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New law on tips for hospitality workers moves closer to becoming legislation

The issue of customer tips and distribution to employees in the leisure and hospitality has long been a source of discussion with stories of shameful tipping practices of some companies withholding tips from hardworking staff, tipped for good customer service.

Indeed, we only have to go back to pre 2009 where hospitality employers were legally entitled to use tips to count towards the national minimum wage obligations. This became unlawful when legislation was passed to ensure that tips could no longer count towards national minimum wage compliance.

Since 2009, there have been increased concerns as society has moved towards being cashless, with 80% of tips being made by card on top of the bill making it easier for businesses to withhold the tip element from staff. Why? Because businesses that receive tips (or add service charges) via card payments have a choice whether to keep it, or pass it on to workers. Of course, there will be many reputable businesses that do distribute tips/service charges made by card – but it lacks transparency both to the workers and the customers making those tips/paying the service charge.

So, finally after first being floated back in 2019, the government is on the verge of passing legislation to make it unlawful for employers to withhold tips/service charges from their staff. These reforms will benefit more than 2 million workers  across hotels, pubs, cafes and restaurants.

The Employment (Allocation of Tips) Bill has recently had its final reading in Parliament and will now go forward to the House of Lords. If approved in the House of Lords (and there is no reason to suspect it won’t be), it is expected to receive royal assent in spring 2023 when it will then become law.

The purpose of this new law is to impose a legal obligation on employers to allocate all tips, gratuities, and service charges to its workers without making any deductions first. The law would also require employers to ensure that the allocation of such qualifying tips between workers is operated on a fair system.

Assuming the Bill becomes a law later this year, the key points for employers to be aware of are:

  • Employers will be under a duty to allocate 100% of qualifying tips, gratuities, and service charges to their staff (with no deductions save for tax and national insurance) by no later than the end of the month, following the month in which the payment was made by the customer.
  • Employees will be able to see their employer’s tipping record and have the right to bring a claim in the Employment Tribunal in the event of a dispute.
  • Tips must be allocated fairly between all workers at the place of business.
  • Employers will be prohibited from making deductions from tips including for credit card fees, bank charges, payroll or other administration costs and commissions from funds gathered. These costs must now be covered by the business.
  • Agency staff are to be given new rights and must be awarded tips and service charge on the same basis as directly employed staff.

It is expected that there will be a statutory code of practice on tipping, setting out principles of faitness and transparency. Where there is an existing tronc system in place, this will be viewed as compliant with legislation provided it is being run as legislation expects.

Employers will need to:-

  1. Be ready for the changes and have a system in place to comply with the requirements once a commencement date is announced – it is expected that there will be 6 months to 12 months lead in time once legislation is passe;
  2. have a clear written policy and process on tipping and, critically, will have to keep a written record of their tipping practices;
  3. plan for absorbing the banking and administration costs of handling tips/service charge payments by card; and
  4. give their workers the right to query their tips and to access information about their tipping record – a transparent employer may want to consider a way to share the tipping history with all staff each month to reduce the likelihood of queries and build trust.

Whilst many would agree that legislation to ensure all tips/service charges are passed on to the workers is long overdue, the current proposal not to allow some of the bank fees/administration costs to be deducted could deter employers from permitting tips/service charges by card. As 80% of transactions are now by card, this could in fact see a reduction in the number of tips being given. However, the hope is many employers will look to absorb the costs, conscious that tips are an invaluable “top up” to their workers wages (particularly in the current climate) and so need to have systems in place to encourage tipping from customers for good service. If they don’t, workers will simply find an employer who does permit tipping via card payments.

Please do not hesitate to contact our Employment team if you would like to discuss any points raised in this article.