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Government publishes Tipping Code of Practice ahead of incoming Employment (Allocation of Tips) Act 2023

We previously prepared an update on the incoming Employment (Allocation of Tips) Act 2023 (the Act) and the potential challenges employers operating in the retail and hospitality sectors may face in complying with the Act. To read this update, please visit our insight page here.

Recent updates

The UK Government (the Government) issued a consultation on 15 December 2023 on the draft statutory Code of Practice (the Code) on Fair and Transparent Distribution of Tips. The purpose of the Code is to support employers in promoting fairness and transparency in the distribution of tips, gratuities and service charges (collectively ‘tips’) that fall within the scope of the Act.

On 22 April 2024, the Government then published its response to the consultation alongside an updated final draft Code. Once the Code has received parliamentary approval, it will have legal effect under the Act.

The Code covers six main areas:

  1. Scope: qualifying tips and qualifying workers
  2. Fairness: factors and methods
  3. Methods of allocation and distribution (including troncs)
  4. Transparency
  5. Addressing problems
  6. Glossary of terms

Code of Practice

Scope: qualifying tips and qualifying workers

The Code outlines what type of tips will be considered a “qualifying tip” and who will be considered a “qualifying worker” for the purposes of the Act.

In accordance with the Code, the key consideration in determining whether a tip is a qualifying tip is whether it is either received by the employer or where the employer exercises control or significant influence over the distribution of the tips, if the tip is received by the worker. The Code explains that not all tips will fall within the scope of the Act. For example, where a worker receives a tip and can keep the tip without any involvement or control from their employer, the tip will fall outside the scope of the Act and the accompanying Code.

The Code also outlines that the Act will apply to all workers but not self-employed individuals and flags that employers should promote fairness in the allocation and distribution of tips between workers, particularly where there is a mixture of contract-types amongst workers at the same location (for example, permanent workers, part time workers, agency workers, and zero hours contract workers). The Code suggests one way this could be achieved is by implementing a clear written tipping policy as mandated by the Act, which all workers can access.

The Code reiterates that employers must ensure the total amount of qualifying tips (no deductions including admin fees) are allocated fairly between workers at the employer’s place of business and that this includes agency workers. The Code explains that for agency workers, the “employer” will be the business where the agency worker is working and once the business pays the tips to the employment agency, the agency then has responsibility to pay the tips to the agency worker without unauthorised deductions.

Fairness: factors and methods

The Code sets out key principles of fairness and outlines guidance on how employers can apply these principles to develop a written tipping policy. The Code explains that in the event of a dispute, ultimately it is for the Tribunal to decide whether an employer has complied with the Act and accompanying Code. Notably ,the Code acknowledges that an employer may have legitimate reasons for allocating different proportions of tips to different workers but emphasises that allocation should be determined in accordance with fair, clear and objective criteria, taking into account the nature of the employer’s business.

As such, the Code sets out a non-exhaustive list of factors which employers may wish to consider when determining the fair allocation of tips namely:

  • the type of role or work (for example, front-of-house and/or back-room workers);
  • basic pay;
  • how the workers are engaged;
  • individual and/or team performance;
  • seniority and/or level of responsibility;
  • length of service; and
  • customer intention.

The Code also highlights that the factors an employer chooses to rely on should be enshrined in its written tipping policy and that employers must avoid any form of discrimination when selecting and applying the relevant factors for allocating and distributing tips. It requests that employers regularly review their approach to allocating tips and consult with their workers on the fairness, clarity, and reasonableness of any system used for the allocation of tips.

Methods of allocation and distribution (including troncs)

The Code permits the use of tronc arrangements in the distribution and allocation of tips. However, it states that should an employer choose to use an independent troncmaster, any framework or directions it sets for its operation must adhere with the Code’s principles of fairness, and the employer must reasonably believe that the tronc is adhering to those principles to comply with the Code. In particular, the Code emphasises that should an employer become aware that an independent troncmaster is not allocating tips fairly, the employer must act, or it could be regarded as having failed to comply with the Code. Examples of the type of action an employer can take include requiring the troncmaster to change its procedures, replacing the troncmaster or, in some circumstances, terminating the independent troncmaster arrangement.

Employers may be concerned about balancing the requirement of fairness, with the requirement that any tronc arrangements in place must be independent from the employer to benefit from the NI exemptions available on tips allocated through tronc arrangements. However, HMRC’s guidance on tronc arrangements and the NI exemption appears to suggest that as long as 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. However, extra care should be taken to ensure this.

There will inevitably be a tension between this non-interference for NI purposes whilst being asked to ensure a fair distribution. The Government response as part of the consultation stated: “The Code of Practice has been updated to reiterate that the legislation and the Code do not make any changes to existing tax and social security rules. We will continue to work with HMRC and stakeholders to ensure communications is clear about the existing arrangements for tax and National Insurance. We will continue to consider further guidance to assist businesses to implement the new rules”.

This expresses the wish to work with HMRC and businesses to resolve such matters but sadly, with limited Government resources, employers may well find that litigation in the Employment Tribunal will actually determine how such tensions are being resolved to comply with this new legislation.

Timing of Payments

The Code reiterates the requirement in the Act that employers must distribute all tips to staff latest by the end of the month following the month in which the tips are paid by customers. To illustrate, if a tip was paid on the 13 May, employers must distribute it by the 30 June.

Transparency

The Code explains that awareness by workers of their entitlements in line with their employer’s tipping policy is a key indicator of whether an employer has met its obligations to handle tips fairly and transparently. In addition to implementing, circulating and maintaining a written tipping policy, employers are also requested to keep a tipping record to detail all qualifying tips received by the employer at the place of business, and the amount allocated to each worker. The tipping record must be maintained for three years beginning with the date on which the tip was paid. It is important that both the written tipping policy and the tipping record are easily accessible for workers and can be provided by the employer readily on request, if required.

Addressing problems

In dealing with potential problems, the Code highlights that employers should have fair procedures in place to resolve any issues or queries from workers. When dealing with any queries or issues, the Code emphasises the need for fairness by employers, particularly by giving equal weight to queries from agency workers as they would to their own workers.

Remedies

In the event a complaint cannot be resolved internally, workers (including agency workers) can seek to enforce their rights in a Tribunal and once the Code has parliamentary approval, it can be introduced as evidence in a Tribunal in the event of a dispute. Should a Tribunal uphold a worker’s complaint regarding fairness or transparency in relation to tipping or the requirements concerning the written tipping policy and/or tipping records, the Tribunal can either make a declaration, recommend, or order an employer to revise a previous tip allocation, or make an order for compensation. More information about the tribunal process for complaints under the Act and the Code will be included in the non-statutory guidance to be published at a later date.

Glossary of terms

The final section of the Code defines the key terms used within it.

Key trends

In advance of the Act coming into force, the well-known London restaurant chain ‘Ping Pong’ has decided to temporarily trial a new tipping policy. Ping Pong has decided to remove the optional service charge of 12.5% from customer bills and will also prevent customers from tipping by card. As an alternative, Ping Pong has proposed to charge an optional 15% ‘brand fee’ to contribute to brand-related expenditure and franchise fees. Additionally, Ping Pong will also increase staff wages by 19% in an attempt to ‘replace’ the earnings staff would have received from tips.

As highlighted in our previous update, whilst the Act’s overall purpose seeks to deal with an important issue in the hospitality and retail sector, the practical realities facing companies operating in those sectors could result in the Act not being fit for purpose. It will be interesting to see whether the trial proposed by Ping Pong is the start of increased changes by retail and hospitality outlets to try to offset the effects of the act. For example, other restaurants might seek to utilise a similar method to the one proposed by Ping Pong or alternatively may implement other methods such as increasing menu prices. It will take time to determine the ultimate effects this has on the sector.

Next steps

Whilst the Act was originally due to come into force on 1 July 2024, it is now not expected to come into force until 1 October 2024. As mentioned previously, the Code also refers to non-statutory guidance being published to provide further clarity regarding the expectations on employers in complying with the Act. This non-statutory guidance is to be published in due course. In any event, employers should seek to take action now, to ensure they are well positioned to comply once the Act comes into force.

How we can help

If you have any questions in relation to the content of this insight or require assistance on any of the above matters, please do not hesitate to contact Michael Powner of our Employment team.

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