How the Tipping Act reforms workplace practices

The Employment (Allocation of Tips) Act 2023, commonly known as the Tipping Act, is now effective UK-wide from the 1st of October 2024.

The stated aim of the Act is “to increase fairness in tipping practices and create a level playing field for employers who already allocate all tips to workers by ensuring that all employers follow the same rules”.

The essence of the legislation is to try and ensure that all tips, gratuities and service charges are passed onto workers, without any deductions. While this is an admirable aim, there are also potentially significant consequences for operators who fail to comply with the legislation.

This introduces a number of new sections to section 27 of the Employment Rights Act.

Significantly, it also amends the definition of wages in the employment rights act 1996 to make clear that wages means “any amount of qualifying tips, gratuities and service charges allocated to the worker under Part 2B of this Act”.

Background

The concept that protection was required against unfair practices by employers in relation to tips is one that has been raised since at least 2016 when the then Conservative government launched a consultation.

Subsequently, the Good Work Plan of December 2018 confirmed their intention to legislate to ban employers from taking fees or making deductions from tips.

The Employment (Allocation of Tips) Bill 2019-20 was one of a raft of measures introduced in the Queen’s Speech from October 2019. However, this was not presented in parliament and accordingly in the Queen’s Speech of December 2019 it was suggested that this would be dealt with in a proposed new Employment Bill.

It was not until September 2021 that the UK government issued their response to the 2016 consultation; at that time, they had confirmed that the legislation would be brought forward “when parliamentary time allows.” However, progress seemed slow and, as of May 2022, a number of people considered they were no longer going to proceed with those plans.

However, in July 2022 the Conservative government confirmed they would back the Employment (Allocation of Tips) Bill 2022-23 as a Private Members’ Bill. It was May 2023 when the bill received Royal Assent, and the Statutory Code of Practice came into force on 31 July 2023.

The remaining substantive provisions of the Act came into force on 1st October 2024.

It should be noted that it only applies to tips by customers paid on or after that date and does not have retrospective effect.

Who is Covered?

The Act protects workers, who are defined under section 230(3) of Employment Rights Act 1996 as “an individual who has entered into or works under a contract of employment or any other contract, whether expressed or implied and (if it is express) whether oral or in writing, under which the individual undertakes to do or perform personally any work or services for another party to the contract who is not that individual’s client or customer”.

This is a wide provision. It will also apply to eligible agency workers if the agency worker works at the place of business of the principal. In this case, the legislation operates as if the agency worker were a worker of the principal and the principal was the employer of the agency worker.

It should be noted that it does not apply to the (genuinely) self-employed. However, the hospitality sector is not one that would normally have a significant number of self-employed workers.

What is Protected?

The Act governs “qualifying tips, gratuities and service charges”. This would cover all employer-received tips and certain worker-received tips.

It should be noted that the basis of any service charge is not relevant, there is no difference whether the service charge is mandatory or discretionary.

While the Act does not define those terms, the Code of Practice does provide definitions of tip, gratuity, gift or service charge.

It is important to note that there is a difference between employer-received tips and worker-received tips.

An employer-received tip is an amount paid by a customer as a tip, gratuity or service charge which is received either by the employer or by another person under a payment arrangement. This would typically include tips paid to an employer using a credit or debit card which would include sums paid to a bank instead of directly to the employer.

A worker-received tip relates to a payment made which is received on payment by a worker and not subsequently received by the employer.

The classic example of a worker-received tip would be where cash is paid directly to the worker. In those circumstances the worker is not required to pay onto the employer.

There could be circumstances where it may not be clear how a payment should be defined, but the principal factor is likely to be whether the employer receives or exercises control or significant influence over the distribution of tips.

Obligations on Employer

There are two main obligations on an employer who are required to make sure the total amount of the tips either paid at or attributable to a particular place of business is allocated fairly between all the workers at that place of business.

Thereafter, once the employer-received tips are allocated, the full amount is required to be paid to the worker.

While the Act does not define fairness, the Code of Practice sets out the key factors to be considered. The Code illustrates factors to be considered to include the type of role, hours worked during the relevant period, performance, basic pay, seniority/responsibility, length of service and customer intention.

Judges are under an obligation to take the Code into account when determining disputes relating to tipping practices. However, it should be noted that a failure to follow the Code does not, in itself, constitute proof of unfairness.

While there is no requirement to allocate all employees with the same proportion of tips, the allocation will have to be capable of being determined by reference to a clear and objective set of factors.

As it will be appreciated, it is important to ensure that any criteria that are used are not discriminatory either directly or indirectly.

There are also worked examples in the non-statutory guidance that accompanies the Code.

A number of tipping schemes were previously administered by an independent tronc operator (ITO). This will still be permitted but it is the employer who remains liable for ensuring that the scheme is carried out in a fair and transparent manner.

Unlawful Deductions and Enforcement

S.11 of the Act amends the previous statutory provisions on unlawful deductions from wages to expressly include “qualifying tips, gratuities and service charges allocated to the worker.”

It is also important to note that it is not possible contract out of the obligations contained in S.11 of the Act.

There must also be a written policy on how tips are dealt with. That policy must be available to all workers and must be kept up to date.

The only exception to this requirement would be where tips are only paid on an occasional and exceptional basis which the guidance suggests would only be a few times per year. It would be unwise to try and rely on that exemption. Further, it would be difficult to know in advance how frequently tips may be received.

As well as ensuring that there is a policy, employers must keep records of how tips have been dealt with to include the amount of tips paid and how they are allocated. These records are required to be kept for a period of three years.

There is also the ability for the employee to request information on the employer’s tipping record. Any such request would require to be provided within four weeks of the request being received.

If there is a failure to allocate and pay the tips fairly then a complaint can be presented to an Employment Tribunal by either the worker or, in some circumstances, an eligible agency worker.

Very unusually, the time period for bringing such a claim is 12 months from the date of the failure (or the last failure) rather than the usual three-month period.

In the event that any such complaint was upheld then there is a mandatory requirement for a declaration to be made. As well as making them the tribunal may order the payment of compensation of up to £5000. The tribunal will have a very wide discretion to award the compensation that may consider to be appropriate.

That compensation could then be increased by up to 25 per cent if there is also considered to be a failure to comply with the ACAS code.