WFM UK: Employment (Allocation of Tips) Act, 2023

Overview

In a significant stride towards promoting fairness and transparency in the service industry, the Employment (Allocation of Tips) Act, 2023, set to go live on 1st October 2024, seeks to revolutionise tipping practices and ensure that employees receive 100% of the tips they earn. This comprehensive legislation addresses key aspects, ranging from the timely distribution of tips to the inclusion of agency workers, and will be accompanied by a Code of Practice outlining the principles for fair tip distribution.

Please note: In this article, tips, service charge and gratuities are all referred to as 'tips'.

The key aspects of the legislation are:

• 100% of tips are distributed to workers
  • The primary objective of the act is to guarantee that 100% of tips are distributed to workers, marking a departure from practices where establishments retain a portion of tips to cover administration fees or similar expenses
• Timely payout of tips to workers
  • The legislation mandates that all tips must be paid out by the end of the month following the month in which the tips were left. This ensures a prompt and fair distribution of tips to employees
• Intra-venue tip distribution
  • Tips left at a venue are required to be distributed among workers within that venue, fostering a sense of fairness among the staff
• Fair distribution and agency consideration
  • The act emphasises the importance of fair distribution, considering factors such as different working patterns, roles and the inclusion of agency workers within the distribution policy
• Documented tipping policy
  • Employers are mandated to have a documented tipping policy, serving as a guide for the fair allocation of tips and must be accessible to all employees, including agency workers
• Employee information requests
  • Employees have the right to request information regarding the amount of tips left by customers and their allocations. This provision promotes transparency and empowers workers to monitor their earnings
• Record retention
  • To ensure accountability, employers are required to keep records of distribution practices and distributed amounts for three years. This enables auditing and ensures compliance with the legislation

Code of Practice

The UK Government will publish a Code of Practice alongside the Employment (Allocation of Tips) Act. The code outlines overarching principles for fair tip distribution. While specifics on the distribution methods are left to the discretion of businesses, all employers must pay regard to this code when formulating their tipping policies.

The Code of Practice principles are set out as follows:

• Scope
  • Qualifying Tips
  • Qualifying Workers
• Fairness
  • Factors to consider when formulating tipping policies
  • Allocation justification
• Transparency
  • Requirement for a tipping policy
• Managing issues
  • Dispute resolution
• Record keeping and reporting

Scope 

Qualifying Tips

Employer-Received Tips - Any amount of money that is received by the Employer in relation to tips - is considered as 'Qualifying Tips'

Worker-Received Tips - Any amount of money that is given directly to the worker, and retained by the worker, is not classed as 'Qualifying Tips'

If tips are left for a worker at a business where tipping is not usual practice, these are not classed as 'Qualifying Tips'

Qualifying Workers

Any person employed by or engaging in work for a business is classed as a worker. This includes agency workers who work within an area of the business.

Self-employed; those providing a service under a Personal Service or Limited Company and Company Directors without contracts, are examples of people who are not classed as a worker for tip distribution.

Fairness

Tips must be allocated fairly between workers at the place of business. The distribution can take different working patterns and roles into account. The mandatory tipping policy should support the justification around why certain distribution decisions have been made.

The Code of Practice sets out principles for employers to consider when creating their tipping policy:

• Employers should decide which principles apply to their business
• Not all workers have to receive the same level of tips
• Businesses should use 'Clear and Objective' factors to determine allocation
• Policies should avoid discrimination
• Employers should consult with workers to seek broad agreement
• The policy should be reviewed regularly

Factors to Consider in Allocation

The following should be considered during the creation of distribution rules:

• The Type of Role
  • Front of House may earn less than Back of House, and so are eligible for a higher tips allocation
• Basic Pay and how the worker is engaged
  • Employees with a lower basic pay may have a higher allocation of tips than those with higher basic pay
  • Agency workers may typically receive a higher basic pay for doing the same work as contractual workers and receive a lower tip allocation as a result
• Individual or team performance
  • Higher-performing individuals or teams may receive a higher allocation of tips
• Seniority
  • Lower-ranked workers may receive a lower allocation of tips in comparison to higher-ranked workers (or vice versa)
• Length of service
  • Workers with a longer service may have earned a higher allocation than those who have just started

It is important to note that any decisions about allocation should be justified and documented within the tipping policy.

Methods of Distribution and Payment

The different methods that can be used for distribution and payment are:

• Distributed and paid via the normal payroll cycle or separate tronc payroll
  • This can be through an integrated or external tronc system that can make payments alongside employees' usual payments
• Distributed and paid using an outsourced third-party
  • Employers must have a reasonable belief that the distribution is being done fairly. If aware that it is not fair, they must take action to remedy it or risk being deemed non-compliant
  • Any costs associated with outsourcing the distribution and payment of tronc should be covered by the employer. No deductions for the payment of tronc services should be taken from tips

Transparency

Employers who receive regular tips must have a tipping policy. All workers must have access to this policy (including agency workers) and any updates to the policy should be clear and visible to all workers.

The policy must include:

• How tips are accepted
• How tips are allocated
• How tips are distributed
• The steps that the employer takes to ensure tips are handled fairly and transparently

If a business has an assigned troncmaster, they should avoid detailing how the tronc is distributed within their policy. This could be viewed as being done under the control of the employer, and HMRC may decide the tronc is subject to National Insurance contributions - when in fact, it is exempt. Instead, the policy should detail how the distribution is kept fair by using a troncmaster. The troncmaster should ensure the distribution rules are available for workers.

Record Keeping & Reporting

Employers must keep the following for 3 years:

• Qualifying tips received
• The place of business where tips were received
• The amount allocated to each worker

A worker can request access to their tip record for up to 3 years - and can ask to see this information once every 3 months.

Record keeping is subject to the Data Protection Act, 2018.

Managing Issues

All employers should make sure there is a process in place should a worker raise a dispute regarding the collection, allocation, or distribution of tips.

Every effort should be made to resolve the dispute internally. If this fails, the worker must contact the Advisory, Conciliation and Arbitration Service (ACAS) who can proceed with an employment tribunal, which can make a public judgement - the results of which may order a reallocation of tips or compensation. It may also impact other workers.

Agency Workers

One major focus of the new legislation is that employers must consider agency workers when deciding their tips policy.  Agency workers have always been entitled to receive a share of tips, but are typically excluded. The Employment (Allocation of Tips) Act, simply applies a level of legislation to ensure they are considered for their fair share of tips.

There are two ways in which agency workers can be paid their tips:

• Through normal payroll
  • This way, the employer calculates and deducts the tax portion of the tips at source when the payment is made
  • Details should be submitted to HMRC via the Full Payment Submission (FPS)
  • A challenge here could be the collection and management of the agency worker's record within the payroll system
  • An additional worker on the payroll may incur additional costs for processing depending on what software or service agreements are in place
• Pass the amount to the employment agency for them to pay the worker
  • The agency calculates and deducts the tax portion of tips
  • The agency reports the information to HMRC via the FPS
  • The employer maintains responsibility for the code of conduct being met. This means that if the agency doesn't pass the tips to the worker, or it is paid outside of the statutory time frame, the worker could raise a dispute directly with the employer, rather than the agency

Frequently Asked Questions

• When a customer leaves a tip via a credit card, there are fees due on the amount left. For example, if a customer tips £100, the business may only receive £97. How much is due to be paid to the workers?
  • The law specifically states that 100% of the amount left by the customer is due to be paid to workers. This means the whole £100 should be added to the distribution pot. The business will need to take the hit for the credit card fees
• All workers have agreed to the rules of distribution via a service they agreed to pay for. Is this still allowed?
  • The service can still be used to distribute and pay tips. However, the cost for that service must not be paid for using tips. The business must cover the cost of the service themselves
• We currently set aside a percentage of tips received in busy periods to make up tip amounts during the slower periods so that employees don't feel the impact on their pay. Can we still do this?
  • From 1st October 2024, any tips received must be paid to workers by the end of the month after the month in which the tips were received. So, in theory, a reserve can be set aside, but the amount must still be paid within the statutory time limit.  Some employers may choose to keep a reserve on a rolling monthly basis, so, for example, they reserve £50 from January, then make sure the Jan amount is paid in Feb, but hold back £50 from February's 'pot'.  However, record keeping and justification for working in this way must be watertight
  • The rules only apply to tips left on or after 1st October 2024, so any amounts left before that date are not impacted by this restriction
• Can we include employees from central locations in tip distribution?
  • The Code of Practice specifies that employees within non-public-facing places of work who contribute to the service where the tips are left can be included in the allocation
• We collect all cash tips left and allocate them to staff once a month based on the number of hours worked. Is this still allowed?
  • Yes, it is allowed, however, where the money is accumulated, it often needs organisation and HMRC would assume the tips are employer-received. This means they would attract PAYE. Distributing at the end of the night suggests that they are worker-received tips, so there is no PAYE impact