While the majority of employers were happy to see that the tips given by customers went to the employees concerned, some took the tips and treated them as the income of the business. Since for many employees in the hospitality industry, their low wages are supplemented to a significant degree by customer tips, this put them at a real disadvantage financially, which was particularly problematic during the cost of living crisis, with food inflation and rising energy prices a major source of concern for low-paid workers.

Hitherto, employees confronted with this practice have had no real legal recourse; the employee has the whip hand. Now, however, there will be a clear legal duty on employers to ensure that tips go to the people whose service has earned them.

There will also be a new statutory Code of Practice, aimed at giving businesses and staff guidance on how to distribute tips fairly and what the new Act will require of them.

How tips must be dealt with

While the Act doesn’t prevent the employer from organising the collection and distribution of tips themselves, they may instead want to outsource this job to what is known as an independent tronc operator.

What’s a tronc?

A tronc is the name given to a particular arrangement in the hospitality sector that lets employers distribute tips, gratuities and service charges in a fair and equitable way. The name comes from the French word for a collecting box.

An independent tronc operator is a person who administers the distribution of the tips made by customers to the business. They take the administrative burden away from the employer, ensure that the tronc is operated in accordance with current employment and tax law and provide a degree of trust since they are not the employer and are less likely to be accused of issues such as favouritism and dishonest practices. Many more employers will now be looking to use an independent operator with the arrival of the Act, but it’s important to carry out due diligence on the candidates as there will likely be a plethora of new providers springing up to answer the demand and their suitability can’t be guaranteed without checking.

If an independent tronc operator is used, then the employer is counted, for the purposes of the Act as having ensured that the total amount of the relevant tips is allocated fairly between workers of the employer at the place of business in accordance with the Act.

Where the employer makes arrangements for a part of the total amount of the relevant tips to be allocated between its workers by an independent tronc operator, the employer is to be treated as having ensured that this part of the total amount of the relevant tips is allocated fairly between its workers, in accordance with the Act.

When tips etc must be dealt with

The employer must: (a) ensure that a qualifying tip, gratuity or service charge is allocated in accordance with the Act, and (b) make any payment that the employer is required to make to a worker under the Act as a result of that allocation, no later than the end of the month following the month in which the tip, gratuity or service charge was paid by the customer. So, for example, if the tip was paid on 2nd April, it has to be allocated by the end of May.

Enforcement: dealing with tips

If an employee or agency worker believes that an employer has failed to comply with the requirements regarding how and when tips must be dealt with, they can make a complaint to an employment tribunal.

One very significant point that employers will need to consider is that the time limit in this case for complaints to the tribunal about tips is twelve months rather than the more standard three. Additionally, if the tribunal is satisfied that it was not reasonably practicable for a complaint to be presented before the end of the twelve month period, they may consider the complaint if it is presented within a further period that they do consider reasonable.

If the tribunal finds such a complaint well founded, they must make a declaration to that effect, and they may order the employer to deal with qualifying tips, gratuities and service charges in accordance with the Act, or make an order requiring an agent to make a payment to the eligible agency worker of the amount that the agent was required to pay to them.

Such an order may, in particular, require the employer to revise an allocation of tips made by the employer or make a recommendation to the employer regarding that allocation, or require the employer to make a payment to one or more workers of the employer in accordance with the Act. Importantly for employers to note, this can include a worker who is not the complainant.

A recommendation is not binding on an employer, but is admissible in evidence in proceedings before an employment tribunal. If an employment tribunal makes a declaration, as outlined above, it may order the employer or agent to pay to the complainant a sum not exceeding £5,000, to compensate the complainant for any financial loss sustained because of the matter in question.

Written policy

The employer must have a written policy on dealing with qualifying tips, gratuities and service charges for the place of business. That written policy must include: (a) whether the employer requires or encourages customers to pay tips, gratuities and service charges at the place of business; (b) how the employer ensures that all qualifying tips, gratuities and service charges paid are dealt with in accordance with the Act, including how the employer allocates qualifying tips, gratuities and service charges between workers. The employer must make the policy available to all its workers and where a written policy is subsequently amended, the employer must make the amended version freely available.

Records

The employer must (a) create a record of how every qualifying tip, gratuity and service charge paid has been dealt with in accordance with the Act, and (b) maintain that record for a period of three years beginning with the date on which the qualifying tip, gratuity or service charge was paid. The record must include the amount of tips paid, the amount that have been allocated to the workers and how many of those tips were allocated by an independent tronc operator.

If a worker or employee wants to see the records outlined above, they can make a request in writing to their employer to provide them. However, the Act says that they can only make such a request if (a) the period is a period of one month or two or more consecutive months, (b) the period begins no more than three years before the date of the request, (c) the period ends before the date of the request, and (d) the worker worked for the employer at any time during each month that forms part of the request. Additionally, a worker can’t make more than one request for records under this section in any three-month period. The employer will have to provide the information required within a reasonable period unless they can show that it will breach data protections rules. If the employer – or their agent - doesn’t comply with the requirements of the Act regarding the written policy or record keeping, a worker can make a complaint to an employment tribunal. The tribunal can only consider that complaint if it’s made within three months of the date of the failure to comply. However, this time limit can be varied if the tribunal is satisfied that it was not reasonably practicable to present the complaint within the original three-month limit.

If it turns out that the complaint was well-founded, then the tribunal must make a declaration to that effect and order the employer to comply with the requirement. The tribunal may also order the employer to pay an appropriate amount, not exceeding £5,000 to compensate the complainant for any financial loss they’ve suffered as a result of the employer’s shortcomings.

What will employers need to do?

The Act means that employers will need to take steps to make sure that all tips and service charges are allocated fairly between workers. Because of the requirement for the Government to draft a Code of Practice and begin the process of consultation on it, it’s unlikely that the Act will come into force until well into 2024. The Code of Practice will put flesh on the bones as far as the Act is concerned, making it easier for employers to understand what the law requires. While this may seem like a long way off, businesses should definitely not get complacent; it’s better to have policies and procedures in place well ahead of time so that problems can be ironed out before it becomes legally imperative. Engaging the services of a legal expert will ensure you stand the best chance of being compliant with the requirements of the Act.

About the author

This blog is provided by our specialist litigation and commercial law partner, rradar. This article is for general guidance only and aims to provide general information on a relevant topic in a concise form. This article should not be regarded as legal advice in relation to a particular circumstance. Action should not be taken without obtaining specific legal advice.