Service charges and gratuities: tips on tips

New legislation, the Employment (Allocation of Tips) Act 2023, is coming into force on 1 October 2024, making it mandatory for employers to fairly distribute all tips to workers and eligible agency workers, free of unnecessary deductions. Guidance on this – Code of Practice on Fair and Transparent Distribution of Tips – will come into force on the same date. The Code of Practice is currently subject to consultation and will be finalised shortly.

New legal provisions

‘Tips’ includes all qualifying tips; service charges; and gratuities, which an employer has a significant influence on or exercises control over.

Payment needs to be made in full to the worker no later than the month-end after the month in which the customer paid the tip. For example, if the customer paid the tip on 26 July, the tip needs to be distributed fairly by 31 August.

What is the purpose of this Act?

• To improve fairness for workers and ensure that the recognition of good service and hard work is going to the workers, as intended by the consumer
• Create a level playing field for employers who allocate tips.

Allocating tips ‘fairly’ does not mean allocating the same proportion to all workers. You may have legitimate reasons to allocate different workers different proportions. The following factors may influence a worker’s allocated proportion:

• Their role
• Their basic pay
• Their hours worked
• Their team contribution
• Their seniority and level of responsibility
• Their length of service
• Customer intention.

Does it apply to all tips?

This new legislation does not apply to genuinely self-employed members of your team.

It will also not apply where an employer does not receive or exercise control or significant influence over tips; for example where tips are paid directly to workers in cash and kept or informally pooled by workers. In such a scenario, existing tipping practices will continue.

Our business receives tips – what should we do?

We advise the following for employers:

• Maintain an accurate written record of tips paid and the method in which it was paid – i.e. cash, card payment or bank transfer – as workers have the right to request records
• Prepare and maintain a written policy or practice for how tips are accepted, and how the allocation of tips will be done fairly and transparently, so that it aligns with the Code of Practice on Fair and Transparent Distribution of Tips
• As part of preparing your policy you should consult with staff to get their opinions on how the tips are allocated
• The policy should include a mechanism to resolve issues in relation to the allocation of tips, which aligns with the Code of Practice on Fair and Transparent Distribution of Tips
• Take extra care to avoid unintentional unlawful discrimination – e.g., the allocation method indirectly discriminating against a particular group
• Review your approach to allocation on a regular basis, particularly if the total amount of monetary tips changes significantly.