The New Allocation of Tips Law

Earlier this year we commented on the implementation of the Allocation of Tips Act (the Act) - Banning deductions from staff tips | Crowe UK.

The Act creates a legal obligation on employers to fairly distribute all qualifying tips and to have regard to a statutory code of practice (the Code) and non-statutory guidance when developing a policy for its allocation.

The Act came into force in October and over the course of the last few weeks we have advised a number of clients on whether their existing policies are compliant. We have set out below some of the key points that businesses should be aware of.

Which employers are covered by the Act?

The Act applies to employers who have a place of business where qualifying tips are paid more than on an occasional and exceptional basis, the Code clarifies that a clothing shop where staff are tipped only a few times a year, would not be required to have a policy.

Who is protected by the Act?

The Act protects workers and expressly applies to eligible agency workers – the employer must apply the same rules to agency workers as it does to its permanent workers.

What tips are covered by the Act?

The Act applies to qualifying tips, gratuities and service charges which means all those received by the employer, or subject to the employer’s control.

It doesn’t matter how the tip is paid by card, cash or app etc.

Therefore, tips paid directly to staff either by cash or by app without employer control or influence are not in scope and can be retained by the employee without being shared out. However, most employers will have policy wording that requires employees to give up any tips received directly i.e. put it in the pot, so that they can be shared out. In doing so the employer operates a degree of control and as such it becomes a qualifying tip.

If the employer applies a mandatory service charge, then this is also outside of the definition of a qualifying tip.

No Deductions from Tips

Under the Act, employers must pass on 100% of tips and service charges to employees without making any deductions, except those required by law (e.g., tax). Employers are prohibited from taking any portion of tips to cover their business costs, this includes card processing fees or using tips to meet the National Minimum Wage requirements.

Fair and Transparent Policy for Allocation

Employers are required to allocate tips in a fair and transparent manner. The Code recognises that employers vary widely in their business practices, and so is not prescriptive in this respect but whatever system is used it must be based on a clear and objective set of factors which must be documented in a written policy that is made available to all workers ,p>Therefore, there is scope to set rules on eligibility such as requiring a minimum level of qualifying service and also applying criteria such as role type or performance when determining allocation.

Is there a requirement to consult with workers on the policy for allocation?

The Code states that employers should consult with workers to seek their broad agreement that the system of allocation of tips is fair reasonable and clear. Additionally, the factors considered by employers in the allocation of tips must be stated in the policy.

Allocation must be to staff working ‘at the place of business’

The employer must allocate the tips to employees at the place of business where the qualifying tips are received. Employers cannot pool tips to all employees across multiple sites as the focus of the Act is to reward for the service provided at business location.

There is an exception to this rule when tips are paid at or attributable to a non-public place of business. The circumstances will be rare, but it would be relevant where a tip is paid at a company headquarters. In this scenario the Act allows the employer to distribute the tip between workers at the non-public place of business and workers at one or more public places of business.

Timely Distribution of Tips

Employers must distribute tips to employees in a timely manner. According to the Act, tips should ideally be allocated no later than the end of the following month after they are received. Employers who delay tip distribution may face penalties for non-compliance.

Record-Keeping Obligations

To ensure transparency, the Act requires that employers keep detailed records of tips received and distributed to its employees. This includes. 

• Maintaining records of all tips collected, along with the date, amount, and method of collection e.g., cash or card. 
• Documenting how tips were allocated and the amount each employee received. 
• Retaining these records for a minimum of three years, as they may be requested by employees or authorities to verify compliance with the Act.

Providing Information to Employees

Employees have a right to transparency regarding tips, and under the Act, they can request information on the allocation process and can request to view their tipping record going back three years – limited to one request per worker in any 3-month period. Employers must provide this information promptly to. 

• Explain how tips are collected and distributed. 
• Clarify the breakdown of any tip pooling arrangements.

Handling Employee Complaints and Rights

If an employee feels that tips have not been fairly- distributed, they have the right to raise a complaint. The Act provides protections for employees who seek to challenge unfair practices, and they can escalate concerns to the Advisory, Conciliation and Arbitration Service (ACAS) if issues are not resolved internally. However, beyond this, employees may enforce their rights by making a claim to an employment tribunal.

How does using a tronc fit with the requirements of the Act?

A tronc is a pay arrangement used to pool and distribute tips to employees which are paid free from employee and employer NICs. The term tronc has French origins relating to collection boxes.

A tronc arrangement will set out certain conditions how the tips are allocated and how the arrangement is administered. A tronc can be run by an independent third party but it can also be run by an employee of the business. It is a qualifying condition that the person who allocates the tips, (the Troncmaster) is not part of the ownership of the business, nor the business has influence over how the Troncmaster allocates the tips.

Where a tronc arrangement fails to meet the qualifying conditions, the employer could expect HMRC to recover the NIC savings had over the previous six years.

In relation to a Troncmaster, the code states the following:

‘If an employer chooses to appoint an independent tronc operator, the instructions or framework the employer sets for its operation must be in line with principles of fairness. If they do so, and they have a reasonable belief that the tronc is operating independently and fairly, the employer will be regarded as having complied with this code of practice’.

The Code emphasises that should an employer become aware that an independent tronc master is not allocating tips fairly, the employer must act, or it could be regarded as having failed to comply with the Code.

The employer also has a duty under the Code to deal with employee issues, the Code states:

‘An employer should ensure they have fair processes in place for resolving issues and responding to queries from workers who have not received the share of tips they expected to. For the purposes of fairness, employers should ensure they give equal weight to queries from agency workers as they do to their own, directly employed, staff. The Acas code of practice on disciplinary and grievance procedures should be followed by employers and workers.’

In addition to the above, the employer must also have a tips allocation policy.

Therefore, there is a fine line between satisfying the employer’s duty to ensure fairness under the Code and ensuring that the tronc master retains sufficient independence to ensure NI is not payable. However, HMRC’s guidance on tronc arrangements and the NI exemption appears to suggest that if the employer does not determine, directly or indirectly, the allocation of those tips i.e., deciding who should receive how much, then the employer can be said to be maintaining independence from the tronc arrangements. Consequently, ensuring the tronc arrangements comply with the principle of fairness (without getting involved with the allocation of the tips) should not compromise independence.

As a result, many of the sections in an employer’s tips policy will invariably need to refer to a separate tronc policy in order that the employer is not deemed to be controlling the allocation of tips.

What are the Penalties for Non-Compliance

• Employers who fail to comply with The Employment (Allocation of Tips) Act 2023 (the Act) may face enforcement actions, including. 
• Financial penalties for withholding tips or failing to distribute them fairly. The usual definition of wages relevant to an unlawful deduction has been amended by the Act to expressly include qualifying tips, gratuities and service charges, therefore any reduction to an allocated tip is likely to be an unlawful deduction. 
• Compensation requirements, where employers may be ordered to compensate employees for any improperly withheld tips. 
• Potential reputational harm, as non-compliance could lead to public scrutiny or legal action.

How Can Employers Ensure Compliance?

To comply with the Act, employers should consider implementing the following.

1. Consult with your staff

To ensure fairness and transparency, and reduce the potential for grievances, you should involve your staff when determining your approach to allocation.

2. Draft a Clear Tips Policy

Develop a written policy outlining how tips are collected, distributed, and recorded by the company. This policy should be accessible to all employees.

3. Educate Managers and Staff

Ensure that managers understand the new legal requirements and are consistent in applying the tips policy in the business. Inform employees of the new policy so they are aware of their rights under the Act.

4. Keep Accurate Records

Implement a system to record all tip-related transactions, including the collection and individual allocations.

5. Encourage Open Communication

Create a workplace environment where employees feel comfortable raising concerns about tips or gratuities. Having an open-door policy for tip-related queries can help address potential issues before they escalate to ACAS claims.

6. If you use a tronc make sure you are still meeting your duties under the Act

As the employer you have a duty to ensure that the tronc is operating fairly.

The Act marks a significant shift toward fairness and transparency in the handling of tips received by businesses in the UK as the Act provides workers with additional protections in the distribution of Tips.

For employers, complying with the Act is a legal obligation - if you need support to draft a suitable policy, or to understand the new rules under the Act, then please reach out to Stuart Buglass and our HR Advisory team.