Does the new Employment (Allocation of Tips) Act 2023 fail to consider the practical reality of employers in the hospitality sector?

What is the Employment (Allocation of Tips) Act?

The Employment (Allocation of Tips) Act, colloquially known as the ‘Tips Act’ (the Act), was first presented as a Private Members’ Bill in Parliament in June 2022 and aims to make it unlawful for employers to make deductions from the tips given to their staff.   

The Act received Royal Assent on 2 May 2023 and it is expected that its measures will come into force a year later, to allow time for stakeholder input by way of a full consultation period. A final version of the Act will then be presented to the Houses of Parliament for approval.

Background

The Act has arisen in response to concerns raised that those working in industries where part of their pay is derived from tips, gratuities and service charges (collectively known as ‘tips’), are not receiving 100% of the tip amount given to them by customers.

These concerns were originally sparked from the production of a variety of media reports in 2015 regarding the alleged unfair tipping practices of certain hospitality businesses, which led to calls for reform to prevent employers deducting any sums from tips before passing them on to workers. This movement was furthered by the impact of the Covid-19 pandemic which triggered a societal change in payment habits and significantly reduced the amount of cash tips being given to workers.

The Act therefore seeks to amend the Employment Rights Act 1996 to impose new legal obligations on employers to ensure that 100% of tips are paid to workers, in full, without deductions and that the allocation of tips is what the legislation describes as “fair”. 

Main Provisions

The main provisions of the Act, which would apply to both workers and agency workers equally, include:

• Requirement that employers allocate 100% of employer-received tips (or worker-received tips where an employer exercises control over the tips) to staff without deductions, except any deductions prescribed by law e.g., tax deductions
• Requirement that employers ensure the total amount of tips is allocated fairly between workers at that place of business
• Requirement that for any tips distributed by way of an independent tronc system, it is fair for the employer to make those arrangements
• Requirement that tips are paid to the worker no later than the end of the month following the month in which the payment was made by the customer
• Provision allowing the Secretary of State to issue a Statutory Code of Practice on tipping setting out principles of fairness and transparency that employers should take into account when dealing with the Act’s obligations  
• Requirement for employers to maintain a written policy on dealing with tips
• Requirement for employers to maintain a three-year record showing how tips have been dealt with in the past and a provision allowing workers to request specific information regarding their employer’s tipping record within the last three years
• Notably, Employment Tribunals would have the authority to enforce these rights and provide remedies in the event of breach. The remedies outlined under the Act include making a declaration that an employer has failed to comply with its obligations under the Act, ordering an employer to revise any tip allocation previously made or make a payment direct to a worker, and paying compensation for financial loss up to the value of £5,000.   

Practical Considerations

Whilst the Act’s intention to provide additional protection for workers in tip-based industries is laudable, particularly in the face of the current cost of living crisis, there are a number of instances where the Act unfortunately fails to consider the practical implications of its provisions. These examples are outlined in further detail below:

Credit Card and Bank Charges

The Act’s explanatory notes emphasise that its “obligations apply to the “total amount” of qualifying tips, gratuities and service charges paid by customers”. This will therefore include any amount deducted (for example) by way of bank, payroll or administrative charges: the intention being that the whole amount paid by customers is available for allocation to workers. This was echoed expressly in the Act’s second reading in the House of Lords, in which it was stated that the Act is specific in its obligations that credit card charges may not be passed on to the worker meaning they cannot be deducted.

Given retailers can typically expect to pay between 1 – 3% per transaction in credit card processing fees, the Act’s obligations seem to imply that employers will now be required to provide what is essentially a ‘grossed-up’ tip figure to workers in order to cover the cost of these automatic credit card and bank fee deductions. However, despite this general guidance, it is notable that the Act does not provide clarity on how this will be executed in practice and the expectations on employers in implementing this.

If it is the case that employers will be required to provide a ‘grossed-up’ tip figure to workers, this is yet another costs burden for the industry during a time of significant economic uncertainty. There is also a risk that businesses may turn to alternative measures, such as limiting card payments, which in an increasingly cash-less society may leave the worker in a worse-off position, in apparent contravention to the Act’s overall aims.

Administrative Charges and Independent Troncs

The Act also makes clear that an employer must ensure that the total amount of tips is allocated ‘fairly’ between workers, with fairness assessed pursuant to a statutory Code of Practice (please see further details on this below). However, where tips are allocated via a tronc system operating independently of the employer, the employer’s obligation to ensure tips are allocated fairly would be discharged and instead the only requirement appears to be to ensure it is fair to appoint the tronc system arrangement.   

A tronc system is the common method used to distribute tips within the hospitality industry. The tips given by customers are pooled into a collective fund, known as the tronc, and a troncmaster is then appointed to determine how the tronc monies will be distributed amongst staff. The troncmaster also has responsibility for ensuring that the tronc is subject to PAYE deductions and may be held responsible for any failure to do so.  The troncmaster can be either an internal member of staff who agrees to take on the role or can be an externally appointed professional company or individual.

The use of an independent external troncmaster is now commonplace for many employers operating within the hospitality sector, primarily because provided the tronc meets certain conditions, HMRC provides that any payment of a tip to an employee is exempt from National Insurance Contributions (NICs) if it is not paid or allocated directly or indirectly to the employee by the employer. In practice, this means that an employer cannot be involved in any part of the decision-making process regarding how tips are distributed and therefore relies on an external troncmaster instead who is led in the decision by the members of the tronc.

As such, in order to not only retain the NIC exemption but also discharge the aforementioned fair allocation obligations under the Act (thereby increasing the chance of compliance and minimising the risk of breach), it seems likely the majority of employers will opt to rely on an independent external troncmaster in order to distribute tips. At present, employers can and often will deduct administrative fees from tips, in order to cover the third-party operating costs of appointing an external troncmaster. However, under the provisions of the Act, it seems this custom will be expressly prohibited. Unfortunately, this appears to be another example of the Act failing to consider the practical realities of the problem it aims to solve.  As flagged previously, this encourages finding alternative methods to deal with the burden of these administrative expenses.

Similarly, even if an internal member of staff were elected to act as the troncmaster in an attempt to minimise these costs, this is again potentially problematic. The individual will be expected to take on substantial additional work and responsibility in operating the tax and accounting elements of the tronc and will likely want to receive a larger portion of the tronc monies as a result. Whether an individual has the necessary skills to manage the tronc is also another factor to consider, as is the lack of clarity over what it means for it to be ‘fair’ for an employer to appoint such a tronc system arrangement.  

Employer’s Tipping Policy, Tip Record & the Statutory Code of Practice

Finally, in its current form the Act still lacks sufficient detail regarding its key provisions and how they are to be dealt with in practice by employers. For example, the Act requires employers to maintain a written policy on tips alongside a three-year record on how tips have been dealt with previously. Whilst the Act’s supporting guidance notes briefly outline the information to be included in these documents, there are no substantive details on how to ensure the policy and record are classified as ‘compliant’ for the Act’s purposes.

Similarly, there is an overriding theme of ‘fairness’ in the Act’s provisions (for example, fair distribution of tips and ensuring the fair appointment of a tronc system arrangement as highlighted above) which, as raised at the second reading in the House of Lords, has not been defined nor any guidance given as to how it can be applied. It appears these important details will be left for further explanation in the statutory Code of Practice on tipping, which the Secretary of State can choose to issue. However, until the content of that Code of Practice is agreed and published, this vital information is lacking, so it is unclear whether factors such as performance will be able to be taken into account when allocating tips.

Summary

At a particularly difficult economic time, the Act serves to ease the pressures caused by global inflation and an increase to the cost of living. This, in line with the increase to National Minimum Wage rates in April 2023, will be welcomed by workers in the hospitality sector.

However, despite the Act’s aim that workers will receive the ‘total amount’ of qualifying tips, there are a number of instances where it appears to fail to consider the practical implications of its provisions in turn putting what it sets out to achieve at risk. This, in addition to the Act’s lack of clarity regarding how employers are expected to implement these obligations in practice alongside the failure to clearly define key provisions, still leaves very important additional clarifications to be made.

What is more, whilst some employers may be willing to incur the additional costs outlined above, many businesses may be forced to utilise other methods to recoup this additional expenditure and generate profit, such as lowering or not giving increases to the hourly rates of their workers (subject to National Minimum Wage requirements) or raising prices for customers. During the consultation period, Parliament should be mindful of the potential costs involved for businesses in administering and distributing tips and recognise that given the current economic climate, a successful Act will lie in achieving balance between the needs of both the workers and the employers.