New tipping laws will require employers to pay all tips over to staff

On 2^nd May 2023 the Employment (Allocation of Tips) Act 2023 received Royal Assent.  This means that employers withholding tips from staff will soon become unlawful.  In this article we look at why the new rules are coming in, who will benefit and what issues employers may face in complying.

Many workers in the hospitality sector and similar are paid minimum wage rates and rely on tips from customers to top up their pay.  The treatment of tips has always been varied – cash tips might be kept by the individual or pooled and shared, and while it might seem reasonable to do the same with credit card tips, these are sometimes retained by unscrupulous employers.

The new law seeks to solve this problem by making it illegal for employers to pocket tips and gratuities and requiring them to be paid to staff.  It is claimed that these changes will benefit more than 2 million workers across the hospitality, leisure and services industries in the UK, helping to ease some pressures of the cost of living and boosting wages for those in what are often lower paid jobs.

Although the official start date has not been released, it is expected to be some time in 2024 following consultation and secondary legislation.  The consultation is expected to result in a Code Of Practice for employers.

The new law will apply to employees, workers and agency staff which should cover the vast majority of people working in these sectors.

The main benefits to employees (and other types of staff) are as follows:

• The right to receive 100% of all tips paid, whether by cash or electronically
• The only allowable deduction is for tax or NI (if applicable)
• Tips must be received by the end of the month after they were paid by the customer
• A right to request information from the employer on how tips are allocated
• A right to bring an Employment Tribunal claim for unpaid tips up to 12 months later (compared to 3 months for most employment related claims)

The new law will place an administrative burden on employers who don’t have similar processes in place already.  A Code of Practice is expected before the law takes effect, but employers will as a minimum need to:

• Create a written policy on how tips are to be allocated
• Account for all tips received from customers and allocate and pay them over to employees in a timely manner with the right tax/NI deductions
• Keep records of these payments for 3 years and respond to requests from employees to see these records within 4 weeks

If an Employment Tribunal finds an employer hasn’t complied with the new rules they will be able to:

• Award compensation of up to £5,000 to each claimant to reflect losses they may have incurred due to non-payment of tips
• Order the employer to pay over any unpaid tips not just to the claimant but to anyone else working there who should have received them
• Force the employer to revise their tip allocation method and policy if it is unfair

This could be an extremely costly and time-consuming exercise.

While it seems perfectly reasonable that tips should be allocated out to the staff who earned them, there is currently a lack of clarity on how this should happen.

For example:

• Who should be considered as having earned a tip?  Is it just the waiting staff, or should it include bar staff, kitchen staff, reception staff, managers or anyone else involved in the entertaining process?
• In an industry where hours are flexible and changing, how should tips be allocated?  Should it be using the details for the shift that was worked, or across a different reference period?
• How can a policy be applied fairly where the different levels of tips are earned in shifts where the age or gender splits are different?  For example, tips might be higher in the evenings where there is a younger mix of staff and lower in the daytime when older staff with families might be in the majority
• How will staff react when tips are reported in the payroll?  Increases in reported pay might affect entitlement to in-work state benefits, even thought the amount taken home hasn’t changed.  Of course HMRC would argue that all income should be declared and taxed properly, whether cash in hand or paid through payroll!

It will certainly be a challenge to find the right balance and create a policy that is fair for everyone.

The next few months are going see most employers in the hospitality, leisure and services sectors reviewing their processes and getting the policies and procedures in place.  Employees will be wondering how they will be affected and we are unlikely to get proper clarity until 2024.

If you are an employee with questions on the new tipping law, or an employer who needs to understand how you will be affected and what you need to put in place then Backhouse Solicitors are here to help.  Contact us today to book a free initial consultation with one of our friendly, expert employment solicitors and let us help you keep on the right side of the new tipping laws.

Tel:          01245 893400
Email:     info@backhouse-solicitors.co.uk
Visit:       17 Duke Street, Chelmsford, CM1 1JU
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