UK: The new Statutory Code on Tipping – Where are we now?

As employers in the Hospitality and Leisure sectors will be acutely aware, a new regime for the treatment of tips, gratuities and service charges is due to come into force shortly. The legal changes set out in the Employment (Allocation of Tips) Act 2023 (the “Tips Act”, available here), will now come into force on 01 October 2024. Our earlier article, here, sets out the background to, and details of, these changes

What are the latest developments?

The Tips Act is intended to be supported by a new statutory code of practice to be issued by the Secretary of State. The previous government published an (updated) final draft Code of Practice on Fair and Transparent Distribution of Tips (the “Code”, available here), has now been approved and confirmed as coming into force on 01 October 2024 by the Secretary of State.

The Code is intended to assist employers when implementing the provisions of the Tips Act and, whilst it doesn’t answer all of the questions employers may have, it does provide us with some further guidance on the intended new regime.The Code will not be legally binding but will be admissible in evidence at an Employment Tribunal and is to be taken into account by an Employment Tribunal in proceedings where relevant. A failure by an employer to observe any provision of the Code will likely be relevant in determining their compliance with the provisions and requirements of the Tips Act. Accordingly, employers should seek to comply with the Code as far as possible when handling tips, gratuities and service charges.

Key takeaways from the final published Code

1. Businesses must:
   
   • have a written tips policy which sets out key information about the allocation and distribution of tips in clear, plain language;
   • ensure (and be able to evidence) that this policy, together with any updates, has been disseminated to all workers, including agency workers; and
   • ensure that tips are allocated and distributed in a fair, reasonable and timely manner.
2. The Code doesn’t provide a complete picture - further guidance on key aspects of the proposed new regime, such as the employment tribunal process for addressing complaints, will be included in the non-statutory guidance to be published in due course.
3. Consultation with workers regarding the content and implementation of a tips policy is recommended but not legally required (subject any other obligation to consult with affected workers or their representatives, e.g. under a collective agreement).
4. Cash tips which are paid directly to the worker by a customer together with tips a customer pays direct to workers digitally via an app, in each case without any intervention or interference from the employer, are not ‘employer-received’ and are therefore outside the scope of the Tips Act.
5. The Tips Act provides for specific obligations and rights regarding agency workers. The Code provides further clarity, including confirming that whilst an agency worker can take action directly against the hirer in respect of a failure to comply, the agency will be required to distribute tips to agency workers once allocated by the hirer. Business which engage agency workers are reminded that they should ensure that any terms with their agencies give them sufficient commercial protection and power to enforce compliance by the agency.
6. The updated final version of the draft Code includes very few material amendments to the prior draft (see section below), but the changes that are included give us a potential indication as to the areas of expected dispute or focus. These include the treatment of agency workers, determining what amounts to “fair” allocation and excluded forms of tipping.
7. The Code doesn’t change the overall scope or direction of the Tips Act and, as noted above, does not clearly resolve any of the key grey areas under the Tips Act. It doesn’t clearly spell out, for example, what might be considered as fair and reasonable allocation of tips, or how an employer should distribute any such tips, leaving employers to interpret these requirements under the Tips Act – which gives rise to uncertainty. The Code also still leaves the way open for employers to impose and retain a separate voluntary admin charge (such as a brand fee, as proposed by the Ping Pong restaurant chain), provided the customer is informed of the purpose of the payment (making clear that the charge is not intended to be a tip, gratuity or other payment in respect of service and is not intended to be passed on to staff).

What does the Code say?

Scope: Qualifying Tips and Qualifying Workers

Qualifying Tips – the Code states that:

• the determining factor for whether a tip, gratuity or service charge (a “tip”) qualifies is whether the employer receives or exercises control or significant influence over the distribution of tips – not the method of payment;
• a non-monetary tip which has a fixed value (such as a casino chip) may also qualify;
• tips paid by card or an alternative electronic method (e.g. an employer app or a QR code) or which are otherwise collected and/or distributed by employers are likely to qualify; and
• where a worker receives and keeps a cash tip or where a customer uses an app to directly tip worker, in each case with no employer control or involvement, the tip will be out of scope.

Qualifying Workers – the Code confirms that:

• the Tips Act applies to all workers but not self-employed people. Employers:
  • should allocate and distribute tips fairly between all workers (taking particular care where there is a mixture of permanent employees, directly recruited staff, agency workers and zero hours workers at the same location); and
  • must ensure that all workers have access to all workplace policies which affect them;
• for agency workers, references to “employer” refer to the hirer (even where the agency is the actual employer) but the agency is responsible for passing on to its workers any payment of tips paid to the agency by the hirer in respect of an agency worker.

Fairness: Factors and Methods

• Factors to consider for fair allocation of tips – the Code states that:
  • employers don’t have to allocate the same % of tips to all workers but must use clear, objective, fair and reasonable factors to allocate and distribute tips and should regularly review their approach;
  • factors which employers may consider include (i) the type of role work (e.g. front / back of house); (ii) basic pay, (iii) hours worked during the period when tips are received, (iv) individual or team performance, (v) seniority / levels of responsibility, (vi) length of service and (vii) customer intention;
  • employers must avoid unlawful discrimination when deciding what factors to consider;
  • employers should consult with workers to seek broad agreement in the workplace but consultation is not mandatory and employers are not obliged to obtain worker agreement to the tips policy under the Code.
• Methods of allocation and distribution (including troncs) – the Code reminds employers:
  • they can choose to allocate and distribute tips using a tronc and a worker can be an independent tronc master;
  • the instructions or framework for the operation of a tronc much be in line with the principles of fairness and the employer must have a reasonable belief that the tronc is operating independently and fairly; and
  • the employer must act if they become aware of the tronc master acting in an unfair or improper manner in order to maintain a fair allocation of tips.

Transparency – the Code makes clear that:

• employers must clearly inform each individual worker of their entitlements in line with the applicable tips policy (including any updates) and be able to evidence they have done so;
• employers can choose how to disseminate the policy but must ensure that all workers have the same access to the written policy (it must be provided in an accessible format for disabled workers) and that the policy is written in plain language;
• tipping records must be processed in accordance with UK GDPR, and that the information to be provided to a worker on request only includes the amounts paid to that worker, not the specific amounts paid to other workers.

Addressing Problems – the Code confirms that:

• employers must implement fair processes and should follow the ACAS Code on Disciplinary and Grievance Procedures for addressing issues and queries on allocating tips, and give equal weight to queries from agency workers;
• workers (including agency workers) can enforce their rights through the employment tribunal system. Further information about the employment tribunal process will be included in the non-statutory guidance to be published in due course.

Material changes from the previous draft Code of Practice

There were very few material changes from the previous draft of the Code - the key material changes are:

• Clarification of ‘qualifying tips’:
  • additional explanatory detail regarding qualifying service charges (now defined as “including both automatically added and other voluntary service charges”);
  • insertion of clarification that tips, gratuities and service charges become “qualifying” for the purpose of the Tips Act if they are “received or controlled or significantly influenced by the employer” (additional wording underlined);
• Exclusion of digital tipping: additional clarification of what is meant by the term “digital tipping”;
• Clarification on agency workers: additional clarification regarding the treatment of agency workers, including of the allocation of responsibilities for ensuring agency workers receive qualifying tips as between the hirer and the agency employer, notification of tip entitlements and other key requirements;
• Clarification of fair allocation practices: inclusion of “hours worked during period when tips are received” as a possible factor for employers to consider when allocating tips;
• Encouragement for worker consultation and review: inclusion of additional comments encouraging employers to consult with affected workers and to regularly review the allocation of tips.

Conclusions

Those employers who were hoping for a clearer steer on implementing the Tips Act are likely to be disappointed by the final draft Code, which doesn’t take us much further in terms of understanding how the Tips Act may be interpreted in practice. Certain key aspects are either not addressed in any real additional detail (for example, tipping records) or are subject to further clarification under the additional non-statutory guidance (e.g. enforcement). This leaves employers with a degree of uncertainty, with the revised implementation date of 1 October 2024 now fast approaching.

The Code also leaves some obvious ambiguity with regard to troncs. Employers will have to balance the requirement for a troncmaster to be independent from the employer (to preserve the advantageous NICs treatment of tronc-distributed tips) against the Code’s requirement for a tronc’s operational framework / directions to adhere to the Code and for employers to take action where they become aware of a troncmaster not allocating tips fairly (noting example actions given include requiring the troncmaster to change its procedures, replacing the troncmaster or terminating the independent troncmaster arrangement). HMRC’s guidance suggests that a troncmaster will be deemed sufficiently independent as long as the employer does not determine, directly or indirectly, the allocation of tips (emphasis ours); whilst the Code makes clear that is does not change existing tax and NIC rules, the government’s consultation response states that it will “continue to consider further guidance to assist businesses to implement the new rules”. Accordingly, there is a clear likelihood that will in practice be resolved via employment tribunal litigation given available resources and other government activity.

In addition, whilst the Labour party has to-date signalled its support for the Tips Act and proposed changes to tipping practices in the UK, employers should note the potential for further reform of employment rights, as signalled by the new Labour government, which may impact this area further. It is therefore advisable to keep an eye out for further developments.

In the meantime, employers should take appropriate steps to prepare for the Tips Act coming into force on 01 October 2024, taking into account the provisions of the Code, including updating and/or rolling out their written tips policies.