What should a tipping policy include, and other frequently asked questions about the Employment (Allocation of Tips) Act 2023

The Act is the underlying legislation, passed last year. The Code of Practice, once approved, will provide statutory guidance on how to comply with the Act. Non-compliance with the Code of Practice doesn’t give rise to an action in itself, but it will be admissible as evidence in Employment Tribunal proceedings and can be taken into account. The Code of Practice will be supported by non-statutory guidance which is yet to be produced.

The updated Code of Practice was published on 22 April, 2024.

The most significant change is the delay to implementation, with the Act and Code of Practice likely to take effect from October 1, 2024 rather than July 1, 2024 as was previously expected.

Although little has changed between the draft and updated versions of the Code of Practice, the updated version does try to give a little more clarity and reassurance around some aspects of the draft documentation:

• Giving an example of digital tipping, where a customer uses an app to directly tip members of staff and bypass the employer, is confirmed to be outside the scope of the Act.
• It was confirmed that non-monetary tips, such as tokens, vouchers or casino tips, are included in the scope of the legislation if they are “received or controlled” by the employer.
• Timely pay out means employers must ensure that tips are paid out, at the latest, by the end of the month after they were left by the customer.
• The list of factors to consider when considering the fair allocation of tips have been updated, and now includes “hours worked when tips are received”.

The updated Code of Practice adds “hours worked when tips are received” to a list of factors that can be considered when determining fairness. Although only intended to be illustrative and not an exhaustive list, the Code of Practice suggests:

• Type of role of work (for example, distribution between front of house and back-room workers)
• Basic pay (and how workers are engaged)
• Hours worked during the period when tips were received
• Individual and/or team performance
• Seniority or level of responsibility
• Length of service with the employer
• Customer intention

The Code of Practice says that employers should “consult with workers to seek broad agreement in the workplace that the system of allocation of tips is fair, reasonable and clear.”

This ensures that staff have the opportunity to share their views before decisions are made and helps employers to flesh out any potential issues or concerns in advance. Publishing an existing policy without any consultation, even if it includes the reasoning behind allocation decisions, is unlikely to achieve this

The Code of Practice makes no distinction between tip or gratuity, which it defines as a “spontaneous payment offered by a customer”. Service charges are defined as “an amount added to the customer’s bill before it is presented to the customer”. If it is made clear that it is purely discretionary and there is no obligation for the customer to pay, then it is a voluntary service charge under the Code of Practice. All three are referred to collectively as ‘tips’ in the Code.

The Act increases employers’ responsibilities around records keeping regarding tips. Under the Act, where qualifying tips, gratuities and service charges are paid on more than an occasional or exceptional basis, employers must record:

• the amount of qualifying tips, gratuities and service charges paid at the location they were received; and
• the amount allocated either to each worker or arranged to be allocated by an ITO (independent tronc operator).

These records should be kept for a minimum of three years from the date on which the tip, service charge or gratuity was paid. These records are subject to the normal data protection obligations.

Workers also gain the right to request information on:

• the amount of qualifying, tips, gratuities and service charges paid at the place of work; and
• the amount of qualifying, tips, gratuities and service charges that were: (i) allocated to that worker; and (ii) arranged to be allocated to their workers by an ITO.

The request can go back three years and workers can’t make more than one request in any three month period.

The draft Code of Practice states that if an employer chooses to appoint an ITO, the instructions the employer sets for its operation must be in line with principles of fairness. An employer that does this, and who has a reasonable belief that the tronc is operating independently and fairly, will be regarded as having complied with the Code of Practice.

Using a tronc operator does not remove the employer’s obligation to ensure tips are distributed fairly, transparently and on time. If employers believe that the ITO is acting in an unfair or improper manner, they are obligated to step in.

The updated Code of Practice does, however, make it clear that, where operators are passing on tips to agencies to distribute among their workers, it is the responsibility of the agency to ensure tronc is distributed in full and on time.

100% of monies collected through service charges, tips and gratuities must be distributed to staff in line with the agreed tipping policy, at the latest, at by the end of the month after they were left by the customer. This means employers cannot take any deductions from these funds for uniforms, bonuses or staff events or funds, which are more common at private members’ clubs.

The new legislation doesn’t make any changes to the existing legislation in regards to tax and national insurance contributions. HMRC provides full guidance on this.

The Act does not allow employers to make any deductions from tips to cover their own expenses, and employers cannot deduct the costs they pay in National Insurance contributions from tips owed to workers.

The use of an ITO can impact whether tips are subject to National Insurance contributions. HMRC provides full guidance on this but we suggest that operators take independent advice on this.

No. Employers cannot take administrative or processing fees from tips, or use them to pay for the tronc service (i.e., the ITO or supporting software).

The Act prevents a worker from opting out of or diluting their right to receive a fair allocation of tips. Any provision that is deemed to be a “prohibited reimbursement provision” (a clause which effectively requires the worker to reduce their wages, or repay any of them to their employer) will be void.

Where qualifying tips, gratuities and service charges are paid at (or are attributable to) an employer’s place of business on “more than an occasional and exceptional basis“, the employer must have a written policy on how it deals with tips.

A tipping policy should detail the processes employers have in place to ensure tips are handled fairly and transparently. It must also name any tronc services employed, as well as the rules and reasoning around allocation and how tips are distributed.

There is no defined timeline for policy reviews, but the Code of Practice recommends that “An employer’s approach to allocating tips should be reviewed on a regular basis in line with staff turnover and any wider changes to the organisation.”

Although the method of payment does not determine whether a tip is a qualifying tip for the purpose of the Act, if a worker receives and keeps a cash tip, with no employer control or involvement, the tip is out of scope for the Act. However, non-monetary tips (e.g. vouchers, stamps or tokens) can be qualifying tips if they are received, or controlled, by the employer.

The Code of Practice allows for a number of allocation considerations at the employer’s discretion, provided they are fair. For example, front of house could be eligible for higher tip allocations than back of house if they’re paid less. Similarly, staff members with a lower basic pay could be allocated more tips than those on higher pay grades, or tips can be weighted in favour of staff with more seniority, those who have worked for the business the longest, or worked the most hours in the tipping period. High performing teams and individuals can also be eligible for a higher allocation of tips.

As of October 1 2024, 100% of qualifying tips, gratuities and service charges must be distributed to workers in line with a venue’s stated tipping policy. Employers are no longer able to take administration or processing fees from tips, or use them to pay for tronc services (such as ITOs or supporting software).

If a worker receives and keeps a cash tip, with no employer control or involvement, the tip is out of scope for the Act. Non-monetary tips, such as tokens, vouchers or casino tips, are now included in the scope of the legislation if they are “received or controlled” by the employer.

No, employers are no longer allowed to smooth distribution out throughout the year. All tips must be distributed, at the latest, by the end of the month after they were left by the customer.

All tips must be distributed, at the latest, by the end of the month after they were left by the customer. Operators shouldn’t assume that payment on the next run is compliant, and should review payroll dates to avoid situations where tips are paid too late.

The Code of Practice warns that employers must avoid any form of unlawful discrimination when selecting and applying the factors for allocating and distributing tips. Employers should take care to ensure that their tipping policies do not unintentionally discriminate against groups of workers that have a protected characteristic, such as age, sex, race or religion/belief. Consulting properly with staff can minimise the risk of discrimination.

For hospitality chains and large brands, tips should be dealt with on a location specific basis. This also means that existing practices where tips from multiple sites are pooled and distributed to the wider staff will no longer be lawful. As a result, those that work in smaller venues or sites with high delivery trade could end up paid less than colleagues in larger venues that generate more tips.

If a director is on the payroll and has an employment contract then they may be able to participate, but effort still needs to be made to ensure this is fair. For example, a director working on the floor or in the kitchen could fairly receive gratuities, but if they’re in head office or an investor it would be difficult to justify including them.

The Act does not apply to self-employed people, only workers (including agency staff).

Under the Code of Practice, an agency worker is an individual who is supplied to work temporarily for and under the control of a hirer (the operator) and who has a contract with the agency that supplied them, rather than the operator who they are providing their services to.

Employers have an obligation to ensure their tipping policy is accessible, either physically or in electronic form. The policy can be emailed to agency staff prior to their first shift, or employers could opt to display posters in staff areas detailing tipping policy. Where operators engage agency workers, employers can provide those workers with a copy of the tipping policy themselves or have the agency share the policy with the worker on their behalf.

Operators can pay tips via a third party or as part of the normal payment cycle. Where an amount is payable to an eligible agency worker, the operator can choose to pay the amount to the agent instead of paying it to the eligible agency worker.

The Code and the full measures of the Tips Act come into force on 1 October 2024. Any tips received prior to October 1st, 2024, are not caught within the legislation and can be managed in line with the policy in place when they were received.