code) has been introduced to promote equal conditions for all employees by ensuring a clear and objective set of factors are applied when deciding fair allocation.
The Code sets out:
- Key principles on what fairness is for the purposes of the (E(AT)A 2023);
- The areas in which employers need to make decisions to comply with their duties; and
- How they should apply these principles in their specific places of business.
Should a case on unfair tipping policies be taken to an employment tribunal, judges have a duty to take this Code into account in determining disputes relating to tipping practices.
Non-Statutory Guidance
Further non-statutory guidance has been published to accompany the Code and help employers and workers interpret the legislation.
This guidance encourages employers to take into consideration
- Agency workers: they do not necessarily require an equal share of tips, but equally should not be unduly disadvantaged by being employed by an agency;
- Multiple sites of operation: employers cannot pool the tips received across multiple sites of operation or different branches;
- Scope of workers: all workers involved in directly providing a service to customers should be considered in the distribution of tips – employers are responsible for making it clear which roles are covered for the allocation;
- Employment tribunals and tipping: if the complaint is based on a failure to comply with the requirements surrounding how and when tips are distributed, it must be presented within either:
- Twelve months of the failure to comply; or
- Twelve months of the most recent failure to comply (in the event of multiple failures)
- Failure of information: If the complaint is based on a failure to comply with the requirements surrounding the written tipping policy and tipping records, it must be presented within either:
- 3 months of the failure to comply; or
- 3 months of the most recent failure to comply (in the event of multiple failures).
The non-statutory guidance also provides templates for employers to create their tipping policy and templates for employees to request their tipping records.
Tronc schemes
Some employers, especially in the hospitality industry, where this proves to be an attractive option, use a troncmaster for managing and distributing tips. Essentially, this is where someone independent of the employer handles the allocation of tips.
Tronc schemes can provide opportunities for tax savings, as payments are exempt from NICs, although still subject to PAYE.
If a tronc scheme is used, employers must ensure that the allocation process meets the fairness requirements of the (E(AT)A 2023).
This is an area where professional advice may be sought, specifically where an employer starts to manage the allocation of tips too closely, inadvertently prompting NIC liabilities. Any tronc scheme must be fully independent to maintain its tax benefits.
How M+A Partners can help
M+A Partners’ experienced Payroll team works with clients to ensure tips are accurately taxed and recorded through a workplace’s payroll, or within any separate payroll system for managing and sharing tips at the workplace (a tronc).
Should you require assistance with how tips are processed in your payroll and their tax treatment, please get in touch with our expert below or email enquiries@mapartners.co.uk.