The Fair Tips Act 2023, formally known as the Employment (Allocation of Tips) Act, came into force on 1 October 2024. Now, a year later, the Hospitality sector is grappling with the realities of implementing the legislation, which was designed to ensure fair and transparent distribution of tips to workers.
While the Act was welcomed in principle, its practical application has exposed significant challenges for employers, particularly in an industry still recovering from pandemic-related disruptions and economic pressures, especially the increase in employer’s National Insurance and National Minimum and Living Wage rates.
In this article we look at some of the key points and where we are one year on, since the Act was introduced.
Fair and transparent distribution: A work in progress
The Act mandates that 100% of tips must be passed on to employees, with only tax deductions permitted. Employers are required to inform staff of their eligibility and the basis of tip allocation.
Many businesses have struggled to implement systems that ensure transparency. A recent survey found that nearly half of Hospitality workers remain unaware of how their tips are managed, and 37% believe they should receive more.
While the principle of fairness is clear, the lack of standardisation across the sector has led to many negative comments which has ultimately led to the mistrust among staff.
Timely distribution of tips
Tips must be distributed by the end of the month following collection, including those received via card, app, or non-monetary formats. Businesses have faced logistical hurdles in tracking and processing tips promptly, especially where multiple payment platforms are used.
The shift to digital tipping has required additional investment in new systems to help monitor the level of tips received and the amounts which employees are entitled to receive.
No retention of tip funds by employers
The Act prohibits employers from retaining any portion of tips—even to cover credit card fees or payroll costs. This has placed a financial burden on operators, with compliance costs estimated at £12,000 to £360,000 annually for some businesses.
As an observation, whilst the idea of passing on all the tips to employees is commendable, the lack of financial support for managing the entire process has placed a considerable burden across the sector.
Tronc scheme rules and transparency
Employers must provide a written tronc scheme detailing how tips are allocated, accessible to all staff. Leading up to the implementation of the Act many, especially smaller businesses needed to ensure scheme rules were put in place.
This resulted in some inconsistencies in how schemes were introduced, with some delays in arrangements being implemented.
Place of work and fair allocation
Tips must be distributed fairly across all staff at a given location, including those in non-public-facing roles. This has been the subject of much debate recently with some well-known brands including head-office staff as participants in the distribution of tips.
Defining “place of work” and ensuring equitable distribution has proven difficult, especially in multi-site operations. This is one area where changes to the legislation may be considered, providing greater clarity around non-public facing roles.
Record-keeping obligations
Employers must maintain three years of tip records, and employees have the right to access their personal tipping history. This has potentially required upgrades to HR and payroll systems as well as the introduction of new reporting protocols to help respond to employee requests.
The need to maintain tip distribution records has increased the level of accountability but, as a part of a common theme over the first year the legislation has been in place, it is the employer who has needed to bear the costs connected with its implementation.
Inclusion of agency workers
Agency workers are now entitled to tips, with agencies responsible for tax and NIC deductions. For many, this was a controversial inclusion, especially where agency workers may be paid a higher hourly rate compared with employees.
As an observation, the coordination between employers and agencies has been patchy, with some disputes arising over entitlements.
Allocation criteria and consultation
Employers can use various criteria to allocate tips – role, performance, seniority – but must consult workers and avoid discrimination. Many businesses operate on a basis of each shift worked. However, achieving consensus on allocation methods has been difficult, especially in diverse teams.
The requirement for consultation is laudable but expectedly this led to delays and potentially disputes around how fair tips were being shared.
Dispute resolution and tribunal claims
Employees can now take disputes to the Employment Tribunal, with potential compensation of up to £5,000. Unsurprisingly, employers are concerned about the risk of litigation, especially where tip allocation is subjective.
This provision has empowered workers and providing a framework to pursue any failings in the distribution of tips. Business will be nervous about any disputes which cannot be resolved locally which could result in increased legal exposure for businesses.
A sector under pressure
One year on, the Fair Tips Act has made strides in promoting fairness and transparency. However, the Hospitality sector continues to face significant operational and financial challenges in complying with the legislation. It is questionable that all businesses are fully compliant with the legislation.
However, there is a need for further support, clearer guidance, and perhaps a move toward standardised tipping practices, something that will not only be well received by employees but customers too.
Things not adding up? Get in touch with Nick Bustin, Director and Head of Employment Tax, for advice or support.
