The Act legally requires employers to allocate all the tips, gratuities, and service charges they are paid (or over which they exercise control or significant influence) to workers without any deductions. They must also ensure a fair distribution of qualifying tips between workers.
Background
The Employment (Allocation of Tips) Act 2023 received royal assent in May 2023, making it illegal for businesses to withhold tips from staff. A draft statutory code of practice was then published in December 2023 to help employers and workers understand the legislation. The code was in consultation until 22 February 2024 and has now been finalised and published.
The legislation was due to come into force in July 2024 but was recently pushed back until 1 October 2024.
Key features and implications for employers
The Act aims to ensure protected rights for those working in the hospitality and leisure services, and a fairer and more transparent system for distributing tips, gratuities and service charges. Key features of the allocation of tips legislation include:
- All tips and gratuities must be distributed fairly and in full to staff.
- Tips paid by cash and card will be protected, and employers cannot deduct from them.
- Tip distribution is no longer optional and cannot fluctuate according to profit and loss.
- Workers, including those on zero-hour contracts, are protected by the legislation.
- Workers can enforce these new obligations through an Employment Tribunal.
- If an employer fails to comply, they could face fines of up to £5000 per employee.
Allocation of tips – Important definitions
The law ensures protected rights for those working in the hospitality services and leisure sectors. It focuses on the distribution of tips, gratuities, and service charges that fall within the scope of Part 2B of the Employment Rights 1996 Act (“the Code of Practice on Tips”).
The Act defines “qualifying tips, gratuities, and service charges” as employer-received or specific worker-received tips. These are tips that are either received by the employer and subject to the employer’s control, or connected to worker-received tips but then also subject to employer control in how they are distributed. A typical example is when employers first receive the tips money and then allocate it to workers.
Tips received directly by workers (whose distribution amongst workers is not controlled or influenced by the business) are not affected by the new rules. These include cash tips given directly to the worker, with no employer involvement, or digital tipping – where a customer uses an app to directly tip members of staff (again without involving the employer).
Complying with the code of practice
The new code of practice sets out certain principles for the ‘conduct’ of fairness and transparency and how employers should apply these principles in the workplace. It applies to businesses in England, Scotland and Wales.
Key points to note are that employers must:
- Maintain a written policy on how tips are handled at their place of business and ensure that this policy is available to all workers.
- Maintain a record of all tips paid at their place of business, their allocation and distribution among workers, and which workers have the right to request access.
- Tips must be distributed within one month of receipt. Employers are required to maintain records demonstrating how every tip has been dealt with for three years from the date the tip was paid.
Income tax and national insurance implications
The Act and Code of Practice haven’t changed the tax and national insurance treatment of tips. The reporting and payment of tax/NIC depend on who pays the employee and how the tips are managed.
For example:
- Suppose the employee receives and retains tips directly from the customer. In that case, tips should be reported through self-assessment (not PAYE) and would be liable to income tax.
- If the employer collects and distributes tips to employees instead, income tax is paid via PAYE along with NIC payments.
- Where the business delegates the responsibility of allocating tips to a tronc master, income tax is paid via PAYE, but NIC is not payable on the tips.
Getting ready for the change, and can we help?
To be compliant with the new regime and legislation (and depending on the business and its current operations), this may involve:
- Adapting systems and processes for the new reporting regime.
- Preparing or updating necessary employment policies.
- Educating staff and ensuring the policy is available to all workers.
If your employees receive tips, gratuities, or service charge payments through a tronc system, the person who runs the tronc (called a tronc master) must run a payroll and report the information to HM Revenue and Customs (HMRC).
We can help set up a PAYE scheme and run the payroll with the appropriate deductions. Speak with your Shipleys contact or one of the specialists on this page.
Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary. If you would like advice or further information, please speak to your usual Shipleys contact.
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