New law banning deductions from staff tips

In early 2023, The Employment (Allocation of Tips) Act 2023 (the Act) received Royal Assent. On 15 December 2023 the Department for Business and Trade issued a consultation on the draft statutory Code of Practice (the Code) that will support the Act.

The Act and its supporting Code are set to ensure tips are fairly passed on to staff without deductions.

Why are changes being made?

The government had announced plans to introduce legislation back in 2015 when a Call for Evidence revealed that two thirds of employers were making deductions from the tips received by staff or retaining it in full to increase profit or cover operating expenses. At the same time, the practices of some of the UK’s largest retailers were exposed in the media.

From this, the government held consultations on proposed legislation, but no concrete action followed, only a broad promise to take action at a later date. However, since Covid-19 and the recent cost of living crisis, there has been growing pressure on the government to tackle the issue.

How does tip allocation currently work?

There is a distinction between tips that are paid in cash and those paid by card. Cash tips are considered the property of the staff member, except when they are placed in a tips box. On the other hand, tips made by card are considered paid directly to the employer, and thus legally belong to the employer.

Individuals have very little control over the tips paid by card, and even cash tips are not safe from employers who make redistribution of cash tips a term of employment. This practice is common in the hospitality sector, where employers target tips to offset the increasing costs of energy, labour, rent, supplies, and other expenses that cut into their margins.

What changes are being made?

The Act will apply to “qualifying tips”, defined in the Code as tips which the employer has influence or control over whether paid in cash or by card rather than those where an individual receives and keeps a cash tip with no employer involvement.

For “qualifying tips” the following will apply:

• No deductions – Qualifying tips cannot be subject to deductions beyond those required by law.
• Fair Allocation – The allocation of qualifying tips will be based on the total amount received and must be fairly split between the employees at the location where they were earned. The draft Code includes factors to consider when determining a fair allocation and permits the use of a tronc on condition that it fulfils the requirements set out in the Act. 
• Written employment policy – Employers will need to have a clear written policy that details how qualifying tips will be fairly allocated to staff. The policy should be easily accessed by staff and should include procedures for resolving issues raised by individuals. 
• Records – Employers will be required to keep a record of tips and how they were allocated. These records should be maintained for at least 3 years and be made available to staff within 4 weeks of receiving a request.
• Period for payment – Employers must ensure that staff receive their tip payment within one month following the month in which the customer gave the tip. 
• Entitlement for agency workers – Staff who are not directly employed by the company, such as agency workers must also receive a fair share of the tips without deduction. In circumstances where the tips are paid to the agent the agent is prohibited from making deductions (other than those required by law).
• Redress – where an employer fails to implement a policy or fails to distribute tips as per the requirements of the Act an individual can make a claim to an Employment Tribunal.

How can you prepare? 

The Act is expected to come into force in May 2024 and businesses should start making plans now to meet the new obligations.

Employers should begin by reviewing current practises on the distribution of tips with a view to establishing a new policy that meets the requirements of the Act. Employers should also ensure that there is a mechanism in place to record the tips that are received and how they have been allocated. In most cases there will be a need for clear staff communication and more training for supervisory staff who will have a greater responsibility in overseeing tips reporting. 

Some in the sector may need to budget to minimize the impact of losing previously retained tips. The Act will ensure around £200 million a year goes back to hospitality employees.

The Act is undoubtedly a positive step forward for individuals and may also serve to help employers in the sector attract and retain employees.