New Law on Tip Distribution: What Employers Need to Know by October 2024

From 1 October 2024, employers across various sectors will face a new legal obligation to ensure that 100% of tips, service charges, and gratuities received by their business are distributed to staff.

This change, brought about by the Employment (Allocation of Tips) Act 2023, significantly impacts how tips are handled, with businesses required to act transparently and fairly in their allocation practices.

Here’s what employers need to do to prepare for the upcoming changes:

The New Legal Duty

The new law amends the Employment Rights Act 1996 and guarantees that all workers, including employees and agency workers, are entitled to 100% of the tips paid by customers at their place of work.

This applies to both cash and electronic tips.

A new statutory Code of Practice provides guidance to help employers comply with this law.

Employers must ensure they allocate tips fairly and transparently between workers at the place of business where the tips were received.

If they fail to comply, they risk facing legal claims from workers.

What Counts as Tips?

Qualifying tips: Tips, service charges, and gratuities that the employer receives directly or collects from workers to distribute.

This includes tips paid through a service charge or tips received under a tronc system (where a third party distributes tips on behalf of the employer).

Non-qualifying tips: Tips that are directly received by the worker and not controlled or redistributed by the employer.

These tips fall outside the scope of the law.

Even non-monetary tips (like vouchers or casino chips) fall under this law if they have a fixed monetary value and can be exchanged for goods, services, or cash.

Preparing for the New Duty

Employers should take the following steps to ensure compliance:

Assess Tip Practices: Review your current system for handling tips and determine if it qualifies under the new law.

If tips are regularly received in your business, you’ll need to introduce or update your tip allocation processes.

Create a Tips Policy: Develop a written policy outlining how tips will be distributed among workers.

This policy should:

• Be fair, reasonable, and transparent.
• Clearly outline how tips are divided, considering factors such as job role, performance, seniority, and customer intent.
• Be shared with all workers and regularly updated if changes occur.

Consult with Employees: Employers must engage with their workers to reach an agreement on how tips will be allocated.

The process must be clear, and while fairness is essential, it does not always mean tips will be divided equally.

The allocation should consider non-discriminatory and objective factors, like team or individual performance and the type of work performed (e.g., front-of-house vs. backroom staff).

Keep Records: Employers are required to maintain detailed records of how tips are received and allocated.

Workers have the right to request access to these records, as long as they have been employed during the relevant period.

Employers must provide this information upon request but are only required to do so once every three months.

Penalties for Non-Compliance

Failure to comply with the new law could result in workers bringing claims to an employment tribunal. Claims can be made if:

• Tips are not allocated fairly.
• Tips are not distributed by the end of the month following the month they were received.
• Adequate records are not kept, or a proper policy is not in place.

Employers found to be in breach may be ordered to compensate workers for financial loss, with fines of up to £5000 possible.

Key Takeaways for Employers

Many businesses—particularly those in hospitality—will be impacted by these new rules, but it’s not limited to restaurants and bars.

Any business that regularly receives tips, service charges, or gratuities needs to be aware of these changes.

What to Do Now:

• Review and assess your current tip-handling procedures.
• Draft and implement a fair and transparent tip distribution policy.
• Consult with workers and keep them informed about any changes.
• Ensure you maintain accurate records of all tips and their distribution.
   

If you need help to work through the steps please email us or give us a call at HR Solve It. We have worked with other hospitality businesses in the Thanet area to make sure they are compliant.

If your structure is already in place and you just need a policy we can provide you with a draft policy from £75 plus VAT.