All change for tipping as new legislation draws closer

It’s been more than seven years since the Government first announced an intention to introduce legislation regarding how tips, gratuities and service charges paid by customers must be dealt with. The Bill is now entering the final stages of its journey through the House of Lords and is expected to take effect in early 2024, with 1 or 6 April being likely dates.

The Bill will affect all hospitality businesses and even those who believe they are already doing “the right thing” will need to take note. New obligations on businesses and new rights for workers are being introduced, and failure to be prepared could result in an expensive Employment Tribunal claim.

It is important to note that the Bill is not retrospective and will only apply to monies paid on or after the date it takes effect, and nor will it change or affect arrangements agreed and entered into beforehand.

What is covered?​

All payments of discretionary service charges, all tips paid to a business either as a part of a card transaction, cash tips where these are collected and managed by a business, and all app payments (including third party tip apps) where the money does not go directly to the employee. All such payments are referred to as “tips” in this article.

No charges, administration or deductions​

100% of the face value as paid by the customer must go to staff. Businesses are not allowed to deduct, charge or retain any amount at all including to cover credit card fees and bank charges. Any amount deducted by third parties must be made good by the business. Only statutory deductions via payroll – Income Tax and, if no tronc is used, employee National Insurance are permitted.

Timeline​

Monies must be paid to workers by the end of the month following the month of receipt, so a tip paid on 3 April must be paid no later than 31 May.

Multi-venue operators​

Tips must be paid to staff working at the venue where the money was generated and cannot be pooled or shared with other sites. There is an exception which allows money generated in a trading site to be paid to staff working at “non public” places of business such as a head office or dark kitchen.

Agency workers​

Agency workers will be entitled to receive a share of tips on the same basis as directly-employed staff and cannot be excluded simply because they work for an agency. A business must either pay the agency worker via their payroll or pass the money to the agency, who must then pay it to their worker in full by the end of the following month without deduction (apart from statutory payroll deductions).

Contractual Changes​

It will not be possible, even by agreement, to reduce a worker’s wages in exchange for tips, a specific share of tips, or a greater share of tips. This will affect businesses who currently allocate tips themselves (which are classed as “wages”) and who might subsequently wish to set up an independent tronc system.

Obligations on businesses​

A business will now have a legal duty to ensure that 100% of tips are paid to workers within the specified time in a manner which is fair. The details of how this is done must be in writing and a copy given to all workers in sites where tips are generated. Workers will be entitled to see how much money has been generated in tips at their place of work, although not how much individual members of staff have received.

Tronc systems​

It will continue to be up to businesses to decide if they wish to have independently-managed tronc systems. If so, these will automatically be designated as “fair” and a business will not be responsible for how the Troncmaster shares or allocates those funds. The taxation treatment of tronc systems is not changing and the exemption from National Insurance still applies if operated correctly.

Where a business chooses to manage tips directly without a tronc system they will remain subject to NICs and additionally the business will now have to provide written details to their workers of how they ensure this is dealt with in a fair manner.

Rights for workers​

Workers at all sites where tips are generated must be given a copy of the written policy on how tips are dealt with and will be entitled to ask for details of the amounts collected at any site where they have worked. Where no tronc exists they will also be able to ask for the records showing how the business ensures monies are dealt with fairly.

Businesses who fail to keep sufficient records, or refuse to give them to employees, will face being taken to an Employment Tribunal. Tribunals can order businesses to amend unfair tip allocations they have made (but not those made by independent troncs) and can issue orders of up to £5,000 for failure to keep or provide records. Orders can be given not just in respect of a worker who brings a claim but any other similarly affected worker.

Code of Practice​

Once the Bill has been passed the Government will publish and consult on a statutory Code of Practice. The Code will seek to define what constitutes “fair” and businesses must have regard to this when deciding on their arrangements.

It will provide examples of what the Government believes to be fair, but will not be prescriptive nor will it be a “one size fits all” model. Employment Tribunals will use the Code to decide on the fairness of arrangements brought before them by workers.

Although it is expected to be next year before the Bill takes effect businesses will need to plan ahead and pay close attention to the draft Code of Practice when published. Operators who do not currently run independent tronc schemes should consider introducing one now, as the legal presumption of fairness that automatically applies will be important in the new landscape.

The Bill should help in stopping the minority of businesses who have continued to behave poorly over tips, provide protections for workers in those businesses, and increase consumer confidence that when they choose to pay tips and service charges that these do indeed go to staff. Despite the disruption for some, this should be welcomed and will hopefully provide a more certain and stable legal framework going forward.