New legislation on tips for May 2024

New legislation on tips for May 2024

Statutory redundancy pay and tribunal awards to increase

Last month, the Employment (Allocation of Tips) Act 2023 received royal assent (the act). This act has been in the pipeline since 2018 following concerns that workers in the hospitality sector were not receiving 100% of their tips, gratuities and service charges (collectively referred to as “tips” in this article). The act will come into force in May 2024, with the exact date to be confirmed in due course.

What will this mean for employers in the hospitality sector?

The act imposes new obligations on employers to allocate 100% of any qualifying tips over which they exercise control or significant influence to staff. “Qualifying tips” for these purposes are any employer-received tips or worker-received tips which are subject to employer control, disregarding any deduction made by either the employer or any other party (i.e. a bank or payment provider). 

Qualifying tips must be paid to staff in full by the end of the month following the month in which the tip was received, without making any deductions (other than normal deductions for tax and National Insurance contributions (NICs)). The act applies to employees and workers, including agency workers.

In addition to the requirement to allocate tips in a fair and transparent manner, employers will need to have:

  • A written policy which sets out how qualifying tips are dealt with
  • A record of the allocation of qualifying tips which must be kept for three years from the date the tip is received by the worker

It has been reported that the government will produce a Statutory Code of Practice (code) on the fair and transparent distribution of qualifying tips which employers must have regard to. It is expected that formal consultation on the code will begin later this year, although it has not been reported when the consultation period will open. Any failure to comply with the code will be relevant to claims in the Employment Tribunal. 

How will this impact workers?

Workers will be able to request specific information regarding their employer’s tipping record. If an employer fails to comply with the act, it is understood that the worker will be able to lodge a claim in the Employment Tribunal in respect of such failure. A worker will have up to 12 months from the date of the employer’s non-compliance with the act to lodge a claim in the Employment Tribunal, which is far longer than the usual three-month period for most employment-related claims. 

Possible remedies for any failure to comply will include a declaration, an order to require the employer to revise any tip allocation previously made or to make a payment direct to one or more of its workers. Compensation of up to £5,000 can also be awarded by the Employment Tribunal in respect of any financial loss suffered by the claimant.

What about troncs?

Tronc systems are commonly used in the hospitality sector to collect tips from customers in a common pooled fund which is then distributed to staff. A tronc master is then appointed to determine how the tronc monies will be distributed amongst staff. A tronc master is either a member of staff or an external party – employers often outsource this sort of arrangement, with the administrative costs historically being passed onto workers. Workers benefit from this arrangement as tronc systems are exempt from NICs.

Employers will still be able to operate tronc systems under the new legislation, but the act prohibits any administrative costs being passed onto workers and it also requires employers to ensure that it is fair to operate a tronc system arrangement. It is unclear how the latter will be determined but further guidance will be contained in the code when it is published. With employers no longer being able to pass on the administrative costs of operating a tronc system, employers may decide to move away from tronc systems in the future.

Additional financial and administrative costs for employers

The act provides some detail on the information that must be included in written policies and retained in written records, although it is expected that the code will contain further guidance when it is published in due course. 

As employers will not be able to pass on administrative charges which are imposed by banks and/or tronc operators, they will likely look to make savings elsewhere in their businesses or pass such costs on to customers. These additional costs may have a significant impact on an already struggling hospitality sector.

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