Withholding Tips and Service Charges From Workers

Withholding tips and service charges from workers will be made unlawful in 2024

By Natasha Elston

Background

The way in which tips are distributed in the hospitality, leisure and services sector has long been a contentious issue. Cash tips legally belong to employees and until now, there have been no rules in respect of tips being paid via debit or credit card.  Rather, it has always been within an employer’s discretion as to whether they keep tips or give them to employees. However, according to the Government, 80% of tips are now paid via card, meaning there has been an appetite for reform.

This is embodied in the Employment (Allocation of Tips) Act 2023 (the ‘’Act’’), which means that employers will be banned from withholding tips from staff. As a result, more than 2 million workers will now not only have their tips protected, but will also be able to see their employer’s tipping record. Further, the Government has stated that, collectively, employees will receive an additional £200 million following the Act’s enforcement. The Act has just received Royal Asset and is likely to come into force in a year’s time.

To whom does the Act apply?

The Act has a broad scope, applying to employees, workers and agency staff.

The Act

The key points from the Act are that:

• Employers must ensure that they allocate their workers, employees and agency staff 100% of any tips, gratuities and service charges (minus tax or National Insurance deductions). These must be allocated in a fair and transparent way.
• This must be done within one month of the customer paying the tip, gratuity or service charge.
• Employers must keep a written record of how the tips and service charges are to be allocated.
• Employers will be required to keep a record of the movement of any tips throughout the business over the last 3 years.
• Measures in the Act will be supported by a statutory Code of Practice. This is being developed and will be subject to formal consultation later this year.
• Claims can be brought in the employment tribunal where their employer has failed to deal with tips properly and within the above time limits.

Enforcement of the Act

Both employers, and those wishing to bring a future claim against their employer, should be aware of how the Act will be enforced:

• Claims can be brought within 12 months from the date in which the employer failed to pay the tip. This contrasts the usual 3 month period in which one can bring a claim in the employment tribunal against their employer.
• Employment tribunals can require employers to change their tip allocation policy.
• Tribunals can order employers to pay tips not just to the worker bringing the claim, but also to any workers employed by the employer.
• The tribunal can order the employer to compensate the worker bringing the claim of up to a maximum of £5,000. This should reflect additional financial losses of non-payment of the proper tip.

Issues  

Businesses may encounter various problems when trying to implement the new legislation.

Issues may arise in relation to a business’s payroll. For example, workers may not want tips added to their pay packets – this would be taxed as income and thus, impact one’s ability to claim benefits.

Further, the Act may create discrepancies between different types of workers. Notably, if women work a day shift, yet staff receive better tips at night, would this count as ‘pay’ for gender pay gap purposes?

The Act also raises questions on how tips will be allocated and to whom. In the leisure and hospitality sector, which the Act is likely to impact the most, staff often do not work set days or hours. Will the tips be allocated to everyone ‘on the books’ that month or will they be distributed per shift? Will the Act apply to everyone, for example from porters to managers?

It will be interesting to see how businesses adapt to these changes. We may see businesses – particularly small ones – move away from service charges.

What we can do to help

We advise that employers should seek guidance on what is required under the legislation. Further, employers should have an appropriate policy in place in advance of the Act’s commencement to minimise the risk of any employment tribunal claims.

Employees, workers and agency staff should be aware of their rights under the new Act and the circumstances in which they may have a claim against their employer.

Our Employment team has extensive experience in both dealing with the preparation of workplace policies and bringing and defending claims in the employment tribunal. We will be pleased to assist you with any concerns or queries you may have about this.

(This article is not intended to be comprehensive or to provide specific legal advice.  It should not be relied upon in the absence of specific advice given in relation to particular circumstances.)

Get in touch for further information with Natasha Elston