From 1 October 2024, the Employment (Allocation of Tipping) Act 2023 (“Tipping Act”) comes into force. This new law will change the way tipping and service charges are handled in the hospitality industry. The law is clear: employees must receive their entire tip, without deduction. This also ensures that tips are distributed fairly among staff. Additionally, employers must have a written policy on how tips are awarded. (Of course, we’ve got you covered with our advice policy template on our platform!)
What is the code of practice?
To help businesses adapt to the changes, the government has published a Code of Practice on the fair and transparent distribution of tips. This explains how tips should be distributed fairly and transparently within your team.
Who is protected?
Tipping law covers both employees and workers. This also applies to temp workers, so if you’re hiring through an agency, they’re included too!
And here’s something important: your team cannot “opt out” of these protections. You will therefore need to review existing employment contracts, policies and procedures to ensure they comply with the new rules (for example, any clauses allowing the deduction of tips).
What types of tips does the tipping law apply to?
This law applies to tips, gratuities and service charges paid to your business, including credit or debit card payments. It doesn’t matter whether the service fee is optional or mandatory: if it comes from the company, it’s covered.
Cash tips paid directly to staff? These are a little different. If your policy states that cash tips must be shared, they fall under the tipping law. But if staff are allowed to keep the cash tips they receive directly, then they can keep everything and the law won’t apply.
Fair distribution and payment of tips – what does this mean?
If a tip passes through your business (whether by card or cash and needs to be shared), you are responsible for ensuring it is distributed fairly. You will need to follow the code of practice, which means:
- Tips do not need to be split equally. Different employees may receive different amounts based on things like role, performance, or hours worked.
- Don’t forget temporary workers! They must be factored into your tip allowances.
- You’ll want to use clear, fair, and objective criteria for how you distribute tips, and you should consult with your team to make sure everyone is on the same page.
Here are some factors you might consider when deciding how to distribute tips:
- Role (front-of-house or back-of-house)
- Base salary, type of employment (permanent or casual)
- Hours worked during tipped shifts
- Individual or team performance
- Seniority or level of responsibility
- Customer intent (did the customer leave the tip specifically for anyone?)
It is also important to avoid unintentional discrimination. For example, if your front-of-house team is all one gender or race and your back-of-house team is a different group, be mindful of how you distribute tips. Learn more about diversity and inclusion best practices here.
Employers are considered to have fulfilled their obligations when they use an independent trunk operator to allocate tips, such as an independent third-party organization, or an employee of the company, such as the maître d’hôtel). But this is only the case where the employer has a reasonable belief that the trunk operates independently and fairly.
And regarding timing, payment must be made no later than the end of the month following the month in which the tip, gratuity or service charge was paid by the customer. So, if a tip is paid on June 23, it must be distributed before July 31.
Written advice policy – a must
If tipping is a regular part of your business, you should have a written policy. This policy must explain:
- If you encourage customers to leave tips
- How tips are distributed among employees
- How disputes over tipping will be handled (you can use your existing grievance procedure for this)
Even if you only deal with cash tips that staff keep directly, you must still provide written information explaining why you do not have a formal tipping policy.
Need a practical model? You can find all sorts of useful templates on our next-gen platform.
Recordkeeping 101
If tipping is part of your business, you must keep a record of how each tip was allocated for three years. Employees have the right to inspect these records, so make sure they are up to date.
What happens if you don’t comply?
Failure to comply with the tipping law may result in complaints being made to an employment tribunal, which could result in compensation of up to £5,000 per violation.
Payroll Considerations
It should be noted that tips are not taken into account in the calculation of the national minimum wage and do not affect the calculation of redundancies or holiday pay. For tax advice, HMRC has useful information on how tipping, service charges and trunks should be treated.
Need additional help?
If you need more help navigating these changes, our human resources advisory service can guide you through your employment law and human resources obligations. Plus, you’ll have access to ready-to-use documents like a tipping policy and grievance procedure.