Tips, Gratuities and Service Charges- What You Need to Know About the New Legislation

Recently, the Employment (Allocation of Tips) Act 2023 received Royal Assent. The new legislation captures all qualifying tips, gratuities and service charges, ensuring they are ‘allocated fairly’ to workers (including agency workers).

Jas Dubb of The Wilkes Partnership comments:

“The Act is set to, for the first time, put in place a legislative framework around all qualifying tips and gratuities left to reward staff for the quality of their service by customers.  Whereas before, employers in the hospitality and tourist sectors were left to apply their own discretion and moral opinion on whether to distribute tips to staff, the intention of the legislation is to firmly ensure workers receive all the tips and gratuities left.”

The Government estimates the change will affect up to 2 million workers and estimates about £200 million a year will go back direct to staff, which otherwise would have been held on to by their employers.

Background

The new legislation has come about as a result of a Private Members’ bill with the support of the Government.

The previous situation was a little bit ‘patchy’ largely depending on how the tips and service charges were gathered and who held on to them.  For example, if the tips were handled directly by staff at arm’s length from the employer, typically using a Tronc system, then staff were able to distribute tips as they saw fit.  Whereas, service charges automatically added to the bill and collected by the employer, would remain with the employer to decide whether to pass on the service charge to its staff. There were also direct tax consequences, dependent on the system in place, which had a significant impact on the direct wages of staff and the amount of tax paid.

A new Code of Practice will be introduced giving greater certainty, but at its heart will be the aim to ensure staff receive all tips, gratuities and charges left for them.

Main points to know

The act will cover ‘workers’, meaning that it will have broad protection to employees and agency staff alike.

The main aim is to ensure that there is a duty on the employer to allocate all qualifying tips to workers.  Under a new Code of Practice, there will be an obligation to put in a written policy detailing how the allocation will occur, otherwise tips can be handed over to an independent Tronc operator to allocate to staff.

What this will mean for employers is an obligation:

• to put in place a written policy compliant with the Code
• to distribute tips either by compliance with its written policy or through the Tronc operator
• a requirement to keep pay records for 3 years

What it will mean for employees is:

• they will have the right to retain 100% of the tips without deductions made by the employer
• a fairer and transparent system of distribution of tips
• the right to request pay information and to see records
• it will be a ‘day one right’ given to staff with no need for qualify service

Enforcement

The main enforcement points to take note of are as follows:

• there is a 12 (not 3) month limitation period [NB. Most employment rights have a 3 month limitation period to bring a claim]
• the right to complain not to suffer an unlawful deduction from wage, and if proven, the Tribunal can order payment of any shortfall in pay
• the Tribunal can order tips and service charges to be paid not just to the Claimant, but to any other worker employed who may have suffered similarly
• The Tribunal has the power to impose a fine of up to £5,000 per Claimant reflecting any additional finance loss caused by non-payment
• the Tribunal can order employers to revise their tip allocation policies

Commencement

Although the Act has received Royal Assent, it will not be in force straight away.

The Government is still under consultation to produce the Code of Practice.  It is estimated that the Act will be in operation by May 2024.

To discuss anything arising from this update, please contact Jas Dubb on 0121 710 5929 or via email at [email protected]. You can also contact any other member of the Employment Team on 0121 233 4333 or email us at [email protected]