Allocation of tips

New laws on allocation of tips are now in force.  100% of tips and service charges must be paid to staff.  This will be particularly relevant to employers in the hospitality sector where tips are commonly paid.  Guidance has been published to help employers comply.  It provides helpful examples and templates to assist employers and workers and can be found here.

What tips are covered?

Employers must allocate ‘qualifying tips’ among workers in full. Agency workers are also entitled to receive tips.  It is unlawful for employers to withhold tips or make deductions before  paying these to workers.

A ‘qualifying tip’ includes tips, gratuities and service charges which an employer exercises control or significant influence over. This includes situations where employees tell staff how to distribute cash tips or if they collect cash tips and distribute them at the end of a shift or as part of the regular payroll. If tips are received by card or other electronic means (such as an app or QR code), the tip is still a qualifying tip.

‘Fair’ distribution of tips

Tips must be allocated in a fair and transparent way.  This includes:

• Consulting with staff to explain the changes to the legislation
• Seeking broad agreement with workers such that the allocation is fair, reasonable and clear to them
• Seek guidance on preparing policies and train managers and supervisors
• Maintain written records of how tips have been allocated (for 3 years from the date the tip was paid)
• Ensure tips are paid no later than the end of the month following the month in which the tip was paid. For example, if a worker is tipped in November 2024 this should be paid to the worker in the following month’s payslip i.e. no later than December 2024.

The factors that an employer may take into account when deciding how to allocate tips include:

• The type of work e.g. distribution between front of house and back-room workers
• The level of basic pay and how the workers are engaged
• The amount of hours worked during period when tips are received
• Individual or team performance
• The worker’s seniority or level of responsibility
• The length of service with the employer
• Considerations as to the customer’s intention i.e. did they intend to tip a specific worker.

Transparent distribution of tips

Employers are required to have a written tipping policy, which should be accessible by all staff. An employer will not have met its obligation to handle tips fairly and transparently if individual workers are not aware of their entitlements in line with the policy.

Top tips for employers

Employers could be liable in the employment tribunal for a failure to comply with their obligations to allocate tips.  Employers should:

• Have a written policy setting out how the tips are to be allocated. By setting out clear situations and factors in which an employee can expect to receive tips and when, employers can seek to reduce the risk of a claim for unpaid tips reaching the Employment Tribunal
• Periodically review the policy in line with staff turnover and any wider business changes. Employers should bear in mind that a previously functioning policy may become unlawful and discriminatory if certain groups of workers become split on the basis of a protected characteristic
• Maintain records of tip allocation for three years and make those records available to workers on request. Appropriate mechanisms to record and distribute tips should be implemented, for example including both electronic and cash tip arrangements.

Most food and drink businesses already pass on tips to the staff who earn them. The new laws aim to create a level playing field by ensuring that all employers do the same.  This creates another layer of bureaucracy for businesses to address though.  We hope the crack down on businesses not passing on tips to staff in full, and the transparency the new laws provide to staff, makes it worth the effort.

If you have any questions about the topics raised in this article, please get in touch.