The Employment (Allocation of Tips) Act 2023:

What Employers Need to Know

The Employment (Allocation of Tips) Act 2023, coming into force on 1st October 2024, introduces new legal requirements for distributing tips to employees. Historically, tip distribution has been an area of contention, especially in the hospitality industry. This legislation aims to ensure that tips, intended as recognition for good service, go directly to the workers.

Aiming for Fair Distribution of Tips

For years, employers have been allowed to make deductions from tips or use them to meet National Minimum Wage obligations, as long as this did not breach legal pay requirements. This has led to widespread concerns about fairness, particularly in sectors where tipping is customary. The new legislation addresses these concerns by ensuring that tips are distributed fairly and go directly to the employees, as intended.

What Qualifies as a Tip and Who Receives It?

Under the new Act, tips are categorised as either employer-received or worker-received.

• Employer-received tips include those collected via electronic payments, such as card transactions or mobile apps, and must be passed on to staff.

• Worker-received tips are those handed directly to employees, but the Act only applies if the employer has control or significant influence over how these tips are managed. This means that businesses should have clear policies on the treatment of tips received directly by workers.

Interestingly, non-monetary items like vouchers or tokens can also be considered tips under the Act, as long as they hold a fixed value and can be exchanged for goods or services.
All workers, regardless of employment status, are eligible to receive tips under the Act. This includes agency staff, though it excludes the self-employed. Ensuring the fair distribution of tips to all eligible workers is key for compliance.

Fair Tip Distribution and Record-Keeping

The Act requires employers to distribute 100% of tips fairly and transparently, ensuring no discriminatory practices in how they are allocated. While there is flexibility in distribution, factors such as job role, seniority, hours worked, or length of service can be considered. However, all tips must be paid by the end of the month following the month they were received.

Businesses that receive tips regularly are required to keep detailed records of the tips received and how they are distributed. These records must be maintained for at least three years, and employees have the right to request access. If a business only receives tips occasionally, there is no obligation to maintain records, but employees must be informed of this. 

Implementing, Policies and Tronc Systems

To ensure compliance, employers should develop and implement clear policies regarding the distribution of tips. These policies should be created in consultation with employees, ensuring transparency and fairness, and should be regularly reviewed and updated as needed. Once finalised, the policy should be communicated to all staff.

Some businesses may choose to use a tronc system for managing tip distribution. A tronc allows an independent party, either internal or external, to manage how tips are shared among staff. Even if a tronc operator is used, the employer remains responsible for ensuring that the process complies with the Act.

Consequences of Non-Compliance

Failure to comply with the new tipping laws could lead to serious consequences. Employees can raise complaints through internal grievance processes, or take their case to an employment tribunal. If a tribunal finds that tips have not been fairly distributed, employers could be required to compensate the affected workers, with potential fines of up to £5,000. Additionally, tribunals may order payments to all affected workers, even if only one person raises the claim.

Code of Practice

The Secretary of State for Business and Trade will release a Code of Practice to provide employers with additional guidance on ensuring fairness and transparency in tipping practices. Employment tribunals may use this Code when ruling on cases and may increase compensatory awards by up to 25% if employers are found to have breached the Code.  

Preparing for Compliance

With the Act coming into force soon, employers should take steps now to ensure they are prepared. Reviewing current practices, creating clear policies, and maintaining thorough records will help businesses avoid potential legal issues. 

Intelligent Payroll is here to guide you through these changes and ensure your business remains compliant with the new tipping regulations.

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