Employee tips and service charges – Everything you need to know about the new law on allocating tips

Katy Parkinson and Ben Foulds from Harrison Drury’s employment law team detail the legal changes affecting employee tips that will come in under the new Employment (Allocation of Tips) Bill and offer guidance to employers.

The Employment (Allocation of Tips) Bill completed its third reading in the House of Lords on 21 April 2023 and received Royal Assent on 2 May 2023.

This Bill creates a legal obligation on employers to allocate 100% of tips, gratuities, and service charges to their employees without making any deductions, with the intention of ensuring workers receive 100% of the tips that they have earned.

There is expected to be a 12-month lead-in period to give businesses time to comply with the new requirements. In the coming months, a Statutory Code of Practice (setting out how tips should be distributed in a fair and transparent manner) will be consulted upon, before being brought into force.

Why was change necessary?

In recent years, businesses have increasingly adopted the practice of retaining a portion of service charges to cover costs relating to customers who leave without paying, damages, till discrepancies and administrative expenses like credit card fees and payroll expenses.

However, this practice has been criticised by industry experts who estimate that it results in around two million leisure sector workers losing out on approximately £200m annually due to unjustified deductions from their tips.

What are the key changes on distributing tips?

1. 100% of tips or service charges left by customers must be passed on to workers with no deductions (save for where PAYE deductions are required by law).
2. Employers must distribute tips to workers in a fair and transparent manner by the end of the month following the month in which the tips or service charge were received by the employer.
3. For a minimum of three years from the date of first payment, employers must keep records of all tips or service charges received and distributed to workers.
4. All tips or service charges paid at and or attributable to a single venue must be allocated amongst workers at that venue.
5. Employers will be prohibited from negotiating with a worker to vary their contractual salary or wages in return for a share of tips or service charges.
6. Agency workers will be given new rights and must be awarded any tips and service charges on the same basis as directly employed staff.

The changes will not be applied retrospectively, so they will only apply to tips paid by customers on or after the date on which the legal obligation to allocate tips fairly comes into force, which is anticipated to be around this time next year.

What are the implications for employers?

Employers will need to:

Create a written policy: Employers will be obliged to create (or update) their own written policy detailing how they allocate tips and service charges at their place of business. This must set out how the employer complies with their legal obligations and must be made available to all workers at the place of business.

Keep records of tips: Employers will be required to keep records of all tips or service charges received and distributed to workers for a period of 3 years from the date of first payment. These records can be requested by employees and casual/zero hours workers at any point and they will have this right regardless of their length of service.

Decide on how banking and administration costs will be managed: Employers will no longer be able to deduct bank fees/administration costs associated with accepting tips on cards and they will need to consider how these extra costs will be absorbed. It is worth noting that employers who do not accept tips by card could face difficulties in retaining staff who may feel this will lead to a significant reduction in their take-home cash – currently 80% of tips are paid via card.

Employers should take the opportunity to audit their current arrangements now to identify any areas of potential non-compliance.

If their policies and procedures are not already compliant with the future requirements (which seems likely to be the position for many employers), they will need to make plans to become compliant to ensure they are able to allocate tips and service charges fairly to workers once they are legally obliged to do so. They will also need to carefully consider how to communicate and manage the changes across their workforce, particularly where their current practices are contractual.

Businesses are urged not to leave making changes until the last minute to reduce risk and ensure that they can manage any changes to processes operationally, and also to assist with the retention of staff.

What will happen if employers don’t comply with the law on tips?

Employers need to take these changes seriously as a failure to comply with any of the above requirements could give rise to claims by workers in the Employment Tribunal.

Employers need to be mindful that all workers, regardless of their length of service and regardless of whether they are an employee or a casual/zero hours worker, will be able to request tipping records from their employer and bring claims in the Employment Tribunal.

The Employment Tribunal will have the power to make a compensatory order of up to £5,000 to compensate a worker for any financial loss sustained in relation to underpaid tips.

The requirements of Employment (Allocation of Tips) Bill will clearly have significant implications for employers in the leisure sector.

Our employment law experts can help with advice, audits and policies in relation to your tipping distribution arrangements. Please contact the team on 01772 258321 or email the team.