From October 1st 2024, the Employment (Allocation of Tips) Act 2023 (“Tips Act”) comes into force. This new law will change how tips and service charges are handled in the hospitality industry. The law is clear: employees must receive their tips in full, without deductions. It also ensures tips are split fairly between staff. On top of this, employers must have a written policy on how tips are allocated. (Of course we’ve got you covered with our Tips Policy template in our platform!)
What is the Code of Practice?
To help businesses navigate the changes, the Government has issued a Code of Practice on the Fair and Transparent Distributions of Tips. This explains how tips should be fairly and transparently distributed among your team.
Who is protected?
The Tips Act covers both employees and workers. It also applies to agency workers so if you’re hiring through an agency, they’re included in this too!
And here’s something important: your team can’t “opt out” of these protections. So, you’ll need to review existing employment contracts, policies, and procedures to ensure they meet the new rules (for example any clauses that allow deductions from tips).
What sort of tips does the Tips Act apply to?
This law applies to tips, gratuities, and service charges paid to your business, including credit or debit card payments. It doesn’t matter if the service charge is optional or mandatory—if it comes through the business, it’s covered.
Cash tips paid directly to staff? These are a little different. If your policy says cash tips should be shared, they fall under the Tips Act. But if staff are allowed to keep any cash tips they receive directly, then they can keep it all, and the law won’t apply.
Fair allocation and payment of tips – what does it mean?
If a tip comes through your business (whether by card or cash that needs to be shared), you’re responsible for making sure it’s fairly distributed. You’ll need to follow the Code of Practice, which means:
- Tips don’t have to be split evenly. Different staff might get different amounts based on things like role, performance, or hours worked.
- Don’t forget about agency workers! They should be considered in your tip allocations.
- You’ll want to use clear, fair, and objective criteria for how you split tips, and you should consult with your team to make sure everyone’s on the same page.
Here are some factors you might consider when deciding how to distribute tips:
- Job role (front-of-house vs. back-of-house)
- Basic pay, employment type (permanent or casual)
- Hours worked during tip-earning shifts
- Individual or team performance
- Seniority or responsibility level
- Customer intention (did the customer leave the tip specifically for someone?)
It’s also important to avoid any unintentional discrimination. For example, if your front-of-house team is all one gender or race and your back-of-house team is a different group, be mindful of how you’re splitting tips. More on diversity and inclusion best practices here.
Employers are taken to have complied with their duties where they use an independent tronc operator to allocate tips, such as an independent third party organisation, or an employee in the business, like head waiter). But this is only the case where the employer has a reasonable belief that the tronc is operating independently and fairly.
And when it comes to timing – payment must be made by no later than the end of the month following the month in which the tip, gratuity or service charge was paid by the customer. So if a tip is paid on 23 June, it must be distributed by 31 July.
Written Tips Policy – a must-have
If tips are a regular part of your business, you’re required to have a written policy. This policy should explain:
- Whether you encourage customers to leave tips
- How tips are split among staff
- How disputes about tips will be handled (you can use your existing Grievance Procedure for this)
Even if you only deal in cash tips that staff keep directly, you still need to provide written information explaining why you don’t have a formal tips policy.
Need a handy template? You can find all sorts of helpful templates in our next generation platform.
Record-keeping 101
If tips are part of your business, you must keep records of how every tip was allocated for three years. Employees have the right to inspect these records, so make sure they’re up to date.
What Happens if You Don’t Comply?
Non-compliance with the Tips Act can lead to complaints being brought to an Employment Tribunal, which could result in compensation of up to £5,000 per breach.
Payroll Considerations
It’s worth noting that tips don’t count towards National Minimum Wage calculations, and they don’t affect redundancy or holiday pay calculations. For tax guidance, HMRC has useful information on how tips, service charges and troncs should be handled.
Need more help?
If you need more support navigating these changes, our HR Advisory Service can guide you through your employment law and HR obligations. Plus, you’ll get access to ready-to-use documents like a Tips Policy and Grievance Procedure.