Allocation of Tips Act—What UK businesses need to know

As a hospitality or service-sector business owner, you understand the hard work your staff puts in and how much customer tips are appreciated.

That’s why the Allocation of Tips Act 2023 was created—to ensure all businesses properly pass along all customer tips to their employees.

This article outlines the tipping requirements, so you can review your processes and make any necessary adjustments before the new Code of Practice takes effect later this year.

What is the purpose of the Act?

The Allocation of Tips Act 2023 became law on 2 May 2023 to amend the Employment Rights Act 1996 and ensure tips are passed on to employees, by prohibiting employers from withholding tips earned by their staff.

Business and Trade Minister, Kevin Hollinrake, commented: “Whether you are pulling pints or delivering a pizza, this new law will ensure that staff receive a fair day’s pay for a fair day’s work—and it means customers can be confident their money is going to those who deserve it.”

The UK government estimated that an additional £200 million a year would be paid out to staff that would have previously been deducted by businesses.

Which businesses are affected by the Tipping Act?

If you operate a service-based business in the UK and receive service charges, gratuities, or tips on behalf of your staff, you must follow the requirements of the Tipping Act.

This law primarily affects businesses in the hospitality industry, e.g. owning a restaurant, café or coffee shop, bar, hotel, or casino.

The Act seeks to standardise tipping practices and create a level playing field for those businesses that already operate a fair policy. Employees were previously powerless if businesses decided not to pass on tips and gratuities to them.

What are your business requirements under the Act?

Under the rules of the Allocation of Tips Act 2023, you must:

1. Pass on all tips, gratuities, and service charges to workers without deductions, except for limited scenarios like income tax withholding. This code does not affect existing tax provisions related to tipping. For more details, refer to UK government tax guidance.
   
2. Ensure the fair and transparent distribution of tips when you as the employer controls or significantly influences their allocation.
   
3. Adhere to the Code of Practice on Fairness and Transparency when distributing or influencing the distribution of tips.
   
4. Maintain a written policy on tip handling at your place of business and make this policy available to all workers.
   
5. Maintain detailed records of all tips paid, including how they were allocated among workers. Provide workers with access to these records upon request.
   

Which tips qualify under the Act?

Whether a tip qualifies under the Tipping Act comes down to the level of your control or influence over the tip distribution.

Tips are considered qualifying if the business either receives the tips directly (such as tips and service charges paid by card) or if you exercise significant control over how tips received by workers are distributed (for example when employers tell staff how to divide cash tips or collect and redistribute tips).

Employer-received tips, like those paid electronically, are your responsibility to distribute fairly to workers. Non-monetary tips can also qualify if you control or significantly influence them, such as casino chips that have a fixed monetary value.

However, not all tips fall under the Tipping Act. Tips that workers receive and keep directly, with no employer involvement, are outside the scope of the Act, as is digital tipping where customers tip staff directly through an app, bypassing the employer.

Complying with the Code of Practice

The legislation and the supporting Code of Practice on Fair and Transparent Distribution of Tips was due to come into force in July 2024 but has been delayed until October 2024. The Code of Practice is designed to provide guidance to help you interpret the legislation.

Rather than outlining an exhaustive list of factors, the code establishes broad principles to guide you on what constitutes fairness under the Tipping Act.

The code requires using a clear, objective set of factors to determine tip allocation and distribution that are appropriate for the business circumstances.

You do not necessarily need to allocate the same proportion of tips to all workers to distribute tips fairly. There may be legitimate reasons to allocate different proportions of tips to different workers.

However, you should ensure you give fair consideration to all workers involved in providing customer service, including agency workers.

Factors you may consider include:

• Type of role or work (e.g. front-of-house versus back-room)
• Basic pay and worker engagement
• Number of hours worked
• Individual or team performance
• Seniority or level of responsibility
• Length of service
• Customer intent

It’s recommended you consult with staff to reach a consensus that the tip policy is reasonable, fair, and clearly communicated. This collaborative process can help identify and address any staff concerns.

It’s up to you how to circulate the written tipping policy to staff, for example—electronically, such as by email or staff portal, or as a physical document.

Regardless of the format, the policy must be written in plain language and available in an accessible format for any employee upon request.

The Code also recommends you review your tip allocation approach regularly as staff and organisational changes occur.

All customer tips must be distributed to staff no later than the end of the month following the month the tips were received. For instance, if a customer leaves a tip on August 25th, you must distribute that tip to staff by September 30th at the latest.

What are your employees’ rights?

If you need to resolve issues and respond to queries from workers who have not received their expected share of tips, the process should follow the Acas code of practice on disciplinary and grievance procedures.

As an independent statutory body, Acas offers impartial advice on employment rights and obligations. Drawing on its expertise, Acas helps maintain positive relations and resolve workplace disputes.

You and your employees can contact Acas for guidance at any time.

Under the Tipping Act, staff, including agency workers, can enforce their rights through the employment tribunal system if the issues remain unresolved.

Complaints may be based on failure to comply with fair allocation, distribution, written tipping policy, or tipping record requirements.

If an employment tribunal finds a complaint about fairness or transparency in tipping is valid, it can issue a public declaration, order you to revise a previous tip allocation, make a non-binding recommendation on a previous allocation, or order you to pay compensation to the affected worker(s) and any other workers at the relevant workplace who did not file a complaint.

Conclusion

To comply with the Allocation of Tips Act, you need a robust and fair process in place where all tips are properly recorded and swiftly distributed to your staff.

Complying with the new Code of Practice will demonstrate your fairness and transparency to everyone in the business, which your employees are sure to value and appreciate.