What you need to know: Allocation of Tips Act 2023

Background

The Allocation of Tips Act 2023, which received Royal Assent on 2nd May 2023, represents a significant shift in the legal landscape regarding how tips and service charges are handled in the UK. The Act mandates that workers receive 100% of any qualifying tips or service charges left by customers, minus the necessary deductions for tax and National Insurance Contributions (NIC). This legislation marks a move towards greater transparency and fairness in the distribution of gratuities, ensuring that those who work in the industry directly benefit from the additional payments made by customers for good service.

Under the new law, service charges that are automatically added to bills must now be distributed to the staff, with businesses no longer authorised to keep this money. The introduction of this Act aims to eliminate the previous practices where some employers would retain a portion of tips or service charges. The government’s intent is clear: to ensure that workers receive the rewards intended for them by customers.

Who This Affects

The Allocation of Tips Act 2023 primarily impacts workers and employees within the hospitality sector, including eligible agency workers, who are engaged in work within restaurants, cafes, bars, and hotels. However, it may also extend to other industries where tipping is common, such as the beauty and personal care sector where tips are paid on more than an occasional and exceptional basis.

What Qualifies as a Tip?

The Act draws a distinction between different types of tips, specifying what qualifies as a “tip” under the new regulations. It covers tips that are added to customers’ bills, but not those given directly to the server in cash or other forms where the employer does not maintain control, or significant influence, over them. Specifically, the Act focuses on “qualifying” tips, which include:

1. Tips received by the business: These are gratuities left by customers that the business collects, typically as part of the bill and then distributed to workers by the business.

2. Tips received directly by workers: These are tips given directly to workers but where the final distribution among the workforce is subject to the business’ control either directly or through an associated person of the business.

The Act does not cover tips received directly by workers and whose distribution amongst workers is not controlled or influenced by the business. This means that direct cash tips handed to employees, where the employer has no say in how they are shared, remain outside the scope of the legislation. If this is occurring at your workplace, your staff will be required to make self-assessments with the HMRC for the additional income received.

Requirements for Qualifying Tips

To ensure fairness, the Act imposes several requirements on employers regarding the handling of qualifying tips:

• Fair and Transparent Allocation: Employers must allocate tips and service charges in a manner that is transparent. This involves establishing clear criteria for how tips are distributed among employees, and the factors should be fair and reasonable, and could include factors such as job roles, level of customer interaction and hours worked. Special attention should be given to avoid unlawful discrimination.

• Written Records: Employers are required to keep a written record of how tips and service charges are allocated, and if they were allocated by the business or by a tronc master. These records must be retained for a period of three years from the date the tip is received by the worker.

• Timely Payment: Tips must be paid to workers by the end of the month following the month in which the tip was received. For example, if received on 23rd June, the money should be received by the employee by 31st July at the latest.

• Tipping Policy: Employers must establish and communicate a tipping policy that sets out how tips will be allocated. It should state whether the employer requires or encourages customers to pay tips and how qualifying tips are paid and allocated between workers. This policy should be made available to all workers.

• Right to Information: Workers have the right to request information regarding their employer’s tipping records. Employers must respond by providing details of how tips and service charges have been allocated.

• Legal Recourse: If employers fail to comply with the new law, workers have the right to take legal action. This provision acts as a safeguard, ensuring that employers adhere to the Act’s requirements.

The Role of a Tronc

To comply with the Act, it is recommended that employers establish a “tronc” system, a common practice in the hospitality sector for distributing tips. A tronc is a pooling system managed by a troncmaster (which can be an employee with no favour or bias or, and more advised, an appointed third party) who is responsible for distributing tips and service charges among the staff. Using a tronc can help ensure compliance with the Allocation of Tips Act by providing a structured and transparent method of allocation and also offers other benefits such as exemptions from National Insurance contributions.

Potential Issues or Concerns

While the Allocation of Tips Act 2023 introduces a framework designed to promote fairness, it also raises several practical concerns and challenges for employers and workers alike, such as gender pay equity, benefits eligibility, and administrative burdens.

There is a risk that if, for example, working mothers work more of the day shifts, and the highest tips are earned during night shifts, it could potentially widen the gender pay gap. Additionally, the inclusion of tips as taxable income could affect workers’ eligibility for certain benefits, leading to lower take-home pay and possible resistance from employees who preferred the previous system of cash tips. For employers, particularly small businesses, the new regulations may introduce significant administrative challenges, including the need for detailed record-keeping, restructuring payroll systems, and the establishment of clear tipping policies, all of which could increase costs and require additional resources.

Of course, this is where Tamar HR come in and would be delighted to offer you and your business some advice that are specific to your needs.